Fall of China’s biggest rubber trader unsettles global market Chongqing General Trading Chemical said to have misjudged bets in international trade CGTC would purchase raw rubber from abroad on letters of credit and sell it on to local traders © Bloomberg Share on Twitter (opens new window) Share on Facebook (opens new window) Share on LinkedIn (opens new window) Save Sun Yu in Beijing 16 HOURS AGOPrint this page7 China’s largest trader of rubber has ceased operations after failing to honour contracts with its local and foreign business partners, unsettling the global market for the commodity. The move by state-owned Chongqing General Trading Chemical, which accounts for almost a third of China’s rubber supply, followed misjudged bets on rubber prices, said people familiar with the matter. The fall of CGTC, a big player in the international rubber trade, has sent shockwaves across the industry, with global rubber futures falling following news last week of the company’s imminent suspension of operations. The episode also highlights the challenges faced by China’s state-owned commodity traders in hedging market risks. In a letter to its suppliers last Friday, CGTC said it would “suspend all operations to maximise

[their]

interest”. The letter added that all unexecuted contracts would become invalid and submitted banks’ bills must be recalled. The quest to replace natural rubber car tyres Subtitles unavailable A CGTC spokeswoman said the company was “closely studying the situation”, without giving further details. Traders who work with the company said it had failed to pay for at least 100,000 tonnes of rubber it bought on credit. The company was also unable to fulfil contracts with its domestic clients, including tyremakers and trading companies. “This is having a huge impact on the market given CGTC’s reputation as a large and reliable player,” said a trader. CGTC ran into a liquidity crisis after making duff bets on rubber, which has traded sideways despite a slowing global economy, according to traders. The closing price of the most active rubber contract on the Shanghai futures exchange was Rmb11,470 ($1,600) per tonne at the end of last month, little changed on Rmb11,450 at the beginning of this year. Tong Changzheng, an analyst at CITIC Futures in Beijing, wrote in a report that CGTC had paid a price for making speculative trades. According to Mr Tong, the rubber trader would begin by purchasing raw material from abroad on letters of credit and sell it on to local traders, many of whom were speculators. CGTC then built short positions to hedge risks. When the goods arrived, CGTC paid foreign suppliers with funds partially from its trader clients. Recommended EM Squared Thailand rubber farmers’ structural challenges could get political The model worked during a period of price swings when both traders and CGTC profit from wagers in the right direction. The difference between prices of spot and futures rubber also encourages traders to enter the market. Yet as price movements flattened and the spread narrowed this year, speculative traders were less interested in holding physical goods, thereby reducing purchases from CGTC. That created a funding shortage for the group as its heavy involvement in spot and futures market required significant amount of funds. “CGTC shouldn’t place too much [of a] bet on the direction of commodity prices,” wrote Mr Tong of CITIC. “It needs to have buffer space when prices are moving against its expectations.” Insiders said the incident was a result of CGTC’s aggressive strategy. A former employee of CGTC said the company would run into trouble “sooner or later” because of its “one way only” trading strategy. CGTC held significant long positions in 2016 and shorted rubber in 2017, said the person. CITIC Securities’ Mr Tong said the gap left by CGTC might not be filled quickly because other traders were concerned about market risks. That could lead to a decline in China’s rubber imports in the short term, he added.