(Bloomberg) — From scratch, guarding trains full of the metal from thieves on freezing winter nights, He Jinbi built a copper trading house so powerful it handles one out of every four tons imported into China.
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A born businessman with an infectious sense of humor, the 57-year-old grew up Maike Metals International Ltd. through the crude commodity rush of the early 2000s to become a key conduit between China’s industrial centers and global traders such as Glencore Plc.
Now Maike is suffering from a liquidity crisis and Toi’s empire is under threat. The ripple effects can be felt around the world: the company processes a million tonnes a year – a quarter of China’s refined copper imports – making it the biggest player in the world’s most important trade route for the metal and a major trader on the London Metal Exchange .
With his vast network of contacts giving him an enviable insight into China’s factories and construction sites, he has been the poster child for China’s commodity-fueled boom for two decades – making a fortune from the insatiable demand for raw materials and then dipping it into the red- hot real estate market.
But this year, Beijing’s restrictive Covid Zero policies have hit both the property market and copper prices hard. After months of rumours, He acknowledged publicly last month that Maike had asked for help to resolve liquidity problems.
He said the problems were temporary and only affected a small part of his business, but his trading partners and creditors were cautious. Some Chinese local traders suspended new deals, while one of the company’s longest-standing lenders, ICBC Standard Bank Plc, was concerned enough that it moved some of the copper out of China that backed its lending to Maike.
Even if it manages to secure support from the government and state-owned banks, industry executives say Maike may struggle to maintain its dominant role in China’s copper market.
As much as Toi’s rise has been a microcosm of China’s economic boom, his current woes may mark a turning point for commodity markets: the end of an era in which Chinese demand could only grow.
“In a way, the story of Maike is the story of modern China,” said David Lilly, who became involved with Maike in the 1990s, first as a trader at MG Plc and later as co-founder of trading house and hedge fund Red Kite. “He skillfully managed the dynamics of the Chinese economy, but no one was prepared for the Covid lockdown.”
This account of Toi’s rise to the top of China’s commodities industry is based on interviews with business partners, competitors and bankers, many of whom asked not to be named because of the sensitivity of the situation.
A spokesman for Maike declined to comment for this story, but said in response to earlier questions from Bloomberg on September 7: “Our company has been deeply involved in the development of the commodities industry for nearly 30 years. He maintained a steady development, as all the witnesses. It will soon resume normal operations and continue to contribute to the development of industry and the local economy.”
Born in 1964 in China’s Shaanxi Province, he first encountered copper when he got a job as a supplier of industrial materials for a local company. As a young man he was paid to guard loads of copper on trains crossing China – which could be cold work on freezing winter nights.
In 1993, he and a few friends founded Maike in the western city of Xi’an, known as the capital of China’s first emperor and the location of the iconic Terracotta Army statues. The group borrowed 50,000 yuan (about $7,200) to buy and sell mechanical and electrical products. But his early encounter with copper had an impact and they quickly shifted their focus to scrap copper, copper wire and refined copper.
With a personable personality, a big smile and a light-hearted sense of humor, he was a natural salesman whose charisma would help him build a wide network of friends and business contacts.
As China’s economy liberalized, He used his connections to turn Maike into an intermediary between major international traders and China’s growing crowd of copper consumers.
Within 15 years, China will go from consuming one-tenth of the world’s copper supply to 50%, triggering a supercycle of soaring prices for the metal, which is used in electrical wires in everything from power cables to air conditioning units.
Casino with goods
It was a wild era when, for many, China’s commodity markets were little more than a casino. Groups of traders band together to bet together, setting up ambushes against their opponents on the other side of the market. The bravest players would be given the nicknames of martial arts masters from popular novels.
Although many merchants came and went in those years, He persisted.
“We did a tremendous business together for twenty years,” Lilly said. “There was a time when China’s metals trade was a veritable wild west, and it stood out for its integrity. He would always keep his word.
He also had another characteristic essential to a successful commodities trader: an appetite for risk.
His big break came in the early days of the supercycle. In May 2005, China’s steel industry gathered in Shanghai for the Shanghai Futures Exchange Annual Conference. Copper prices had risen sharply and most of the producers, manufacturers and traders in the audience thought they would soon fall. Even China’s powerful State Reserve Bureau had made bearish bets.
They were shocked to hear Barclays analyst Ingrid Sternby predict that copper will hit new highs as Chinese demand outstrips supply. But she was soon proved right as prices doubled over the next 12 months. The SRB losses became a national scandal and most Chinese traders missed the opportunity to cash in on the gains.
He was not among them. Paying close attention to demand from his network of Chinese users, he had built a bullish position and profited handsomely from the surge in global prices.
It was a pattern he successfully repeated many times over the years. His preferred strategy involved putting options — on the downside, at a price his Chinese clients would likely see as a buying opportunity, and on the upside, at a price they would likely consider too expensive.
Although he enjoyed some of the trappings of success, people who knew him for many years say he remained grounded even as his net worth swelled to levels that likely made him a billionaire on top of it.
In Shanghai, he regularly dined at a restaurant serving Xi’an cuisine, where he ate his favorite cold steamed noodles and fried leek dumplings for 50 yuan ($7).
The development of He’s business reflects the changes taking place in the Chinese business world. Although he started out simply as a distributor of physical copper, he soon pioneered the growing interconnections between the commodities business and financial markets in China.
As Maike grew to become the country’s largest copper importer, he began using the steady flow of metal to raise financing. He could demand prepayment from his end customers and also take out loans against the ever-increasing volumes of copper he shipped and held in warehouses. Over the years, the connection between copper and money has become well established, and the ebb and flow of China’s credit cycle has become a key driver of the global market.
He will use the money raised from his copper business to speculate in the stock market or, increasingly, to invest in China’s booming real estate sector. Starting around 2011, it built hotels and business centers and even its own warehouses in Shanghai’s customs zone.
“In a sense, Maike’s story is the story of modern China”
As the state becomes an increasingly dominant force in China’s business world, he has turned his focus to investing in his hometown of Xi’an, supporting projects under Xi Jinping’s Belt and Road initiative.
This year, however, Toi’s empire began to falter.
The city of Xi’an faced a month-long lockdown in December and January and further restrictions in April and July when Covid resurfaced, hurting He’s property investments. Its hotels were nearly empty for months, and some commercial tenants simply stopped paying rent.
Maike was one of a number of companies that threw their fortunes into the property market in the boom years, said Dong Hao, head of the Chaos Ternary Research Institute. “After the sharp turnaround in the real estate sector last year, such companies have encountered various difficulties,” he said.
The broader malaise of the Chinese economy also pushed the price of copper lower, while at the same time Maike suffered as a result of growing caution among banks towards China’s commodities sector. Confidence in the industry was damaged by nickel’s historic contraction in March, as well as several scandals related to missing aluminum and copper ores.
In recent weeks, Maike has begun to struggle to pay for its copper purchases, and several international companies – including BHP Group and Chile’s Codelco – have suspended sales to Maike and diverted shipments.
The future is uncertain. He met with a group of Chinese banks in late August at a critical meeting organized by the local government of Shaanxi. Maike later said the banks had agreed to support him, including by offering to extend existing loans.
But its trading activity has largely ground to a halt as other traders grow increasingly nervous about working with the company. And as a result of Maike’s troubles, some of the sector’s biggest banks are pulling back from metals financing in China as a whole.
In China, His troubles evoke mixed emotions. Many mourned his plight as tragic for China’s commodity industry and emblematic of an economy increasingly dominated by state-owned companies.
Others would be less sad to see the end of a business model that elevates copper to a financial asset and sometimes causes import margins to deviate from physical fundamentals.
“For many years, traders like Maike have been quite important in copper imports into China – they have been buying very consistently to keep the funding flowing,” said Simon Collins, former head of metals trading at Trafigura Group and CEO of the platform for digital commerce TradeCloud. “With the property market the way it is, I think the music might stop.”
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