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The suit has been filed in the High Court in London and comes after Trafigura discovered that some containers purchased from Gupta’s companies did not contain nickel but were instead filled with material of lower value, such as carbon steel and nickel alloys.
To date, on Tuesday February 14, Trafigura has only examined the contents of about 15% of the containers. But if the alleged fraud is found to be widespread, it could affect a volume of nearly 25,000 tonnes of nickel. This would be equivalent to roughly 10% of Trafigura’s nickel trading book, market participants have said.
In global production terms, that is a fraction of the 3.3 million tonnes of nickel that the US Geological Survey estimated was produced in 2022. But it is more than half the approximately 48,000 tonnes of nickel currently sitting in London Metal Exchange-registered warehouses, and equivalent to a vast number of cargoes, forming part of Trafigura’s sizeable battery metals portfolio.
Thankfully for an already volatile nickel market, pre-sales of the material were confirmed, there were no banks directly exposed to the financing, and there was no hedging exposure for Trafigura, market participants have said.
The list of companies connected to and apparently controlled by Gupta includes UD Trading and TMT Metals. Trafigura had dealt with both companies for many years across metals without any issues. It first became suspicious last year when the commodities merchant identified some red flags during its regular screening processes.
These changes to the normal pattern of trade included lengthier shipment periods and delays in providing documents. But it was not until the fourth quarter of 2022 that the company uncovered what Trafigura alleges to be a fraud that could cost it as much as $577 million, an amount it has already written down in its first-half earnings for 2023.
This would be a painful but not devastating blow to a company whose profit last year exceeded $7 billion, and which still expects its first-half earnings this year to exceed those of a year earlier.
To be successful, any fraud must be convincing, and by all accounts the alleged scheme was.
Market participants told Fastmarkets that it allegedly involved a very elaborate and sophisticated network of counterparties whose ultimate beneficial ownership structure was obscure. It also allegedly involved extensive numbers of fake documents and false bills of lading across many shipments to multiple ports.
Neither TMT Metals nor UD Trading had responded to a request for comment at the time of publication.
While there was not a wholesale failure of Trafigura’s systems and processes, the company will now inevitably be investigating whether it could have unveiled the alleged fraud more quickly and before its exposure grew as extensive as it did. Critics of the firm say that it should have known better, especially because there has been industry talk about other companies facing problems with companies connected to Gupta.
It is obviously not a good look for any company to be the victim of a purported fraud. Yet it seems that Trafigura was willing to take the reputational hit and make it clear that it would publicly pursue any entity it believed had defrauded the firm.
There is more work to be done to inspect the containers. Market participants have suggested that Trafigura had probably only scrutinized the contents of a small number of shipments until recently, in an attempt to avoid tipping anyone off. It is presumed that containerized nickel was the target of choice, rather than any other metal, because of its relatively high value and the fact that shipments can be worth hundreds of thousands of dollars.
Unfortunately for commodities firms, this is highly unlikely to be the last time that a company is allegedly duped by another. The commodities world is littered with schemes of various kinds, often focused on warehouse-related fraud. For example:
Certainly, frauds often further reduce banks’ appetite for trade finance, even if none are directly involved in this particular instance.
What will be interesting now is how commonplace the alleged problem was, including whether it was limited to Trafigura.
Details are now emerging of a long-running dispute between UD Trading and Hong Kong-based TransAsia Private Capital that has seen the former ordered by a Singapore court last month to pay more than $63 million to settle the case. There is also talk of an issue some years back with commodities merchant Gunvor Group, while India’s Central Bureau of Investigation has also been looking into Gupta’s companies.
To be fair to Trafigura, these concerns had not been publicly announced by the entities involved in the same manner as the Geneva-based merchant revealed its qualms last week.
Trafigura will certainly also be wondering how far the tentacles of the suspected conspiracy stretch, and whether any other counterparties are involved.
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