For years the Fanya Metal Exchange has sold itself as a medium for everyday Chinese investors to satisfy their desire for a stake in the world of physical minor metals.
Conference after conference brave staff faced questions and struggled to explain who these investors were, why - it seemed - they all took the same buy and hold strategy and how an independent audit of the exchange's incredible inventory numbers was unnecessary.
How much a year can change.
While the exchange continues to insist that it is positioning itself as a global hub for minor metal transactions, there are now few outside the organization with faith in its ability to succeed.
Since the leak of Chinese government investigations into the Fanya Metal Exchange came to light in December of 2014, the exchange's claimed purchases have effectively ended. And rumors that Fanya's business model was not as it seemed, which had circulated last year, started being openly discussed by those with direct knowledge of the company's operations.
In a discussion with a manager from China's largest non-ferrous metals industry association this spring, there was no hesitation to openly elucidate on Fanya's actual business model: Metals like indium and bismuth were not being sold to individual investors, as had been claimed, but were instead being used as collateral for unregulated loans.
In effect, the exchange is part of China's multi-trillion dollar shadow banking industry.
The process for these loans required borrowers to deliver metal to Fanya's warehouse while putting down about 20 percent of the metal's value as a deposit via their online exchange (I.e. Borrowers were 'buying' their own metal with only a minimal deposit). The borrower would then receive payment from the exchange for about 70 percent of the metal's value.
The settlement terms of the quasi-collateralized loans, however, are not so clear.
With cash hungry bismuth and indium producers, amongst others, sitting on large inventories, transactions and inventories at Fanya's warehouses began to add up. Billions of dollars of unregulated loans accrued, ultimately, attracting attention from local regulatory authorities.
New oversight and regulation stemming from the government investigation seems to have made Fanya's old business model unviable. As of this spring, metal purchases have dried up and now it appears that the Exchange no longer seems to be publishing prices for metals on their website. Indium prices over the same period, not surprisingly, have fallen by more than 50 percent.
In response to this new, regulated environment, Fanya has attempted to legitimize the old business model by structuring it in a more transparent manner.
In late May, the company introduced Fanrong Web, which offers collateralized loans to holders of minor metals. But regulated and transparent settlement terms, along with concerns about the exchange's viability, appear to have greatly lessened interest in such transactions.
While Fanya's tries to contend with these new regulations, it also faces the threat that previous borrowers, who sold into the exchange while prices were high, will choose to walk away with the money rather than take back their metals. In the case of indium, borrowers have little incentive to close their positions and take back metal that is worth half of its loan value.
If this is the case, the exchange is going to be saddled with huge debts owing to its creditors - presumably the banks - while its assets - warehouses full of metals - threaten to continue declining in value.
Recent announcements by Fanya seem to acknowledge that Chinese domestic investors are not as bullish in investing in indium, bismuth and other minor metals as they had hoped.
The company has hired an international manager to oversee the newly formed 'offshore board' in Xiamen, which they are hoping to launch within the next year in hopes of soliciting international business. However, with capital controls regulating the flow of investment in and out of the country, as well as export controls on many of the metals, the details of how this will operate are still yet to be seen.
Meanwhile, with the dam between themselves and a reservoir of metals flooding the market now showing cracks, producers, consumers and traders continue to watch closely and wonder how the Fanya story is going to play out.
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Terence Bell / SM Report
Image: 1970s CME Advertisement / Source: Mikko Sipilä via Twitter: @mikko_sipila
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