Fanya fallout

Author Stuart Penson, Senior Editor, Metals

Several years have passed since Chinese courts shut down the Fanya Metal Exchange (FME) but the fallout from its failure continues to rattle minor metal markets globally.

Court-administered auctions of the exchange’s reputedly massive physical metal stocks — the precise magnitude and quality of which never seems to have been fully clarified, according to some international market participants — are buffeting prices for tungsten, rare earths and other minor metals, compounding the impact of slowing industrial demand in China and elsewhere. The tungsten market is braced for the next auction scheduled for 16 September.

In some cases, metals producers in China have scaled back their output in an attempt to accommodate the influx of auctioned FME stocks. Efforts to place the metal in an orderly way with state-owned Chinese trading firms have helped cushion the market impact. But at the same time, it remains in some cases unclear how much of this metal could eventually reach the open market, and whether it meets internationally recognised specifications. FME’s ability to confuse and unsettle the physical markets continues to the last.

Regardless of the multiple claims in China and elsewhere of fraud and financial scheming aimed at FME, the exchange’s business model as a high-volume speciality metal investment vehicle open to small investors seems to have jarred with the underlying markets from day one. Minor metal and rare earth markets lack the depth, liquidity and hedging tools to accommodate the ebb and flow of multiple speculative investments.

These are metals which, with some exceptions such as cobalt’s recent battery-related plays, are traded relatively conservatively into supply chains spanning big industries like aerospace, automotive and electronics. Merchants do take physical positions, notably in cobalt of late, but the lion’s share of trade is against long-term contracts, or back-to-back spot deals. Investment, rather than genuine consumption, in minor metals on the scale reputedly placed on Fanya was unheard of prior to the flawed exchange’s emergence and seems unlikely to return even on a trusted and properly regulated platform.

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