When German miners first discovered Nickel in the fifteenth century, they named it "Kupfernickel",
or "Devil's Copper" because while they thought it contained copper,
they couldn't recover any from it. They blamed their troubles on the devil, and since then,
nickel has had the nickname “the devil’s metal”. Amongst commodities traders it’s
had a history of devilish behavior too. Last week, Trafigura, one of the world's
largest commodity trading firms announced a $577mn write-down, claiming that they had fallen victim
to a systematic fraud in the devil’s metal. More surprising though to industry insiders
was who they were dealing with, Prateek Gupta, a 43-year-old Indian businessman
with a ‘checkered reputation’ who had been trading with Trafigura since 2016.
Trafigura discovered that shipments of nickel that they had purchased from Gupta-linked companies
contained no trace of the valuable metal, leading them to launch legal action against
Gupta and secure a $625mn freezing order against his business empire.
Court documents show that the alleged fraud drew in Citigroup, who financed the trades, Barclays,
where Gupta's companies held accounts that received Trafigura funds and that the scandal
could reach even deeper into the world of commodities, as Trafigura say that they
sold-on potentially fake nickel cargoes in 11 trades worth almost a hundred million dollars.
The 25,000 tons of missing nickel is not a small amount. It comes to more than 10
per cent of the annual imports of China, the dominant global nickel consumer.
The alleged fraud involved trades in nickel which was in transit during 2022
and allegedly involved all sorts of scheming, misrepresentation, and counterfeit documents.
Now, the scam of delivering metal that isn't what it is supposed to be is no new idea. The
British Museum has an almost 4000 year old clay tablet on display, in which a Babylonian merchant
calls out a supplier for trying to cheat him on a shipment of copper. Clay tablets were the
twitter of that time… Clay tablet ‘beefs’ were quite a thing in ancient Babylonia.
The Babylonians didn't have formal quality metrics for metals, but the merchant in
question knew he had been scammed and warned his supplier (via clay tablet) that "from now on I
will not accept any copper from you that's not fine quality". Its amusing that he knew he had
been ripped off, but was still planning on doing further business with the supplier…
In more recent times metals trading has continued to be a venue for fraud. Last year in China alone,
$500mn worth of copper went missing, and Trafigura’s nickel scandal follows hot on
the heels of the LME nickel trading scandal from March last year, when the London Metal
Exchange had to suspend nickel trading for fear of a total market collapse.
This situation is quite a large fraud and it could work out to be quite far reaching. The
news caused the price of nickel to rise by around 6% on the day of its announcement as it meant that
there was significantly less nickel available to industry than was previously estimated. A
25,000-tonne black hole has just opened up in the nickel supply chain.
So, who are the two parties to this dispute? Well, Trafigura is a multinational commodity
trading company based in Geneva, Switzerland. It was founded in 1993 and operates in more than 50
countries around the world. They specialize in trading a wide range of commodities,
including crude oil, refined petroleum products, metals, minerals, and agricultural products.
They have become known for some controversial activities themselves, including their involvement
in a pollution scandal in 2006 and their attempted use of a super-injunction in the
UK to prevent the press from reporting on it. In addition to its commodity trading activities,
Trafigura is also involved in other business areas, like logistics,
infrastructure, and finance. The company is one of the largest independent oil and
metals trading companies in the world, and has annual revenues in excess of $147 billion.
Just two months ago, Trafigura’s top traders and shareholders were celebrating,
having been awarded a $1.7bn payout as profits boomed during the energy crisis. The firm
made a record $7bn net profit last year. Trafigura is not a publicly listed company,
it’s owned by 1,100 shareholders (mainly made up of executives and traders at the privately held
firm). The company still publishes it’s accounts annually, and you might wonder why they would do
this? Well, every commodity trading house has a different edge and Trafigura's edge is in
financing. Both in the way it finances itself and, in the financing deals it can offer its
counterparties. They publish their accounts so that they can show their strength and because
of that strength, access huge amounts of financing from big global lenders. The
firm is reported to have 73 billion dollars of credit lines from 140 different lenders.
OK, so what about Prateek Gupta and TMT? Well, Prateek began his career as a trainee
at his father’s metals trading company ‘Ushdev International’, where he became a managing
director in 2008. The company became insolvent in 2018 after defaulting on loans from several Indian
banks. The Wall Street Journal reports that many people in the commodities industry steer
clear of Prateek Gupta and his businesses due to his reputation in the industry.
Prateek Gupta has ties to Sanjeev Gupta whose GFG Alliance group of companies is implicated
in the Greensill scandal (that I covered a while ago on this channel.) GFG Alliance is
under investigation by the UK’s Serious Fraud Office for its involvement in that
scandal. While Sanjeev Gupta is not a relative of Prateek’s despite sharing the same surname,
Sanjeev is a former shareholder in Ushdev. As with Prateek Gupta’s alleged fraud on
Trafigura, many of the suspect GFG invoices involved in the Greensill
scandal involved shipments of nickel too. I should point out that GFG has announced
that it “has for years had no business - or relationship with Prateek Gupta . . . and is
in no way connected to any of the activities Trafigura’s announcement referenced”.
So, bankers at Credit Suisse, who were (of course) helping manage Mr. Gupta’s wealth, introduced him
to TMT a small trading firm based in Switzerland less than ten years ago. He went on to buy the
firm in early 2016. TMT had a good reputation in Swiss financial circles before being purchased and
crucially had existing credit lines in place. They also had a trading relationship with Trafigura.
Those credit lines soon shrunk under the new ownership as certain counterparties backed away,
and TMT allegedly began asking counterparties for longer payment terms, saying they were willing to
pay high interest rates. Some counterparties told The Wall Street Journal that they viewed this
as a red flag and declined to deal with TMT. In an unrelated case, the State Bank of India
accused Prateek Gupta and other business associates of his of being “party to a
criminal conspiracy”. The bank claims that the fraud cost it and other lenders to Ushdev
(the firm founded by his father) nearly $175 million dollars at today’s exchange rates.
Investigators in India say that they recovered “incriminating documents and articles” after
opening a fraud investigation based on a complaint from the State Bank of India.
Unfortunately, by the time the Central Bureau of Investigation opened its probe,
Trafigura was already heavily exposed to Mr. Gupta and his related companies.
Now before we get into how the alleged fraud was discovered, let me quickly tell you about today’s
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Sign up using the link in the description below. OK, So, Trafigura began trading with TMT Metals,
more than a decade ago. They provided “transit finance” to TMT and to other Gupta companies.
Essentially, buying Nickel in containers that were already on-board ships and then selling it
when the ships reach their destination, charging interest for the duration of the transportation.
In 2021, transit times for containers at sea expanded, and this was partially just due to
the supply chain disruptions that were occurring at the time, but some TMT shipments took more than
300 days to be delivered, this was significantly longer than made sense for any global shipping
route, and was difficult to explain. Trafigura began reviewing its relationships
with various trading partners late last year, and their risk management team
started to pay more attention to TMT Metals, especially when authorities in India accused
Gupta of defrauding the State Bank of India. In October of last year, Citigroup declined to
finance the trades between Trafigura and Gupta’s companies anymore, meaning that Trafigura was now
financing the trades itself which led to Trafigura investigating their counterparty more thoroughly.
in November, according to the court documents, an “informant” told Trafigura
that one or two of the purchased containers contained something other than nickel.
The fraud was exposed when the company's investigators arrived at a port in Rotterdam
just before Christmas and checked the contents of a container and found other
less valuable metals, but no nickel inside. When the trading house confronted Gupta,
he told the head of nickel and cobalt trading, that the containers contained
mostly a cheaper nickel alloy and a small amount of other materials, rather than the
high-grade nickel metal that had been paid for. Gupta initially blamed his business partner in
India for the mix up and claimed that the contents were different to avoid
sanctions on shipping Russian nickel, despite no such sanctions having ever been in place.
At a meeting in early January, Gupta proposed settling the sum it owed Trafigura,
but the firm instead decided to pursue a fraud claim and to request that the courts freeze
Gupta’s assets. It possibly made more sense to have assets frozen than to give Gupta time to
pay – or find a way of not paying. In many ways, this story is pulling
together a number of other pieces I have covered in the past, like the trading
issues on the LME less than a year ago, the Greensill scandal which is still ongoing,
and the content on supply chain disruptions and the economic effects of the war in Ukraine.
There has been quite a bit of fraud in the nickel market over the last few years for a few reasons,
but mostly that it is a highly priced industrial metal, (currently worth around $26,000 per ton),
and it has become highly financialized. Its surging value as a crucial metal used in the
production of electric car batteries, has made it an attractive target for questionable dealings.
Some examples? Well, a nickel repo deal between Natixis and Marex fell apart in
2017 when it turned out that it was based on false receipts for metal stored by Access World, then a
part of Glencore. After a two-year legal battle, Natixis won a $32m claim against Marex in 2019.
ED&F Man won a $283m dollar fraud claim last year against a Singapore
commodity trader Straits for a fraud also involving fake nickel warehouse receipts.
Singaporian prosecutors have filed 105 charges against an alleged Ponzi schemer,
accused of cheating investors out of over a billion dollars for fictitious nickel trades too.
Even in the Greensill case, where Sanjeev Gupta’s GLG alliance is being investigated by the UK’s
Serious Fraud Office many of the suspicious invoices involved shipments of nickel.
So far, out of one thousand one hundred and four containers, Trafigura has checked 156,
and despite what Gupta told Trafigura, no nickel of any grade at all has been
found in them. The containers were filled with carbon steel,
a low-value metal worth less than $1,000 per ton versus the roughly $26,000 per ton for nickel.
Industry insiders have expressed considerable surprise that Trafigura was dealing with Gupta
at all. Jonas Rey, the chief executive of Athena Intelligence, told the FT that he
had investigated TMT in the past over an alleged scheme involving a network of companies trading
between themselves, each with different bills of lading and their own financing.
“Their reputation was horrendous,” he told the FT. “TMT Metals was blacklisted
from most credit and insurance companies as they were such a high-risk entity.”
Trafigura has said there is no evidence that any of its employees were complicit in the fraud.
An impairment charge of up to $577mn will be recorded by Trafigura in the first half
of 2023 related to this alleged fraud. That is equivalent to more than 8 per cent of the
$7bn dollar net profit the company made in its 2022 financial year. Its best year on record.
While the alleged fraud has drawn in firms like Citigroup, who financed some of the trades,
and Barclays, where Gupta’s companies held accounts, they are unlikely to have been
materially impacted. The scandal is likely to cause banks to increase the scrutiny and
risk management procedures around dealing with firms like Trafigura. This could impact their
financing edge in the commodities industry, which would really matter to Trafigura. It’s not clear
what will happen, and who will take the hit on the potentially fake nickel cargoes that
Trafigura unwittingly sold-on in 11 trades worth $94million dollars. It is also not yet clear if
Trafigura is the only firm to have been tricked in this manner by Gupta’s firms. We will have
to wait and see if more news comes out. It is somewhat amazing to me that someone would run
a fraud like this where they are guaranteed to be caught once the containers are opened.
Corporate filings show that an investment vehicle of Artis Finance, a trade finance start-up backed
by private equity firm TDR Capital, is a secured lender to TMT Metals for receivables financing.
The company’s website states that “only the most meticulously risk-assessed and commercially viable
transactions make it through to the Artis Investment Committee”. This transaction
seems to have made it through too though… Trafigura say that they have yet to decide
whether to claim insurance or not. It is too early right now to do so as they haven’t examined all
of the metal inventories yet, and they have to see how Gupta responds to their claim.
Experts are saying that it may be difficult for Trafigura to recover their losses through
the court system given the complexity and ownership structure of the web of companies
it claims are behind the alleged fraud. Ian Milne, who was responsible for trying
to recover debt from Gupta’s UD Trading for trade finance fund TransAsia Private
Capital told the press that Trafigura is likely to struggle to collect money from
Gupta as while Gupta might have a lot of money out there, “most of it is not in his name.”
After this flurry of fraud in the metals industry over the last few years, things
are likely to change somewhat as lenders increase their scrutiny of who they deal with and the risk
management procedures in place. Scandals like this are likely to make banks even more wary of lending
against nickel trades at a time when commodity financing in general has been shrinking. Outdated
ways of doing business – like paper documents and email will need to be replaced with more
robust approaches if fraud is to be reduced in the industry. Please don’t suggest blockchain in the
comments section, the goal is to reduce fraud, not to draw in different types of fraudsters.
If you found this video interesting, you should watch this one next. Don’t forget
to sign up for Morning Brew using the link in the description below it's totally free
so there's no reason not to try it out. Have a great day and talk to you again soon. Bye.