After being short squeezed in March this year, Tsingshan Group is again in the news, this time concerning the aftereffects of the incident. According to those in the know, through support from various sources in the country, Tsingshan Group managed to complete a spot deal, purchasing nickel ore at an exceedingly high spot price. Although the company managed to sail through this round of difficult situation, it has incurred a substantial loss of USD 8 billion. The company was previously on the global list of top five hundred enterprises and at the forefront of the mining industry in China. However, it has been hit tremendously hard by the global market stumble.
Some market observers highlight this as yet another round of assault unleashed by foreign capitals against Chinese enterprises since the China Aviation Oil and Zhuzhou Smelting Company incidents. Despite having suffered a heavy setback, Tsingshan Group has been able to survive this round of crisis without breaking any promises. Nevertheless, the current turn of the event, including the way it transpired, has had damaging and far-reaching impacts on Chinese enterprises and participants in the futures market. In ANBOUND researchers’ assessment, international capitals’ repeated onslaughts on Chinese enterprises in the international market should not be viewed or criticized excessively from the perspective of morality. There is a greater need on the part of Chinese enterprises to consider internal sources of the problem, namely risk-related mechanism and investment capacity-building.
Citing the China Aviation Oil incident, the Citi Pacific issue, and the central bank’s crude oil treasure liquidation problem in 2020, some market observers expressed that Chinese entrepreneurs not only lack investment experience in the commodity sector and futures market, but are also wanting in terms of risk control and investment capability. The observers highlight Tsingshan Group as a case in point, asserting that despite having been active in the market for years, the company fell prey to international speculators, heavily shorted, and is to date yet to identify the culprits. Elaborating on Tsingshan Group as a case in point, they opine that the company lacks market acumen and is deficient in risk control mechanism. There is a suspicion among those in the field that Swiss Glencore Group is the party benefiting from this short squeeze incident. Just as Tsingshan Group, Glencore Group’s core business is metal trade. The latter influences prices of a considerable number of commodities, as it holds a comparatively large share in the global metal trade market. Tsingshan Group profited from its trading with Glencore Group, resulting in the latter leaving the market before; but in facing up to its investment misjudgment then, the latter managed to ride on its professional risk-control capacity and ensured minimum loss.
This short squeeze episode experienced by Tsingshan Group is a clear indication of the company’s lack of risk control. By continuously investing in anticipation of a market rebound, the company put itself in a risky position, where the competitor continuously gained the upper hand. This incident bears much similarity to the China Aviation Oil incident in that the company is compelled to embark on restructuring exercise after suffering grave loss and insolvency. In terms of professional capability and risk control strategies, Chinese enterprises are clearly lagging far behind seasoned players, such as Glencore, in the international futures market. Under this condition, betting on speculations to gain risk returns is playing with fire. In the short squeeze episode, Tsingshan Group has been able to survive the difficult time through the assistance of the Chinese government and other enterprises in the country. Instead of placing blame on the opponent’s rapacity, Tsingshan Group should value the lesson learned.
At present, there is news that Glencore Group as a seasoned commodity trader has been engaging in many activities suspected of violating regulations and laws. According to news, Glencore disclosed on 24 May that it was set to pay at least USD 1.2 billion in agreements made with U.S. and UK regulatory bodies. The company will pay around USD 0.7 billion to end the U.S. Department of Justice’s investigation into its bribery cases overseas. It will pay another USD 39.6 million to settle the bribery accusation it faces in Brazil. Also disclosed by Glencore is that one of its subsidiaries has agreed to pay USD 48.5 million to settle U.S. criminal and civil investigations into fuel prices. In the seven bribery charges filed by UK Serious Fraud Office against Glencore Energy UK Ltd., the latter is accused of involving USD 2.4 million bribes in procuring preference right to oil exploration in Africa. This UK-based subsidiary of Glencore disclosed that it had allocated USD 1.5 billion for reconciliation expenses in the U.S., UK, and Brazil. This latest development indicates that Glenco is a regular but tainted player in the futures market, where it engages many tactics that infringe regulations governing market behaviors. As such, it is essential that Tsingshan Group reflects on its inadequacy in risk awareness, focusing not on the damaged market rules, but on adaptation ability, resilience enhancement and comprehensive understanding, and monitoring of trading opponents. Only then will the company stop being a “prey” and changes its position to that of a winning market player.
The legal proceedings brought against Glenco by developed countries, such as the U.S., UK, and Switzerland, point to these countries’ regulation-control capacities and strong market-monitoring system. In comparison, China is still a raw beginner in matters concerning international market regulations, lagging far behind in terms of policing the markets and formulating regulations. Judging by the situations surrounding the short squeeze case of Tsingshan Group, China even has a long way to go in establishing the commodity market system within the country. Confronted with increasing geopolitical risks in the current international environment, the commodity market is becoming increasingly volatile with massive inherent market risks. It is therefore essential for enterprises to be clear about the reality and engage in hedging rather than speculations using the futures market. Where monitoring is concerned, there is a need to strengthen policy research and market-monitoring capacity – in order to enhance the growth, internationalization, and competitiveness of the commodity market in the country. It is through rational investment and market-monitoring that the kind of risks leading to the Tsingshan short squeeze incident can be reduced, and the real economic capacity of the capital market service be reflected.
Final analysis conclusion:
In the short squeeze incident that befell Tsingshan Group, the company suffered a huge amount of loss despite fully completing a spot deal. The problems exposed in this incident include internal problems of the enterprise involved, as well as problems pertaining to monitoring and planning capacities. Deep reflections and inferences on these problems are desirable to prevent the repetition of similar risky incidents.
