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A worker loads copper cathodes into a warehouse near Yangshan Deep Water Port, south of Shanghai March 23, 2012. Credit: Reuters/Carlos Barria By Melanie Burton SHANGHAI | Wed Mar 28, 2012 3:06am EDT SHANGHAI (Reuters) - In a dilapidated high rise in a residential district of Shanghai sits the beating heart of China's physical metal trade. The Wu Mao building, encircled by dusty bicycles and razor wire, houses around 500 companies trading copper, zinc, nickel, lead, aluminum and silver. China is the world's top consumer of metals and around 80 percent of the industry's transactions are done out of Shanghai -- 90 percent of which take place in Wu Mao, locals estimate. Severe credit restrictions have compressed margins to such an extent that residents say a rolling third of Wu Mao companies go bust every six months -- but there is still a year-long queue to get through the door. "For the industrial metals business, credit is very important -- the purpose of companies coming into this building is credit," said a senior executive at a company with a unit trading copper and zinc in the building. Wu Mao hosted the Shanghai Futures Exchange in the 1990s, and as hedging units of smelters from the coastal Jiangsu and Zhejiang provinces moved in, the industry began to take shape. Now, a home at this prestigious address can ease access to loans for China's metals industry, where small private enterprises in particular have been choked by Beijing's stranglehold on credit. At Wu Mao, some businesses are units of large domestic smelters or metal product makers, like Aluminium Corp of China Ltd (Chinalco) or Jiangxi Copper Co Ltd, whose roles are to hedge price risk on the domestic market, through trading warehouse receipts and electronically via ShFE. "Most of the companies here are not only trading companies, but units of bigger companies. This department doesn't make money, but the rest of the group makes money," said an executive in his early thirties at a large copper trader. Other companies are boosting turnover to improve balance sheets and to better get credit. In January, an executive from domestic trading firm Ocean Resources, which has an office in the building, told Reuters its company traded warehouse receipts for as little profit as 10 yuan per 60,170-yuan tonne of copper in order to help buttress its balance sheet. Many have made a little money and are hoping to make a lot more by betting on the commodities markets. "Speculators, maybe they have 5 million yuan and they want to make a lot of money quickly so they can go into physical commodities," one Wu Mao veteran told Reuters in Shanghai. Those who successfully punt on prices can then move into real imports and exports, to grow an independent trading or logistics business. "If successful with making money, they get a balance sheet and go into real business -- if they are lucky," he added. RICH KIDS Margins may be slim now, but for Mr Zhang and his girlfriend, a young couple who met trading zinc in the building, the ride around dusty Shanghai streets comes in the comfort of a Mercedes luxury coupe. Many of the employees in the small private firms that dot Wu Mao are in their 20s and 30s, much younger than the cadres at the state-owned shops. Known as "Fu Er Dai", or second-generation rich, they are from families that have found success in textile or manufacturing industries in the nearby provinces, local traders said. "Wu Mao is full of speculators but it is the speculators here that have significantly contributed to the market's liquidity," said the second executive. This army of self-traders at Wu Mao, armed with limited capital by normal industry standards, will flock to any profitable trades; be it imports, spot transactions for stocks in bonded inventories or domestic futures, he said. "In the eyes of the foreigners ... they can't understand how we are able to make money from these trades and may find it shocking that we are willing to take all these risks," he added. "But if we were to stick to the Western way and go by the book when it comes to trade financing, we won't survive." In a bid to crank up credit creation, China's central bank cut the amount of cash banks must hold in reserves in February, boosting lending capacity by an estimated 350-400 billion yuan ($55.6-$63.5 billion). But Wu Mao traders expect little of that to trickle down to their business. "There will always be a place for companies like this because there is not enough credit," the first executive said. "Also, Beijing focuses on growth. This kind of business pays taxes and contributes to the economy so they like it." (Additional reporting by Fayen Wong; Editing by Michael Urquhart) World China Tweet this Link this Share this Digg this Email Reprints We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/ Comments (0) Be the first to comment on reuters.com. Add yours using the box above. 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