* LMEshield gains some tractionn among banks, warehouses
* Some traders worry about privacy of stocks
* LME faces other hurdles of cost, jurisdiction
* Could open way to use LMEshield in China
By Melanie Burton
MELBOURNE, June 1 (Reuters) - The London Metal Exchange is expanding its new electronic method of tracking metal in warehouses, as the system launched in April gains early traction among some western and Chinese banks, as well as warehousing and metals firms looking to cut risks.
Global metals markets were rocked two years ago by a $3 billion fraud in the Chinese port of Qingdao. A firm allegedly duplicated warehouse certificates to pledge metal as collateral for multiple bank loans, hitting companies ranging from Citic to Standard Chartered.
LMEshield, which provides electronic receipts as proof of ownership for metal stored outside the LME's own network of registered warehouses, is adding five jurisdictions where it will operate - Brazil, Chile, India, Japan, South Africa - to a 14-country list and is also extending to coal, iron ore and ferroalloys.
"We are delighted with the support we have seen for this initiative so far, and we plan to add more than 20 facilities to the network in a range of jurisdictions in the next few days," the LME's head of business development Matt Chamberlain said.
Members of the working committee behind LMEshield include Goldman Sachs, Louis Dreyfus and fund behemoth Red Kite Capital.
Warehouses run by Henry Bath and Independent Commodity Logistics are already live, while at least another two warehouse companies are in train, industry sources said.
Signs of take up will be welcome news for the LME. It has been suffering from falling trade volumes, struggling new products and large withdrawals from its warehousing network, since it was bought by Hong Kong's exchange for $2.2 billion four years ago.
And with slowing factory growth in China, still by far the world's biggest consumer of metals, counterparty risk remains one of the biggest headaches for business.
"It gives more transparency, control, it's helping reduce the risk around the financing," said Jeremy East of Standard Chartered in Hong Kong, who heads Asia metals trade.
The LME saw a 9 percent on-quarter decline in the trading of metals contracts in the first quarter, and rival CME is snapping at its heels with a string of new metals product launches and its own storage expansion plans.
As well as eventually raising revenue via daily and transaction fees, data gathered by LMEshield could offer the LME and Hong Kong exchange intelligence for new product launches.
The LME is currently not permitted to register warehouses in China, but if more Chinese firms adopt it for offshore stocks the LME increases its chances of becoming an industry standard.
"It's the way to get in (to China) without really getting in," said a trader at a Chinese merchant in Singapore.
A majority stake in Henry Bath, an LME warehousing firm, with a 221 year history and an early adopter of LMEshield, was bought in January by state-owned China National Materials Storage and Transportation Corporation (CMST) to expand its global business.
For banks, an unwieldy paper trail can be shifted into electronic form, with documentation standardised, soothing concerns of compliance departments.
But LMEshield could face cost obstacles after years of low commodity prices and since the LME operates under British law there may be jurisdicational issues with extending it into China.
Traders who count on proprietary knowledge of trade flows are also wary about their private stocks being revealed.
"What it is, is a better, ordered way for keeping records, and for getting slightly more security," said a London-based banker. (Editing by Ed Davies)