Question
SINGAPORE'S status as a key commodities trading hub for Asia has come under the spotlight in the wake of recent failures among big names in
SINGAPORE'S status as a key commodities trading hub for Asia has come under the spotlight in the wake of recent failures among big names in this sphere.
The collapse of Singapore's Hin Leong Trading - part of a sprawling empire with businesses ranging from oil trading, terminalling and storage, sea transportation and bunker supply - has rocked the city state's tight-knit oil community. Much of this is unfolding as a result of an unprecedented crash in oil prices amid demand destruction and the ensuing supply glut triggered by the Covid-19 pandemic.
Over 20 banks, including Singapore's three banking stalwarts, are exposed to Hin Leong Trading which has a hefty US$4 billion debt pile. The giant trader founded by low-key tycoon Lim Oon Kuin ran out of cash as margin calls ratcheted up and lenders pulled the plug on credit facilities after oil prices tanked. The trader and sister company Ocean Tankers - the region's largest owner of oil tankers - are seeking to be placed under judicial management (JM) and are currently under interim judicial managers.
There appears to be more to the story. Court documents reveal that the trader hid US$800 million losses from futures trading from its financial statements and sold cargoes that were collateral for loans. Singapore's Commercial Affairs Department is probing the trading firm.
The oil slump is throwing up more casualties.
Earlier, palm oil and coal mining firm Agritrade International buckled under severe strain after a unit defaulted on its loan. The company is also mired in fraud allegations by lenders after debt defaults. Hontop Energy (Singapore) - the trading arm of a Shandong-based refiner - fell into receivership, citing falling demand due to the pandemic as a culprit for its financial woes.
Singapore-based oil trader ZenRock Commodities Trading has also hit troubled waters. Reports say lender HSBC is seeking to place the firm under JM while Bloomberg reported that Singapore police raided its office following allegations of "dishonest" transactions by the lender.
These latest cases call to mind another episode that had sent the sector reeling - the collapse in 2018 of another giant commodities firm Noble Group, mired in a big accounting scandal.
Apart from underscoring the tensions that erupt between banks and traders when the sector goes belly up in a crisis, these episodes suggest weak business practices in the industry. Also, are many of these businesses facing cash woes as a result of having overextended during the boom? These fault lines are easy to disregard in the good times but tend to show up when the environment sours. It also begs another question: Are such weak business practices more widespread than have come to light?
As Asia's share of global commodity production and consumption rose in recent decades, Singapore - strategically located in one of the busiest sea routes and led by a sophisticated and business-friendly regulatory structure - quickly turned into a prominent hub, drawing some of the world's biggest trading names. It is imperative for the city state to be watchful - perhaps even tighten regulatory gaps where any exist - to guard its well-fought achievements as a multi-faceted business hub.
(c) Formulate strategies to hedge risks for an oil trader using the following and discuss two (2) disadvantages for each strategy: (i) Options (ii) Futures (iii) Swaps
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