Fall of major commodity trader makes trade harder . . .
Hin Leong, a globally significant Singaporean oil trading firm, recently collapsed after making a bad bet on oil prices amid COVID-19 pressures and the company’s fraudulent activity. Now bankrupt and owing C$5 billion to banks, creditors’ hopes of securing even C$2 billion from Hin Leong may be off the table after negotiations faltered on Wednesday. Commodity trading firms link goods producers to end-users, across agriculture, lumber, metals, and oil. For example, an Indonesian baker does not need to directly contact a farmer in Saskatchewan to purchase wheat; a commodity trader, or a network of them, is a critical component in the supply chain that purchases, stores, and transports grain across the world.
World trade relies on loans, credit . . .
Hin Leong’s bankruptcy leaves 23 of the world’s largest banks, including London-based HSBC and Standard Chartered, Paris’ Société Générale, New York’s JPMorgan Chase, and several Singaporean banks, without an easy way to recover the C$5 billion they loaned to Hin Leong. Hard-hit Dutch bank ABN Amro last month quit financing commodity trades as a result, while other banks have frozen activity in this space, and more may follow. Eighty per cent of global trade relies on trade finance: in the commodities world, in particular, loans are a common way for traders to finance buying and selling goods, with letters of credit tied to loans ensuring that producers, shippers, and distributors can rely on payment as the same good changes hands, reducing the risk that anyone of them will be out of pocket in a high volume industry.
With banks exiting, expect more losses . . .
Post-Hin Leong and amid COVID-19, the banks that stay in commodities financing are likely to be more risk-averse, financing a smaller number of major commodity traders to reduce exposure. Smaller commodity traders will face limited options, raising the cost of their loans and, ultimately, the cost of goods worldwide. With European banks exiting the space, Asia’s banks still lack the capacity to handle the volume of transactions commodity traders need. Some, like the Bank of China, were directly impacted by Hin Leong. For trade-reliant Canada, the fall of a Singaporean company risks higher costs for the multitude of goods we import, lower selling prices for the ones we export, and worse financing options for smaller Canadian commodity traders.