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 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.

(a) Appraise any four (4) risks that participants in commodity trading face.

Answer 1

By looking at the case and a depth study of the commodities market there are many risk we come through and which a trader or the participants have to face, will dicuss few risk which can be more relatable to our case here.

Price Risk : Producers, manufacturers and consumers are all affected by changes in prices. Prices are based on the supply and demand of a market. Therefore the different parties agree on futures contracts to make sure they buy or sell their products at an acceptable price thereby relinquishing any possibility to make sure they are able to turn the fortune in their favor and generate profit. But due to covid it seems the oil market crashed due to very less demand and Hin Leong Trading could not hedge that risk therefore lead to their collaspe.

Basic Risk : This is a risk that occurs when hedging a commodity to minimize the effects of price fluctuations. This risk occurs when the basis or the difference between the spot and futures price, changes between the time a hedge is placed and lifted. Usually traders hedge this risk by trading in the futures and option and try to minimize it. Hin Leong Trading failed to hedge sucessfully in the market and suffered huge losses worth US$800 million while trading in futures as well but the company hid such loses from its financial statement.

Liquidity Risk : This arises when the ability to convert capital into cash is possible by the firm. In other words, an illiquidity risk is basically the inability to sell. A liquidity/illiquidity event could literally bring down trading companies. These what happened in our case as well, with Hin Leong Trading having such hefty debt over it's head, most bank tighthened up their credit facilities leading to no cash availibilty and these companies went bankrupt.

Geopolitical Risk: Certain countries have theri own unique recources and strategic advantages. To gain access to these resources, a lot of aspects must be considered and worked out with a government. Such aspects are tax structures, environmental concerns, license agreements and indigenous employers. All these factors can increase the costs considerably and thus must be considered whether it is still profitable. Singapore has is located in a busy sea route which is strategically profitable for commodity trading and also has a business friendly regulatory structure i.e less monitoring and easy norms on import and exports. But these factors helped many companies like Hin Leong Trading escape strict villigence and commit frauds and expose many traders and creditors to the risk, thus much more strict and vigilent regulatory framework is required that will surely help reduce the risk.