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Bankers are now requiring crippling terms from commodity traders in Asia or refusing to lend to them altogether due to the perceived risks in transacting with them.
Asian commodity traders are increasingly deemed as risky clients by banks, especially after Singapore oil trader Hin Leong Trading (Pte) Ltd was found struggling to repay debts of almost US$4 billion.
Weeks before, Agritrade International Pte, another commodities firm in Singapore, collapsed after defaulting on loans.
The pandemic was expected to create a bumper time for commodity traders due to the huge price swings on which they thrive.
As it turned out, only the large trading houses were able to thrive under such market conditions and cope with the risks involved, according to Jean-Francois Lambert, a former trade finance banker at HSBC Holdings Plc., and currently an industry consultant.
"Banks are tightening their exposures on every front. With regard to commodity trading, their reaction is to fly for quality and be quite restrictive on everything else," Lambert added.
Banks are reducing their exposure to commodities by eliminating short-term loans and lending only to the huge traders like the Trafigura Group or Vitol Group. They were already pulling back from lending to commodities traders in Asia before the coronavirus crisis.
Soo Cheon Lee, chief investment officer at SC Lowy, a global banking and asset management group in Hong Kong, noted that commodity traders now have to face increased price volatility, counterparty risks, and supply chain disruptions.
The industry has experienced numerous high-profile collapses in recent years, not only in Singapore. The list includes multi-million dollar losses by major Chinese and Japanese traders, and the downfall of the Noble Group, one of the industry's biggest names.
The coronavirus crisis has also exerted an extraordinary impact on the global commodity markets, ranging from crude oil to copper, and resulting in a tightening of credit.
The disruptions are triggering defaults and as prices plunge, leading to bankruptcies.
