It’s happened again: Another commodities trader in Singapore has all but collapsed under a pile of debt and alleged fraud now under investigation.
Last week, police raided the offices of ZenRock Commodities Trading Pte Ltd., after HSBC filed a criminal complaint of fraud. It has been reported ZenRock has debts in excess of $160 million, $49 million of which is owed to HSBC.
Some of the allegations are similar to those made against fellow oil trader Hin Leong, with cargo offered as collateral for more than one loan and funds being redirected or withheld from lenders, such as HSBC, reported to be owed $600 million. The scandals follow the collapse of Agritrade International and have undermined wider confidence in Singapore-based commodity traders.
Each case highlights the risks in the international business of commodity finance, where high prices provide high rewards and low prices can leave lenders exposed.
There are similarities between the present situation and the global financial crisis of 2008, which was predicated upon the collapse of housing prices in the United States. Now, it is a combination of the coronavirus pandemic and the collapse of the price of oil that has exposed commodity traders who had historically relied upon a higher price of oil and traded against the same.
Essentially, as the price of oil dropped, market participants began to look at where they were placed in debt and commodity supply chains. It was as though more than one chair had been removed from the game of musical chairs; when the music stopped, the price dropped and many players had nowhere to sit and nowhere to go for further funding.
The lesson being, no one controls the music and no one actually owns a seat in the game. Of course, one is a matter of luck, whereas the other has proved to be a big gamble based upon a high oil price that has disappeared along with any chance these commodity traders had of staying in the game and securing a seat.
Going forward, banks will need to change their approach to commodity financing—which may include the sharing of data in regard to inventories and cargo offered or held as loan collateral. As covered previously, banks should accommodate and defend privacy but reject secrecy. There is always the possibility an unknown secret is being withheld, which will ultimately hit the bank where it hurts. Out of the game, without a seat, and out of the money.