By Apostolos Rompopoulos
Tanker Chartering Broker
Trading companies frequently count on short-term credit lines to finance their deals. In case they do not secure those funds it may affect the possibility of completing the transactions. A decrease in transaction values caused by the significantly low oil prices and many high firm bankruptcies have influenced banks' commodity trade finance revenues amidst the pandemic.
According to Coalition, an S&P Global research company, total revenues for this line of business for banks globally dropped remarkably over the year in the first six months of 2020, with a 40% decline in the second quarter. Some of the major commodity and trade-finance lenders including Generale SA, Paribas, and last but not least ABN AMRO Bank NV, are withdrawing from the sector in order to reduce the risk. Commodity trade finance was thought to be one of the most secure businesses for banks for a period. As Srinivasan Govindan, a senior banker and former chief representative of Natixis in India stated “Trades were mostly on a pre-sold basis, backed by letters of credit, thus with limited credit risk. These then increasingly moved to open account terms, exposing them and financing banks to price and credit risks”. Govindan also cites that “Over the years, the usually tightly controlled and monitored, commodity trade financing lines were increasingly replaced with corporate lines in the form of syndicated loans, revolvers, etc., diluting the rigorous structures earlier employed. Low equity base, high leverage, and volatile price movements only compounded this situation.”
Double financing constitutes a major matter in trade and commodity finance. In fraudulent cases, there are examples of borrowers that have pledged the same collateral or inventory to multiple banks at the same time. In addition to that, the lack of a solid centralized database of collateral does not facilitate lenders. According to the investigation by PWC, 60 letters of credit amounting to $1.5 billion were used by Hin Leong Trading to finance cargo that didn’t exist or was pledged to a number of patrons.
Trading companies function on very thin margins and some of them feature a relatively opaque business model, which eventually makes it easy to conceal losses in derivative assets, inventory, receivables etc. Sources from MNC bank in India assert that one small error regarding price movements could destroy their margins for the entire year. Regulatory changes translate to the fact that banks are now forced to raise their charge costs per transaction in order to clear their internal risk-adjusted return on capital employed thresholds. These changes have also tightened the high global recovery rates being ascribed to many structured trade transactions like pre export finance, pre-payments, hence trading deals could not be profitable with the current market levels.
The volatile environment caused by the pandemic has generated a major decline in international trade. This will exert an influence on the free movement of commodities globally. To conclude, the trade and commodity finance business may witness a major transformation globally in the post-COVID era, with increased export and import financing costs, supply chain disruptions, and bigger risks.
Chartering (Wet: Stable+ / Dry: Firmer)
Despite the fact that rates for Capesize units declined w-o-w, the overall sentiment was strong with improved activity recording for the rest of the sizes and expectations for firmer weeks being built up. The BDI today (15/12/2020) closed at 1,273 points, up by 38 point compared to Monday’s (14/12/2020) levels and increased by 152 points when compared to previous Tuesday’s closing (08/12/2020). In the crude carrier sector, earnings remained at unhealthy levels for another week. However, as we are heading toward the end of 2020, there may be some scope for optimism with the remaining stems of the year ready to be injected into the market. The BDTI today (15/12/2020) closed at 435, a decrease of 4 points, and the BCTI at 431, an increase of 60 point compared to previous Tuesday’s (08/12/2020) levels.
Sale & Purchase (Wet: Firmer / Dry: Firmer)
SnP activity continues at significantly firm levels. A generous number of both tanker and dry bulk sales concluded while increased buying interest for Container vessels is being witnessed for another week. In the tanker sector, we had the sale of the “MARAN REGULUS” (310,106dwt-blt ‘00, S. Korea), which was sold to undisclosed buyers, for a price in the region of $21.0m. On the dry bulker side sector, we had the sale of the “MARAN REGULUS” (310,106dwt-blt ‘00, S. Korea), which was sold to undisclosed buyers, for a price in the region of $21.0m.
Newbuilding (Wet: Stable- / Dry: Stable+)
Looking at the number of orders coming to light last week, we are still noticing that the Container sector remains popular followed by a decent volume of bulk carrier units. Italian owner, MSC has ordered 4 ultra-large boxship units which will be shared equally by three Chinese yards, Hundong Zhonghua, Jiangnan, and Yangzijiang shipyard. In the dry bulk sector, among other orders, Jiangsu Ocean Shipping has ordered 4 Ultramax vessels; all units will be constructed equally at two Chinese yards as well, at DACKS and NACKS shipyards. As far as the Tanker crude carrier sector is concerned, Greek owners continue to grab the headlines; it is rumored that Athenian Sea Carriers has signed an LOI for the construction of 2 firm plus 2 optional VLCC units at Hyundai HI at a price in the region of $85.0-87.0 million.
Demolition (Wet: Stable+ / Dry: Stable+)
In the Demolition market, price levels across the main Indian-subcontinent regions remained steady this past week. It seems that the significant rise that we witnessed the week prior was more than sufficient to allure owners to exercise the option of disposing of their vintage units. In addition, steel plate prices in Bangladesh did not support another improvement on offered scrap prices; as a result, both Pakistani and Indian cash buyers retain their high bids, yet, without the need for a further increase in order to remain competitive. Turkey, on the other hand, kept offering increased scrap prices. Indeed, as the steel plate prices rise, so do the cash buyers increase their bids with average levels now being reported above $250/ltd for tanker units while the increased appetite from Aliaga cash buyers further pushes the overall sentiment upward. Average prices in the different markets this week for tankers ranged between 255-410/ldt and those for dry bulk units between $240-400/ldt.
Please click here to open Intermodal's Weekly Market Report for the week 50,2020