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Asia oil market fears China Aviation fallout

SINGAPORE: Asian oil traders fear China Aviation’s $550 million trading loss will stunt derivatives trade and force a credit clampdown, particularly for Chinese firms feeding their energy-hungry economy.

China Aviation Singapore Corp. Ltd. (CAO), a former standard bearer for overseas Chinese firms, racked up the losses from derivatives trading during an oil price surge in October. The firm, which supplies nearly all of China’s jet fuel imports, is seeking court protection from creditors.

The losses were rumoured for weeks, but the total was much larger than expected by the industry, making it the biggest public oil trading disaster since Germany’s Metallgesellschaft AG forced creditors to mount a $2.2 billion rescue after huge losses on energy derivatives in 1993.

Analysts expect the subsequent investigation to focus on the firm’s internal risk management controls, not the pitfalls of derivatives trade itself, but the huge losses are still likely to spook corporate managers of Asian firms.

“Our credit limit is very strict and now companies will be even more vigilant in credit control than in the past,” said one dealer with a Chinese trading house. “The scale of the loss is shocking.”

Banks may also tighten curbs imposed on lending to oil traders, who need that backing to engage in multi-million dollar deals that take place every day, traders say. French bank Societe Generale, one of the industry’s biggest lenders, cancelled a S$300 million loan facility to China Aviation last week.

Most players view the loss as an isolated event, but still fear it may hit market liquidity in the region, which was picking up as Chinese firms raised their profile and increased volatility drove new players into hedging.

“The company seemed to be totally exposed to the upside of the oil market and proper credit control appeared to be lacking,” a trading veteran said. “This is not good for the oil industry.” —Reuters

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