The head of Gunvor, one of the world’s largest independent oil traders, has blamed loose lending practices in Singapore for a string of scandals that have rocked the commodity trading industry.
Torbjörn Törnqvist, chief executive of Switzerland-based Gunvor, said the fallout from a series of company collapses in the city state, including the spectacular implosion of Hin Leong Trading, was a concern as it risked tarnishing the reputation of the entire sector.
“The sheer size of the failures is surprising — it’s a concern that the banks are taking so many hits from the sector,” Mr Törnqvist told the Financial Times. “But this is a Singapore problem. One needs to differentiate between the local companies and the international traders like us.”
Mr Törnqvist said small traders had received too much financing due to “a combination of competition and excess banking liquidity in the Singapore market” that he said had led to a “spiralling cycle of loosely structured credit facilities”.
Hin Leong Trading crumpled under almost $4bn of debt after its founder admitted to hiding $800m losses from lenders, which include HSBC, ABN Amro and Singaporean banks DBS Group and OCBC.
“The industry can’t afford a problem like this at a big international trader,” he said.
Commodity traders rely on access to relatively cheap finance as moving a 2m barrel-capacity supertanker requires almost $100m in credit at current crude prices. The industry operates on razor-thin margins, requiring large volumes of trading to generate decent returns. Financing costs are one of their largest expenses.
Mr Törnqvist’s comments come as Singapore faces calls to take a tougher line on failed companies. The city-state has a suffered a number of blows in the commodity trading sector in recent years, including the near collapse of once publicly listed Noble Group.
Singapore’s location, straddling the shipping lanes that connect China with global markets, has seen it develop into one of the world’s biggest commodity hubs — and a natural home for traders, which the country has courted with low corporate tax rates and other benefits.
Trafigura, whose top executives largely sit in Switzerland, moved its legal headquarters to Singapore eight years ago. Gunvor, Vitol, Glencore and Mercuria all have significant operations there. They rub shoulders with a group of aggressive local players that have carved out strong positions in markets such as bunkering, or marine fuel.
Mr Törnqvist said Gunvor was having a strong second quarter after the extreme volatility created by the coronavirus pandemic had weighed on profits in the first three months of the year. As oil prices have stabilised, traders have been able to generate more consistent profits from storage trades at sea and elsewhere.
“We’ve done very well in the second quarter, which I suspect every trading house has done,” Mr Törnqvist said. Oil prices have risen from below $20 a barrel in April to near $40 a barrel today, but the structure of the market still makes oil storage profitable.
“To pick the absolute bottom is always hard but we basically got it right and saw the end of the down market in time,” Mr Törnqvist said.
The Gunvor head said he thought oil consumption was still down by about 11m barrels a day — or roughly 11 per cent — from pre-pandemic levels, but production cutbacks by Opec and its allies and output declines in the US were starting to bring the market into balance.
He said it would be 2021 at the earliest before demand recovered fully, with the economic hit of the virus also cutting into oil consumption.
“I don’t think we will fully restore pre-coronavirus demand this year. There will be some loss of demand. Even if it is 5 per cent, that’s 4-5m b/d [barrels per day],” Mr Törnqvist said.
“It has been quite a remarkable recovery, but recent volatility shows plenty of uncertainty going forward. [But] with reasonable Opec compliance, prices could be a bit higher by the end of the year.”