Two Hong Kong-based oil traders say banks have reacted to the fraud scandal in Singapore’s commodities finance sector by restricting credit to the wider market, resulting in substantial financial losses.

NewOcean Energy and Strong Petrochemical, two publicly listed companies, make the accusations in interim company filings covering the first half of 2020.

Reporting net losses of around US$174mn, NewOcean says a “considerable number of banks had made an overnight decision of tightening the credit facilities granted to energy businesses” earlier in the year. That caused a squeeze on working capital for trading houses, “dooming them to misery”, it says.

Strong Petrochemical’s H1 losses are lower, standing at US$12.7mn, but the company also says it has encountered difficulties obtaining bank finance to support trade transactions. Both traders reported profits during the equivalent period last year.

Though the two companies say difficulties initially arose due to a drop in demand caused by Covid-19 containment measures alongside a historic slump in oil prices, both cite the impact of fraud cases in Singapore on their ability to do business.

“The Hin Leong incident has had an immediate ripple effect on the oil industry,” NewOcean says, referring to the sudden collapse of one of Asia’s largest independent fuel traders in April this year amid bank accusations of widespread and systematic fraud.

Several other oil traders have also become embroiled in the scandal, with accusations of duplicate financing or fake trades levelled against ZenRock, Sugih Energy, Hontop and others.

“Banks in both Singapore and Hong Kong have apparently [become] very concerned that there could be further defaults by oil traders as oil prices drop, and accordingly began to tighten their credit lines to other oil traders in the market,” NewOcean adds.

“As a result of that and despite that the group has no business or other connection with Hin Leong whatsoever, a number of the group’s banks demanded a reduction or limitation of the documentary and other short term credit.”

NewOcean says it is heavily reliant on the support of bank credit facilities, and so has suffered short-term liquidity pressures. Among the effects has been a missed principal repayment on a US$155mn loan.

The company’s losses have been exacerbated by delays in collecting trade receivables and inventory being sold below purchase cost, it adds. It is now seeking to negotiate a debt restructuring plan with its bank creditors, while downsizing its oil products business and accelerating efforts to recover outstanding funds due.

Strong Petrochemical also cites a fall in demand for petrochemicals and coal, leading to a substantial decrease in its revenue for H1, 2020.

During that period, it says the “scandal in… Singapore’s energy sector caused the banks to curtail their exposure to oil traders by tightening the grant of credit line facilities”.

“Due to the increased difficulty to obtain bank financing for trades, the group further suffered from declined revenue and profit.”

The company tells shareholders it has reduced its annual trade target and is focusing on back-to-back trade arrangements – where cargo is purchased and immediately sold onto another party – in order to minimise inventory risk.

The two filings are a rare example of commodities traders explicitly blaming the events in Singapore for bank nervousness. NewOcean had previously issued profit warnings to investors in July and August, but made no mention of those fraud cases.

However, GTR reported in May that several banks active in Asia were reviewing their exposure to the commodity finance sector after the Hin Leong and ZenRock scandals.

Since then, ABN Amro has announced it is withdrawing from the sector entirely, while other banks are closing their doors to new customers.

Jean-François Lambert, founding partner of consultancy firm Lambert Commodities, says it is “not surprising” to see the two Hong Kong traders reporting difficulties obtaining financing.

“As banks are conducting reviews of their commodity portfolio, there are probably other companies experiencing similar issues, especially in the oil and gas sector,” he tells GTR.

Lambert adds mid-sized trading houses are likely to be worst affected, although difficulties are “rarely advertised” by those that are not publicly listed.

At the larger end of the market, trading houses are understood to be in a stronger position, with Glencore executives describing banks’ de-risking decisions as “a flight to quality”.

Meanwhile, Strong Petrochemical has also announced it is taking legal action against Shandong Yuhuang Shengshi Chemical Co., an oil processing company based in China’s Shandong province.

Strong Macao, a wholly-owned subsidiary of the Hong Kong firm, says the case relates to “unpaid trade debts” following a sale of crude oil worth US$62.5mn in January 2018. Around half of that amount remains due, it says.