Banks are beginning to count the cost of mega-failures amongst commodity traders, notably in Singapore and Dubai, whose less than rigorous trading practices and in some cases suspected fraud have been exposed by the impacts of the coronavirus pandemic.

The exposure of letter of credit (L/C) business to these failures is not clear but it may be massive, as indicated by ABN Amro Bank lodging a claim against Hin Leong Trading, that includes applications for charges related to irrevocable L/Cs tied to the Singaporean oil trading giant's assets (DC World News, 21 April 2020).

Dishonest practices

Standard Chartered and HSBC are facing losses of millions of dollars in loans to Dubai-based Phoenix Commodities, which said it would restructure its debt after incurring US$450 million of losses on currency hedges earlier this year.

HSBC has filed a court application alleging "dishonest practices" and "shams" against oil trader Zenrock Commodities Trading, which like Hin Leong has faced a collapse in global oil prices as well as the impacts of coronavirus.

Dire straits

Agricultural trader Phoenix Commodities, which operates in Dubai and Singapore, is being liquidated after amassing more than US$400 million in potential trading losses.

Other commodity traders that have fallen into dire straits include Agritrade International, Hontop Energy and Petro-Diamond.

Digital L/C alternatives

Some analysts suggest that the fraud risks revealed by the impacts of the coronavirus pandemic could be mitigated by a move away from L/Cs towards the use of digital confirmation facilities.

They say this would also help keep a check on shipments that, particularly at this time when supply chains are so disrupted, in which loaded quantities differ from agreed quantities, qualities vary and ships are late.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.