Saturday, November 01, 2008
Saturday, 01 November 2008
The spectre of commodity defaults looms large in Asia as buyers walk away from deals sealed before the price plunge, and analysts fear the worst is yet to come, compounding the woes of industry hit by tighter credit. But defaults spreading from palm oil to rubber may increasingly drive suppliers to avoid business with smaller firms that have mushroomed in the past few years to take advantage of the commodities boom. "It's a financial freeze. It's something like an ice age, which only stronger and bigger players will survive," said Nicholas Chung, a senior manager of the commodities team at the Korea Development Bank.
"Smaller guys may even be totally eliminated. This ice age will restructure the business. From the second half of next year we will see only big names in the market. Small and medium players are in a very difficult situation now. No banks are ready to increase their dollar exposure."
Dealers said top global commodity players such as Cargill Inc , Louis Dreyfus, ED&F Man, Noble Group, Toepfer International and ADM were among the firms expected to gain ground at the cost of smaller players that fold up.
"The absence of smaller players means there will be less competition and better margins," said one manager at multinational trading house in Kuala Lumpur. "It is not the same industry it was three months before."
As the world tilts towards recession and markets struggle to stay afloat amid a widening credit crisis, commodities have suffered heavy losses, with palm down 65 percent since March and Tokyo rubber futures losing more than half of their value since hitting a 28-year peak this year.
The Reuters-Jefferies CRB Index, a global commodities benchmark, has lost 26 percent this year and is now set for its largest monthly decline ever, with a loss of about 23 percent in October so far.
In recent months, Chinese and Indian buyers have defaulted on thousands of tonnes of palm oil, which has lost nearly three quarters of its value since hitting a record high in March.
Traders said the losses suffered by the vegetable oil industry in Malaysia and Indonesia -- the world's top palm oil producers -- stand at $300 million, with defaults of around 500,000 tonnes since August.
And rubber exporters from Thailand, Indonesia, and Malaysia could have easily lost more than $20 million after Chinese buyers defaulted on around 10,000 tonnes as prices dropped below $2,000 a tonne, they added.
Besides palm and rubber, Chinese buyers havedefaulted on an unspecified amount of cocoa beans from Indonesia, soybeans cargoes from South America and rice from Thailand.
In addition, iron ore shipments from India have been waiting at Chinese ports for buyers, who are refusing to lift cargoes unless the sellers offer a discount.
"Demand will continue to be at low levels. I am bearish on commodities," said Kazuhiko Saito of Interes Capital Management in Tokyo, adding that the market could see yet more defaults.
Buyers in China, whose ferocious appetite helped send prices of some commodities to record highs, have been the main offenders and traders fear that Chinese buyers will increasingly force suppliers to renegotiate prices.
Some defaulters might return to the market, dealing with a competitor, as sellers avoid taking costly legal measures against errant buyers.
"Normally, we will blacklist the buyers but in most cases we will renegotiate the prices. Anyway, the sellers are always the losers," said a dealer on the Indonesian island of Sumatra.
Corn and soybeans have lost more than 40 percent since peaking in June and July, while wheat is more than 50 percent lower from February's record on the benchmark Chicago Board of Trade.
Thai export-grade RSS3 rubber has also lost more than 40 percent of its value since hitting a record high in July.
Coffee prices in Vietnam, the world's largest robusta producer, have dropped nearly 30 percent in the past month. In Indonesia's main cocoa growing island of Sulawesi, prices have fallen more than 30 percent to reflect losses on world markets.
With prices easing, buyers are delaying opening letters of credit, while exporters involved in a document-against-payment scheme find their cargoes stranded at destination ports after buyers refuse to process the documents.
Traders reckon cancellations and washouts occur occasionally when the markets are volatile, but defaults of such huge scale were unthinkable.
"I have been trading palm oil for the last 25 years, I have not seen such wild price swings and defaults," said one trader.
Mounting defaults could also encourage exporters in Asia to consolidate. On the other hand, small and unreliable clients could eventually become the victims of a global credit crunch.
"Once the storm blows over, it may take six months, one year or whatever, it will throw up a lot of opportunities for bigger companies to consolidate as long as they don't get into trouble themselves," said a dealer at an international trading house.
"Every washout will provide an opportunity to build further base. I think it is already happening to some extent and it will happen faster."
Dealers said sellers may be in a position to salvage some cargoes when prices start crawling back. "People who are sitting on the margins and not accepting cargoes might just come back and buy," said one Singapore-based soybean exporter.
"But it's too early and too small a movement to say that a recovery is taking place."