Asian commodity financing hit by economic slowdown

Asian commodity financing hit by economic slowdown

SINGAPORE (Reuters): The global economic slowdown has had a knock-on effect on commodities trade financing in Asia but China's anticipated entry to the World Trade Organization (WTO) offers a ray of hope, industry officials said on Thursday.

Banks have become increasingly selective in lending to the commodities trade in a region beset by general economic woes and compounded in some places by political instability, they said on the sidelines of a conference on structured commodity finance.

"Banks are reluctant -- given the political and economic situation which prevails in many countries in Asia -- to actively solicit new business as risks are currently high," said Mark Gibson, managing director of Kuala Lumpur-based Commodity and Trade Support Sdn. Bhd.

The officials added that the global economic slowdown, driven by the United States, had hit demand for financing from the non- ferrous metals industry more than any other sector.

"As far as impact on the grains side of the business is concerned, it is not that bad. I just cannot guess when things will get better," said Michael Goh, head of trade and commodity finance at Rabobank Singapore.

The officials said many banks were eagerly awaiting China's entry into the WTO, which would open up a vast window of opportunity for commodity financing -- in both grains and non- ferrous metals sectors.

"One of the major problems that foreign banks operating in China today are facing is the inability to fully assess the credit risk," Gibson said.

China is expected to become a member of the WTO by early next year, paving the way for increased trading opportunities and more open markets. It has pledged to open its sheltered banking industry to foreign competition after it joins the WTO.

A spate of financial difficulties faced by commodity trading firms such as Swiss-based Andre and Cie and the Singapore unit of G. Premjee Ltd have acted as eye-openers for many banks, who are becoming increasingly wary in their lending policies.

Saddled with US$400 million bank debts, Andre, once one of the word's top five grain trading groups, won protection from creditors in March after failing to gain more support from banks that had backed earlier restructurings.

Andre's woes surfaced a few months after the Singapore unit of Bangkok-based G. Premjee Ltd was put under judicial management. Court documents put its bank debts at $111 million.

In May, Andre said a court had granted it a further six months of protection from creditors. Hong-Kong based industrial raw materials supplier Noble Group Ltd has already bought Andre's Asian operations.

G. Premjee currently remains under judicial management.

This has made conditions more difficult for many smaller trade houses who are already facing a squeeze in their margins, due to the very low prices ruling for many commodities.