Rubber industry to learn from mistake

Rubber industry to learn from mistake

BALI, Indonesia (Dow Jones): Rubber industry participants are still smarting over contracts that were not honored when a big rubber dealer went bust early this year.

They felt the fundamental tenet on which the rubber trade has been traditionally conducted - trust - was violated because the parties involved chose to honor only those contracts that were profitable.

To prevent this incident from becoming a precedent for future takeovers, the industry has "taken a strong view...(that it will) refrain from dealing with the new company, as well as traders involved in the (collapsed company) who have moved on to other companies," said Tan Swee Hua.

Tan was speaking on behalf of the ASEAN Rubber Business Club's chairman after the club's 25th meeting Saturday in Bali, Indonesia.

ASEAN refers to the Association of Southeast Asian Nations. ARBC members comprise the world's top three natural rubber producers - Thailand, Indonesia and Malaysia - plus Singapore.

Declining to name the companies involved, Tan would only characterize the whole incident as "the liquidation of a big international rubber trader."

A big rubber dealer, the Lewis & Peat group, collapsed earlier this year, leaving its Singapore operations dissolved while its London operation, Lewis & Peat (Rubber) Ltd., was sold to REB Willcox, a subsidiary of U.K.-based Willington PLC (U.WIL).

REB Willcox told Dow Jones Newswires in mid-February that it didn't take over any of Lewis & Peat (Rubber) Ltd.'s liabilities and outstanding contracts.

Lewis & Peat's U.S. division is the sole surviving arm, having emerged from Chapter 11 bankruptcy protection later February.

Industry participants are incensed that the traders involved in the collapsed company, along with the company which bought it, took advantage of the fact that parties whose contracts weren't honored would have no legal protection because the trade was done without letters of credit, Tan said.

Even though preferential treatment of contracts advantageous only to the collapsed company exists in any buy-out, Tan said the rubber trade should be treated differently.

"The contention is the buyer knew very well this is the market practice, and so did the big rubber dealer...those involved in the buy-out and employed in the collapsed company knew what would happen," he added.

Almost 100 percent of trade with large rubber dealers, such as with Cargill Inc., is conducted without letters of credit, but just based on documents of acceptance, or open credit, Tan said.

Such was the case with the dealer in question, which was a large and long-established player, trading 300,000-400,000 metric tons of rubber a year, he continued.

"Without L/Cs (letters of credit), these people whose contracts weren't honored had no legal right when the company went into receivership," he said.

Tan said it was difficult to estimate the total value of shipments affected.

But Lewis & Peat traders were unaware the owners had "over- invested a short-term trade financing facility in long-term projects," said a former trader with the company.

"Traders trade their owners' money in good faith, and when the owners post money out of the company, is it the traders' fault?" he asked. "Do you think we didn't try our best to help within law?"

The Lewis & Peat group was a subsidiary of Indonesia's PT Bakrie Sumatera Plantations).

After an audit showed funds had been misused, Rabobank NV, a key creditor of the Lewis & Peat group, refused to roll over its $60 million short-term trading facility, Bakrie Sumatera's president director Hariwidono said Jan. 14.

It is also a legal issue when buy-outs involve taking over assets, not liabilities, the former Lewis & Peat trader added. "So whose fault is that?"

There had also been cases when rubber exporters defaulted on contracts to companies that had gone under.

He suggested that the industry could create a fund to help out those with dishonored contracts or a better regulation of the industry.

Former Lewis & Peat traders would also be willing to address these issues with those affected when approached, he said. REB Willcox managing director Andrew Gull wasn't available for comment.