Wednesday 29 October 2008
Credit ‘Tsunami’ Swamps Global Trade as Banks Curtail Financing
Suppliers of oil, coal, grains and consumer products from Chicago to Mumbai are losing sales as the credit crisis spreads beyond financial institutions, and banks refuse financing or increase the fees for buyers. Coupled with declining demand, the credit squeeze is threatening international trade, one of the lone bright spots in the global economy.
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Credit ‘Tsunami’ Swamps Global Trade as Banks Curtail Financing
By Michael Janofsky, Mark Drajem and Alaric Nightingale
29 October 2008
(Bloomberg) – Richard Burnett’s lumber company had started loading wood onto ships heading for China. More was en route to the docks. It was all part of an order that would fill 100 40-foot cargo containers.
Then Burnett got a call from his buyer at Shanghai VIVA Wood Products Co. The deal was dead. He told Burnett, president of Cross Creek Sales LLC in Augusta, Georgia, he couldn’t get a letter of credit to guarantee payment for at least six months.
“It was like a spigot got cut off,” Burnett said, recounting the transaction that fell apart in July. The inability of buyers in China and Vietnam to get letters of credit has cost his company as much as $4 million this year, a third of projected revenue, forcing him to lay off 15 of 35 employees, he said.
Suppliers of oil, coal, grains and consumer products from Chicago to Mumbai are losing sales as the credit crisis spreads beyond financial institutions, and banks refuse financing or increase the fees for buyers. Coupled with declining demand, the credit squeeze is threatening international trade, one of the lone bright spots in the global economy.
“It’s like standing on a beach watching a tsunami, knowing that it’s coming,” said Scott Stevenson, manager of the International Finance Corp.’s Global Trade Finance Program. IFC is the World Bank’s private lending arm.
Emerging markets such as Brazil, Vietnam and South Africa are particularly vulnerable because buyers have more trouble proving their financial strength. The slowdown is also damaging the U.S., the world’s largest economy, where exports accounted for almost two-thirds of the 2.1 percent growth in gross domestic product in the 12 months through June, according to the U.S. Trade Representative’s office.
Shipping Rates Fall
Another sign of trouble: The Baltic Dry Index, a measure of commodity shipping costs that banks watch as an economic indicator, fell below 1,000 yesterday for the first time in six years, dropping it 89 percent for the year.
Global trade volumes may sink next year, their first decrease since 1982, according to Andrew Burns, a lead economist at the World Bank. While there is still uncertainty over future prospects, trade may contract by as much as 2 percent, after annual increases of 5 percent to 10 percent over the past decade.
“We only see this kind of shock when we have outbreaks of war, or maybe the oil shocks of the 1970s,” said Kjetil Sjuve, a commodities shipbroker at Lorentzen & Stemoco AS in Oslo. “This lack of credit was a shock to the entire economy. We were hit second after the banks.”
Letters of Credit
Of the $13.6 trillion of goods traded worldwide, 90 percent rely on letters of credit or related forms of financing and guarantees such as trade credit insurance, according to the Geneva-based World Trade Organization.
Letters of credit are centuries-old instruments that allow far-flung partners to complete large transactions. An importing company gets its bank to issue the letter, guaranteeing payment for a delivery. That bank provides the letter to the exporter’s bank, which then guarantees payment to the exporting company.
The system breaks down when banks don’t trust one another and are unwilling to accept a letter of credit as proof that payment is coming.
From 2000 through last year, the use of letters of credit declined to about 10 percent of global trade transactions, the IFC’s Stevenson said. Over the past six months, they began “roaring back into fashion” as sellers sought to guarantee payments from buyers they no longer trusted, he said. At the same time, liquidity problems caused banks to increase charges.
Rates Rise
Until recently, companies paid as much as 1.5 percent of the value of a transaction for credit guarantees. The risk premium for letters of credit in emerging markets such as China, Turkey, Pakistan and Argentina has doubled or tripled recently, said Uwe Noll, director of country/financial institutions sales at Frankfurt-based Deutsche Bank AG.
“The whole global trade production line relies on letters of credit,” Matt Robinson, an analyst at Moody’s Economy.com wrote in an Oct. 23 report. “No letters of credit, no transactions – and no transactions mean no international trade.”
The evidence is piling up in the world’s ports.
An Iranian oil tanker able to carry enough crude oil to supply Ireland for five days arrived at the Turkish port of Ceyhan on Oct. 6. Then she waited eight days before the company that hired her was able to secure a letter of credit that was acceptable to Iraq, the country selling the cargo, according to two people involved in the loading and unloading of the oil.
‘Crisis Situation’
Mumbai-based Essar Shipping Ports & Logistics Ltd. couldn’t buy equipment used to handle bulk materials at ports when the Chinese supplier wasn’t able get a letter of credit from an Indian state-owned bank accepted in China, said V. Ashok, Essar’s executive director.
“This is absolutely a crisis situation here,” Ashok said. “If you don’t discount LCs, how will you do business? Business around the world is done on LCs, not cash. It’s all jammed.”
In Chicago, C1 Resources is holding up 1 million metric tons of cement valued at as much as $150 million, because an African customer can’t secure a letter of credit, said Chief Operating Officer Rob Risner. The order was placed Sept. 10 for shipment to Nigeria, Cameroon and Angola and the customer is still seeking a line of credit, Risner said.
Burnett, of Cross Creek, said the demise of his deals with Asian buyers also reflects the weakness of the U.S. economy, including a slowdown in construction that has reduced demand for the wood products companies such as Shanghai VIVA make.
Liu Jian Jun, manager of Shanghai VIVA, said weak demand in the U.S. and elsewhere killed the deal with Cross Creek, not access to credit.
Small Business Hurt
James Morrison, president of the Small Business Exporters Association in Washington, polled 1,000 of his members this month on the impact tight credit is having on their ability to trade. By a margin of six to one, companies that had tried to get export financing recently said they faced “unusual difficulties.”
A few said their banks had told them the terms of existing credit facilities had to be reworked and the companies would have to provide more principal, Morrison said.
The same is true in Brazil. An Oct. 23 report from the country’s Confederacao Nacional das Industrias, which represents 27 industry groups and 7,000 trade associations, found that Brazilian companies of all size are losing access to credit.
“To make exports feasible, you need funding and this has virtually dried up in the last weeks,” said Flavio Castelo Branco, chief economist for the group.
‘More Cautious’
Policymakers are responding. Pascal Lamy, head of the WTO, has called a meeting of trade officials for Nov. 12 in Geneva to discuss how to get more credit to exporters in poor nations. The organization has invited heads of the largest development banks as well as representatives from Citigroup Inc., JPMorgan Chase & Co. and other commercial banks.
The World Bank has added $500 million to the $1 billion it was already using to guarantee export financing. The U.S. Export-Import Bank, a government-chartered entity that helps finance exports, is gearing up to provide more guarantees, said Jeffrey Abramson, vice president for trade finance.
Dominic Ng, chief executive officer of Pasadena, California-based East-West Bancorp Inc., the biggest lender serving the Chinese community in the U.S., said his bank this year has reduced the number of letters of credit issued for the first time. It is providing about 10 percent fewer letters, after annual increases of 10 percent to 20 percent in the past decade.
“We’ve become more cautious,” Ng said, blaming the retrenchment on a decline in the number of credit-worthy customers. Bank bailouts funded by the U.S. and other governments have begun to ease liquidity problems.
“But we still have credit issues,” he said. “And they are going to get worse, not better, because the economy is getting worse.”
China begins investigation of tainted eggs
29 October 2008
BEIJING: Officials in northeast China said Wednesday they were looking into reports that eggs from a local company were tainted with the toxic chemical melamine, vowing "severe punishment", state media reported.
The government of Dalian, a major port city, said in a notice that contaminated eggs discovered in Hong Kong were produced by a local company on September 6, the Xinhua news agency said.
Xinhua did not name the company, but earlier reports have identified it as the Hanwei Group, one of China's top egg producers.
The discovery of the tainted eggs has led to mounting fears that melamine, which has killed four babies and sickened 53,000, may have contaminated a larger share of China's food supply than previously thought.
So far melamine has been discovered only in dairy products or products containing dairy ingredients.
US retail giant Wal-Mart said Tuesday it had pulled Hanwei's eggs from its shelves in China, emphasising this was a precautionary measure and that products from Hanwei inside the country had not yet been found to be contaminated.
Hong Kong health authorities reported over the weekend that they had found melamine in eggs produced by the Hanwei Group.
"Over the past few days, we pulled this brand of eggs off shelves in all our outlets in China," Wal-Mart spokeswoman Mu Mingming told AFP.
Wal-Mart's move was the first major recall of eggs in mainland China over melamine fears, but Mu emphasised this was a precautionary measure and that the products from the Hanwei group had not yet been found to be contaminated.
Most other major supermarket chains in China, including France's Carrefour, said they had issued no such recall.
Four babies died of kidney failure and 53,000 fell ill in China this year after drinking milk or consuming dairy products laced with melamine. - AFP/yb
Thailand finds smuggled Chinese chocolate tainted with melamine
29 October 2008
BANGKOK (AFP) – Thailand's Food and Drug Administration said Wednesday it had found high levels of melamine in chocolate bars smuggled in from China.
In an official statement the agency said tests showed the Orphic brand of chocolate, discovered in a border town market, contained 34.37 milligrams of melamine per kilogram -- nearly 14 times the permitted level.
The unlicensed chocolate was discovered in northeastern Mukdahan province, 642 kilometres (400 miles) from Bangkok.
The agency urged consumers not to buy any imported dairy products which have not been FDA-certified.
"The FDA has asked Mukdahan provincial authority to crack down on the selling of illegal chocolate and notified all provincial health authorities not to allow the selling of this chocolate," the statement said.
Four Chinese children died and at least 53,000 were made ill after consuming dairy products laced with melamine, an industrial chemical used in the manufacture of plastics.
The chemical had been added to watered-down milk to make it appear to have a higher protein content.
Sharp exports dropping in Thailand may lead to 15 % workers unemployed
October 28, 2008
The Federation of Thai Industries (FTI) warned Tuesday that Thailand's export output has plunged 30 percent and the slump could persist till the beginning of 2009, which could leave many in the industrial sector unemployed.
Thaveekij Jaturajarernkul, FTI deputy chairman and labor committee chairman, was quoted by Bangkok Post as saying that the industrial sector may lay off 10 to 15 percent of employees. Around 700,000 new graduates would also have more difficulties in finding jobs each year, he noted.
According to the reports, the increasing unemployment rate is due to the global economic recession, and many industrial segments of the country have experienced lower sale orders by about 30 percent from the United States, the European Union and Japan.
"Many factories have lifted their overtime and reduced the number of workdays from six to five. Some factories have to lay off 10 percent of their staff, and the consequences should be more apparent by January 2009," Thaveekij said.
He urged the government and the private sector to jointly seek plans to cope with the economic crisis because there are no direct solutions at the moment.
Another FTI deputy chairman Thanit Sorat said the export output, particularly from clothing, furniture, ceramics and electrical appliance industries, has dived by about 20 to 30 percent.
The Thai Chamber of Commerce will announce its study on the economic impact on the country's industries and the plans to manage and address it in the short-term and long-term on Nov. 13
White House to banks: Start lending now
By Jennifer Loven
October 28, 2008
White House tells banks getting federal aid to quit hoarding money and start lending it
WASHINGTON (AP) -- An impatient White House prodded banks and other financial companies Tuesday to quit hoarding billions of dollars flowing into their vaults from Washington and start making more loans. Wall Street soared nearly 900 points on bargain-hunting and hopes of a hefty interest rate cut by the Federal Reserve.
The stock market's amazing climb, with its second-largest point gain ever, was a welcome burst of good news for a nation suffering big job losses and seemingly tumbling into a painful recession.
Consumer pessimism reached record levels in October amid rising unemployment, plunging home prices and shrinking retirement and investment accounts. The Conference Board, a private research group, said consumer confidence fell to its lowest point since it began tracking consumer sentiment in 1967.
Hoping to thaw the credit freeze that has chilled the economy, the Bush administration sent banks an unmistakable message to put aside fears and open up loan windows for cash-starved businesses and consumers who have pulled back on spending.
"What we're trying to do is get banks to do what they are supposed to do, which is support the system that we have in America. And banks exist to lend money," White House press secretary Dana Perino said. While there are limits to Washington's power to affect banks' behavior, the White House decided it was time to use its bully pulpit.
"They (regulators) will be watching very closely, and they're working with the banks," Perino said.
Meanwhile, Treasury Department officials met with banking industry representatives to resolve a glitch in the rescue program that has temporarily prevented some 6,000 of the nation's 8,500 banks from applying for government support.
Treasury is buying preferred shares in banks as a way of injecting cash into the institutions. But about 6,000 of the nation's banks don't have publicly traded shares of stock and therefore are not set up in a way to meet Treasury's current qualifications.
Treasury officials at the meeting assured banking industry representatives that they are working to rework the application forms so that both banks with publicly traded stock and privately held institutions can qualify for the program. They said if the Nov. 14 deadline for applying for government support needs to be extended it will be.
Washington has pumped money and confidence-building measures into the system over recent weeks to get lending, the lifeblood of the credit-dependent American economy, flowing freely again and to combat the worst financial crisis since the 1930s. So far, though, it has not worked. While the crucial and much-watched short-term lending rate called the London Interbank Offered Rate, or Libor, has come down, it remains at elevated levels.
On Wednesday, the Federal Reserve is expected to announce a cut in its fed funds rate -- and Wall Street is looking for a drop in the key interest rate by half a point to 1 percent.
At the center of the administration's efforts to thaw credit is the $700 billion financial bailout plan approved by Congress and signed by President Bush earlier this month. Under that law's authority, the administration is doling out $250 billion to banks in return for partial ownership.
The Treasury Department, which is overseeing the massive capital injection program along with the rest of the bailout, will pour $125 billion into nine of the country's largest banks, which account for 50 percent of all U.S. deposits. Anthony Ryan, Treasury's acting undersecretary for domestic finance, said the first payments went out Tuesday. An additional $125 billion will start flowing to other banks within days, he said.
"As these banks and institutions are reinforced and supported with taxpayer funds, they must meet their responsibility to lend, and support the American people and the U.S. economy," Ryan told the annual meeting of the Securities Industry and Financial Markets Association. "It is in a strengthened institution's best financial interest to increase lending once it has received government funding."
Rep. Henry Waxman, D-Calif., chairman of the House Oversight Committee, asked the banks getting the $125 billion to detail what they are paying their executives and employees, including bonuses.
"I question the appropriateness of depleting the capital that taxpayers just injected into the bank through the payment of billions of dollars in bonuses, especially after one of the financial industry's worst years on record," Waxman said.
The infusion of federal money is to rebuild banks' battered capital reserves so the institutions would feel comfortable resuming more normal lending practices. But that confidence was undercut somewhat when reports surfaced that bankers might use the money to buy other banks. Indeed, the government approved PNC Financial Services Group Inc. to receive $7.7 billion in return for company stock on Friday and, at the same time, PNC said it was acquiring National City Corp. for $5.58 billion.
There is little federal officials can do about it. There is no language in the bailout bill that specifically obligates banks receiving money to increase their loans. Officials had argued that attaching strings to the capital-infusion program would discourage financial institutions from participating.
"The way that banks make money is by lending money," Perino said. "And so they have every incentive to move forward and start using this money."
Other credit-loosening efforts have included:
--A Federal Reserve program, begun Monday, to purchase the short-term debt of businesses, known as commercial paper.
--Temporary guarantees by the Federal Deposit Insurance Corp. of new issues of bank debt -- fully protecting the money, for a fee, even if the institution fails.
--Emergency loans from the Fed for financial institutions and even other types of companies. The Fed has been repeatedly tapping this Depression-era authority to be a lender of last resort.
--New temporary federal guarantees to assets held in money market mutual funds as of Sept. 19 but not since then.
--A temporary increase in the cap on deposit insurance from $100,000 to $250,000 on interest-bearing accounts, and unlimited deposit insurance for non-interest bearing accounts, which small businesses often use to cover payrolls and other expenses and which frequently exceed $250,000.
--The Fed's half-point reduction in its target interest rate on Oct. 8, done in conjunction with rate cuts by other central banks around the world.
Meanwhile, layoffs continue. Whirlpool Corp. said Tuesday it will cut 5,000 jobs. That's on top of other recent layoffs of thousands of workers by Xerox Corp., drugmaker Merck & Co. Inc. and financial services firm National City Corp.
IOI share price plunges on forex losses
By FINTAN NG
October 25, 2008
PETALING JAYA: Plantation heavyweight IOI Corp Bhd’s share price plunged 18.33% to close at RM2.45 yesterday on reports that the company had lost money hedging palm oil purchases in euros after the currency fell.
Quoting TA Securities analyst James Ratnam, Bloomberg said Loders Croklaan, a Netherlands-incorporated IOI unit, hedged against forward purchases of crude palm oil stretching out as long as 12 months.
The euro has lost 7.3% against the ringgit this year.
According to Ratnam who spoke to an IOI official, the separate resignation of an IOI finance executive is for personal reasons and isn’t tied to the forex loss, Bloomberg reported.
Citing a company source, Reuters reported that IOI had asked two or three key personnel to resign following the forex losses.
In its statement yesterday, IOI said a significant part of its revenue was derived from several foreign currencies, including the euro and the US dollar, “due to its involvement in substantial downstream businesses.”
IOI said the losses were due to “timing differences” of its forward contracts.
“The losses or gains from these timing differences have been occurring in the past but have been made more significant recently due to the volatile foreign exchange markets,” the company said, adding that the company’s downstream businesses derived their profits from “locked-in contribution margins and not from fluctuations in exchange rates.”
The statement did not state the extent of IOI Corp’s forex losses. “The share price weakness is more of a knee-jerk reaction,’’ Ratnam had said in a note to clients.
IOI had reported in financial year ended June 30 that RM61.78mil of unrecognised losses from currency options contracts, of which RM59.30mil were from sales contracts and the remainder, purchase contracts.
On a year-to-date basis, its share price has fallen 68.39%, in tandem with the fall in the price of crude palm oil (CPO), which is off its March high of nearly RM4,500 per tonne.
CPO fell RM160 to close at RM1,390 per tonne yesterday as fears of a global recession dampened demand.
Aseambankers Malaysia Bhd analyst Ong Chee Ting said in a report on Wednesday that there was still some downward pressure on CPO prices and plantation stocks due to investors unwinding theirlong positions on commodities.
Speculators were also fuelling the price decline on concerns that weakening demand would significantly outpace supply slowdown, Ong said.
“Amid such uncertainties and the present high CPO inventory of close to two million tonnes in Malaysia, we believe there is further potential downside to CPO prices,” he said, adding that prices could fall to RM1,200 per tonne over the next month or so if crude oil headed towards US$50 per barrel.
But there might be a technical rebound towards the end of the year due to a weaker US dollar and the seasonal low production period between December and June 2009, Ong said.
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