Posted on 12/01/2004 5:41:28 AM PST by conservativecorner
SINGAPORE (AFP) - A Singapore-listed Chinese company that sources jet fuel for China is in deep trouble after losing 550 million US dollars in speculative oil trades, triggering concern over other China-linked stocks.
China Aviation Oil (Singapore) Corp.'s losses, announced by the company late Tuesday in a statement to the Singapore Exchange, equal its market capitalisation of 549 million US dollars, raising serious questions about the unit's future.
It is the largest amount a company in Singapore has lost by betting on derivatives since rogue British trader Nick Leeson bankrupted Barings Investment Bank when he blew more than one billion US dollars in the 1990s after getting the bond market wrong.
In the statement, China Aviation Oil said its high-flying chief executive officer, Chen Jiulin, has been suspended from duty pending an independent audit of the firm's losses by PriceWaterhouseCoopers.
The company said it has also sought help from Singapore's High Court to work out a repayment scheme with its creditors.
Its Chinese government-owned parent, China Aviation Oil Holding Co., has established a task force to oversee its daily operations.
China Aviation Oil admitted the huge losses came through "speculative oil derivative trading," blaming the situation on record high oil prices in October, which it called wrong, expecting them to fall instead of rise.
"As the prices of crude oil were at an all time high at above 55 US dollars per barrel, the company faced significant margin calls on its open positions and did not have the resources to satisfy the margin calls," it said.
To help cope with the situation, China Aviation Oil turned to its parent firm, which provided an emergency loan of 100 million US dollars, but that proved to be too little, too late.
"This loan quickly proved to be insufficient to satisfy the company's requirements ... a more complete rescue proposal would be required."
Derivatives allow an investor to take what can be a highly leveraged position in an underlying security or asset based on its likely price in the future.
If the market behaves as expected, the returns can be spectuclar, as can be the losses if it does not.
Analysts said the losses racked up by the company reflect the poor level of corporate governance within its top management.
"They gambled on the wrong side so they lost," said Eswaran Ramasamy, director for Asian oil markets at energy information provider Platts.
"What I am very concerned about is the lack of transparency in the company." Ong Eng Tong, an independent oil consultant with almost 40 years of industry experience, said the sorry state of the company exposed its lack of management control.
"Their business is the jet fuel business ... they should have concentrated on that," Ong said.
China Aviation Oil supplies one third of China's total jet fuel needs and has a monopoly on such imports into the mainland.
The fallout from the disaster at China Aviation Oil, formerly regarded as one of the leading Chinese firms to list in Singapore, was being felt on Wednesday by other mainland firms that are publicly traded here.
Most Chinese-listed stocks were taking a beating as investors bailed out on worries about their level of corporate governance, dealers said.
"Its really shocking ... It reflects weak corporate governance and will hit sentiment in other Chinese stocks," a local research analyst, who did not want to named, said of China Aviation Oil (Singapore) Corp.
In morning trade, several Chinese stocks were among the top 40 losers on the local exchange.
Among them were China Petrotech, which fell 2.5 Singapore cents or 5.16 percent to 46 Singapore cents, and Hongguo International, which lost 10 cents or 4.55 percent to 21 cents.
Shares of China Aviation Oil (Singapore) Corp. have been suspended since Monday.
If so, I would expect the price of crude oil to drop rather quickly over the coming months.
From what I have read, it played a big part in the run-up of oil prices. I sure would hate for the oil bubble to burst, and have oil in the $30 range. END SARCASM!
Watch for falling prices.........(and Chinese from windows)........
HAH-Haw!
[/NELSON]
You know the Chinese have really joined the Capitalist world when they lose $550 million in derivatives trading. LOL.
I have stated many times to people that I would not invest any money in a Communist run company....duh
So I never invest in CCN of the news media...lol
Hey, its only money, you've still got your health.
A great oil trader (who taught me everything I know) always liked to say, "Pigs get fat, hogs get slaughtered."
PriceWaterhouseCoopers.......Ummmmmm,.........and Martha Stewart. Oh Okay, good choice.
the movie "Rogue Trader" with Ewen McGregor is a great flick.
Bttt!
The real reason that guy from Barings fled Singapore:
"Oh, s***! If they gave those American yobs six lashes with the cane for graffiti and vandalism, how many are they going to give me for losing 800 megabucks without my employer's permission?"
although in this case they were betting the price of oil would come DOWN ... turned out they were very wrong in their bets...
Confucius says:
This Chinee oil trader soon become kidney donor of both kidneys
A Saudi (I believe the Oil Minister) warned last summer that anyone who speculates in the current market will be burned... not unexpected
Live on the bubble, die with the bubble.
In other words, I can't sell short?
THAT STINKS!!! Now how do I put that knowledge to work for me?
Typically, aviation firms are in danger from oil prices going higher, so they purchase derivative hedges. Should oil go up, those hedges make very, very large profits. Those profits then offset the firm's more expensive oil purchases for their actual daily business operations.
But, China Aviation lost enormous amounts of money on hedges while oil went up, indicating that whatever they were doing, it wasn't the typical anti-oil hedge in use by normal aviation firms.
That's a red flag.
That's a very non-standard bet for an aviation firm. The "aviation business" itself is essentially a living bet that oil will go down. The whole reason for an aviation firm to hedge oil is to be protected in case oil prices make a large rise.
So why would a Chinese firm in the land of 10% annual GDP growth everywhere bet the whole company on a double or nothing gamble that oil would drop before November ended?
His bets today, for instance, would have paid off handsomely. But timing is a very difficult thing to guess right on. So again, why risk the entire company on such a risky bet?
Methinks China is seeing some cracks in the seems.
Sounds like the Enron style of business.
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