Thursday, December 2, 2004
China Aviation loses $550m in speculative trade
AFP
SINGAPORE: A Singapore-listed Chinese company that sources jet fuel for China is in deep trouble after losing $550m in speculative oil trades, triggering concern over other China-linked stocks.
China Aviation Oil (Singapore)'s losses, announced late onTuesday in a statement to the Singapore Exchange, equal its market capitalisation of $549m, raising questions about its 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 $1bn in the 1990s after getting the bond market wrong.
In the statement, China Aviation Oil said its high-flying CEO 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 HC to work out a repayment scheme with its creditors. Its Chinese government-owned parent, China Aviation Oil Holding, has established a task force to oversee its daily operations.
China Aviation Oil admitted that 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 prices of crude oil were at an all-time high at above $55 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 $100m, but that proved to be too little, too late.
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 spectacular, as can be the losses if it does not.
Analysts said the losses racked up by the company reflect the poor level ofcorporate governance within its top management.
"They gambled on the wrong side, so they lost," saidEswaran 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," he added. 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 country.
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.
"It's 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).
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% to 46 Singapore cents, and Hongguo International, which lost 10 cents or 4.55% to 21 cents.
Shares of China Aviation Oil (Singapore) have been suspended since Monday.
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