Asia structured commodity finance: All Sarsed out?

As the initial panic over Sars subsides, businesses in Asia will now begin counting the costs. For commodity brokers and trade financiers, it is difficult to quantify. Christian Stauffer provides a front-line account of the various ways – both big and small – the disease disrupted structured commodity finance deals in the region.

For people who have lived in Asia for years, waking up one morning and reading in the local newspaper that a new “plague” has arrived is quite common. Climate and generally poor sanitary conditions cause a variety of diseases that people in the region have learned to live with – bird flu, encephalitis, dengue fever, not to mention the usual malaria, tuberculosis or hepatitis A. However, in most cases, these diseases affect more remote areas (the ones that attract adventure tourists and the occasional trade financier on a scouting trip to find the next business opportunity). Areas with commodity production are very seldom in the centre of developed cities.

Moreover, in the case of Sudden Acute Respiratory Syndrome (Sars), it was probably the first time since the discovery of Aids that a human-to-human transmissible “plague” attacked the modern, powerful, rich and developed world: Hong Kong, Singapore and Toronto and then New York, Paris and a few other key business centres. Even worse, this new “plague” was unknown and left the most sophisticated specialists doubting a quick end to the crisis and fearing the real impact would remain unknown for quite some time.

In the first few days of the “flu-like disease”, as it was called in the press, there was a feeling that something was going on, but no one knew what. It started somewhere in China, went to Vietnam and then to Hong Kong but, as usual, most people thought it would soon be under control. At that time, travelling, which is an essential part of any customer relationship, was still going on and business was going ahead as usual. After being quickly and surprisingly brought under control in Hanoi, Sars then hit Singapore and Toronto and it was clear that something was going on and it was bad. The World Health Organisation placed a travel ban on Hong Kong and Singapore. Companies, following the recommendations of the local department of health, started issuing their own (sometimes ridiculous or contradictory) recommendations and rules, quarantine and home confinement were implemented, emails with this or that guru’s advice started to circulate in the corporate world, corporate travel bans were issued and contingency plans were activated. Death was in town and no one knew how to fight it. In a society in which people are already culturally prone to superstition and legends, it was easy for Sars to create psychological panic, and it did.

Let’s now analyse the impact on the trade business and, in particular, the area of structured trade finance. Hong Kong and Singapore, the two main trade and finance operating centres in Asia, came to a total halt. One of my colleagues couldn’t get in touch with his bank manager, who, it turns out, was ordered by his employer to stay home. Can you do structured operations without your bank manager?

Even simple banking operations went into slow motion. There was a good account manager who was promoted and his new colleagues took more than a month to accept a meeting with his most recent customer. Companies’ internal policies were more and more hectic, with some asking staff to wear facemasks all the time and trading rooms and banking back offices looking like surgery theatre. Sars was spreading at a speed of 80 cases a day at the peak of the outbreak, people were still dying and the world was condemning Hong Kong, Singapore and China.

This time of uncertainty affected business immediately, tremendously and negatively for all but perhaps suppliers of facemasks or related medical equipments. Multinational companies started repatriating people and entire families were sent back home pending better days. Simultaneously, the Chinese government admitted publicly that previously announced figures were miscalculated and that the actual numbers of people affected were much higher. This was the last punch to knock down an economy that is highly dependent on China and cross-border exchanges with China. Within a few days, travel from Hong Kong and Singapore was either suspended or not welcomed. A friend of mine was planning a visit to one of his offices abroad but was kindly, and understandably, asked by that office to postpone his trip. Meetings scheduled abroad were cancelled at the last minute when a participant from Hong Kong was announced or discovered.

For people in structured commodity finance based in Hong Kong, their natural captive market is in China and, of course, is closely tied to trade volume and prices. Both were put on hold. Trade volumes were going down in all types of commodities. Projects previously initiated were put on standstill pending the next possible visit from customers or bankers, or any sort of news that could help clarify the situation. No manager would realistically put any of his China-based colleagues at risk for a visit and, while they were stuck behind their desks, initiation of discussions with new prospects fell to zero. In Singapore, the mood was slightly better and the problem better under control, but the South-East Asian hub was still under tremendous pressure. This had a knock-on effect on business in the south zone, where uncertainty lingered in countries like Malaysia, Indonesia and Vietnam. Let’s not forget Taiwan, which was badly affected and which is still the number-one “foreign” direct investor in China.

What about China? The question is difficult to answer but it goes without saying the situation was probably very critical. Ask yourself whether you would be glad to go to Shanxi province to visit a potential customer running a smelter or a steel mill. Newspapers started evaluating the economic impact and agencies started downgrading their growth figures for the entire region.

It is important to remember that the trade of many commodities in Asia is essentially sustained by a large number of very small or small-to-medium-sized mono-product traders, who were severely affected and who are not large enough to shoulder a long period of inactivity or an immediate shift to another region or product. They either trade or disappear, creating a de facto bad-debt “credit card” effect in the trade-finance banking world. In China especially, which is still in a phase of privatisation and consolidation, many industries are fragmented into hundreds of small and medium-sized companies – metal production is a prime example. Even the larger ones were affected by a sizeable drop in their volumes, although the risk of them disappearing is also much lower.

Asian markets are mostly driven by mass numbers of retail consumers, who were suddenly told to stay at home and not go out to work and/or buy, spend or travel anymore, sending the regional demand, and subsequently the commodity markets, to the floor. In a period when Asia was already reeling from instability in South-East Asia, the Bali blast and the war in Iraq – meaning existing structured transactions under execution were at risk – it was nothing short of a total disaster. Structured commodity finance often means committing the participants to a transaction for a few months or even years, and Sars modified the risk parameters of any deal under execution. Even shorter trade-finance transactions had to be revisited for a better understanding of the risk profile of the customer.

Fortunately, life is gradually getting back to normal in Hong Kong; facemasks have mostly disappeared or are seen only in crowded areas (it will probably be a plus for fighting lung diseases caused by classic pollution in this city) and no new cases are being reported. The same organisation that downgraded the region is now saying that Sars may not have such an important impact on growth after all. They are probably not thinking about my good friend Mr Wong, who was a trader for years and had to close his business, and the hundreds of other Mr Wongs, as well as the most recent unemployment figures that are climbing over the 8% mark. No one will ever know exactly how much damage Sars has caused, not least of all in terms of people’s perceptions of Asia, but there is no doubt that damage has been done and it will take more than a few months before the region, and its structured commodity business, gets completely back to normal.

Christian Stauffer is an independent broker and consultant specialising in trade and structured commodity finance, based in Hong Kong.