The distressed Singapore oil trader has admitted to US$800 mil of undisclosed losses. Is its collapse a sign of deeper problems within the industry facing falling demand and cheap supply?
SINGAPORE (April 24): The 318,833-tonne oil tanker Pu Tuo San, similar to her 13 sister ships, are all named after famous mountains of China. For years, the giant vessels plying Singapore’s seas flew the flag high for Lim Oon Kuin’s oil empire, Hin Leong Trading.
The low-profile tycoon started in 1965 as a one-man, one-truck business reselling oil. Over the years, Lim, also known as OK Lim, expanded rapidly, establishing himself as a leading bunker supplier that grew in tandem with Singapore’s port traffic.
At his peak, Lim owned a fleet of 152 vessels that shipped all kinds of oil and gas an Universal Terminal, a joint venture that offered 2.33 million tonnes of storage space as well as fuel storage and blending facilities. For the fiscal year ended Oct 31, 2019, Hin Leong reported earnings of US$78.2 million ($111.6 million) on revenue of US$4.56 billion.
But Lim’s empire is quickly unravelling. A fortnight ago, news emerged that beneath the sprawling portfolio of assets, Lim had hidden some US$800 million in losses incurred from payments made to satisfy margin calls, accumulated over several years. The losses were concealed as “accounts receivables” and remained recorded as such after the losses were realised.
“I had given instructions to the finance department to prepare the accounts without showing the losses and told them that I would be responsible if anything went wrong,” says Lim in an April 17 affidavit used to apply for court protection against creditors (see Page 9 sidebar on banks). The Singapore police wasted no time in starting their investigations while various government regulators quickly stepped in.
Long trade cycle
According to Lim, the trouble started a few months ago when other oil traders started defaulting on their loans. Spooked by the news, several of Hin Leong’s lenders tightened their credit lines, adding strain on its liquidity. Then, the price of crude oil collapsed to just US$22 per barrel on March 31 from US$67 at the end of 2019 after Saudi Arabia and Russia disagreed over production cuts.
In previous down markets, Hin Leong could afford to hold on to the inventory and wait for recovery. However, due to margin calls made by banks for both uncommitted credit and inventory financing facilities, Hin Leong was forced to sell cargo to make up for the shortfalls.
But even after sales were made, buyers took up to two months to pay, putting further stress on Hin Leong’s cash flow. “This long trade cycle to convert expenses (purchase price, freight, storage and manufacturing costs) into revenue (sale price) means that Hin Leong is very vulnerable whenever there is a nosedive in the price of oil,” says Lim in his affidavit. Lim also claims that he was not sufficiently hedged via futures as his preference and focus was to sell physical fuel instead.
With the Covid-19 pandemic, Hin Leong’s troubles deepened when one of its vessels had to stop operating after the pilot from PSA Marine was diagnosed as a positive case.
As of April 9, Hin Leong reported liabilities of US$4.05 billion versus assets of US$714 million. The value of its inventory held is estimated at US$141 million, which is a vastly different from the US$1.277 billion stated on Oct 31, 2019. At present, Hin Leong owes secured creditors some US$3.64 billion and Lim claims he cannot be certain if the conditions for the security of the loans are valid or can be fulfilled.
National security
Between April 8 and April 16, Hin Leong received a total of 23 letters of demand. While most were from banks ranging from ABN AMRO to Westpac Banking Corp, others were from Hin Leong’s trading partners. One such instance was Zenrock Commodities Trading, which, on April 9, asked for prepayment of US$5.33 million to be made before April 13 for 142,500 barrels of fuel.
SembCorp Cogen, the power generating subsidiary of Sembcorp Industries, took precautionary measures too. SembCorp Cogen buys fuel from Hin Leong and maintains a stockpile at Hin Leong’s Universal Terminal. Citing “national security” reasons, SembCogen, in an email on April 15, asked Hin Leong to consolidate its stockpile of 110,000 cubic metres of fuel worth $94 million into three dedicated storage tanks and prevent commingling with fuel belonging to other customers.
Universal Terminal was also asked by SembCorp Cogen to fix prominent notices on the three tanks stating “SembCorp Cogen Pte Ltd is the owner of the Gasoil contents in this tank”. In its email, SembCorp Cogen also claimed it had the right to deploy security guards to protect the three tanks. A week later, SembCorp Cogen announced it had terminated the gas supply and storage agreement with Hin Leong.
Familiar plot
To a certain extent, Hin Leong’s rise and fall is a familiar plot in the high-stakes commodity world (See Page 10). “We’ve seen multiple times in the past when oil prices have dropped suddenly and quickly, people who had long oil exposure or poor hedges or made mistakes or took poor positions, they get exposed and quickly get bankrupt,” says Jeff Brown, president of consultancy Facts Global Energy.
In a volatile market, a single oil tanker can make the difference between profit or loss. “An oil tanker has a lot of value tied up in it. If the value of an oil tanker full of oil drops in half in a month, you can be very exposed,” says Brown.
During the Global Financial Crisis of 2008– 2009 when oil prices crashed along with the financial markets, a few well-known companies went bust, including a “condensate splitter” — otherwise known as a refinery — in Singapore, adds Brown. “I suspect there are others that are in trouble. We may not know about it yet. Not just oil traders, but also other upstream companies. We will certainly see bankruptcies. And we have already seen some,” says Brown.
Bigger worries?
After reports of Hin Leong’s problems surfaced, the government quickly assured the bunkering market that other providers can fill the gap right away. “While there is some immediate collateral impact through credit-tightening on other bunkering players, it is manageable. Our priority is to ensure that our bunkering sector remains robust. And it is,” said transport minister Khaw Boon Wan on April 20. According to Maritime Port Authority, there are 43 other licensed bunkering providers — including two that got their licences just recently: Minerva Bunker and TFG Marine.
To be sure, the Singapore bunker market isn’t quite as fast-growing as it used to be and the number of bunker providers is dropping. In 2019, there were 45 providers, including Hin Leong’s subsidiary, Ocean Bunkering Services. In 2018, there were 51.
In the first three months of this year, nearly 12.72 million tonnes of bunker fuel were sold, up 5.3% y-o-y from 2018’s 12.07 million tonnes. However, from a peak of 50.6 million tonnes in 2017, total annual volume has dropped to 49.8 million tonnes and 47.5 million tonnes for 2018 and 2019 respectively, partly due to more fuel-efficient ships but also because of the US-China trade war.
Amid the shrinking overall market, Hin Leong’s market share has fallen as well. It was listed by MPA as the top bunkering provider in 2018 but dropped to third place in 2019, behind PetroChina International (S) and Sentek Marine & Trading respectively.
In an interview with Reuters in 2013, Lim said that he has been in this oil business for four decades and he was not planning on going away. “I am there to watch over the kids to see if they make any mistakes,” he said. “Oil is something that after you touch it, it stains and stays on your fingers for 30, 40 years. After all these years, I still haven’t found the right detergent.” Sadly, Lim now has to deal with a different kind of stain. — reporting by Jeffrey Tan
