Chinese Oil Trader Loses $550M In Derivatives.

The Singapore-listed China Aviation Oil (Singapore) Corp., sourcing jet fuel for China, has lost $550m in trading in oil derivatives, triggering concern over other China-linked stocks. The losses, announced on Nov. 30 in a statement to the Singapore Exchange, equal the company's market capitalisation of $549m, raising serious questions about its future. (This 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 $1 bn in the 1990s after getting the bond market wrong).

In its statement, China Aviation Oil said its high-flying CEO Chen Jiulin had been suspended from duty pending an independent audit of the firm's losses by PriceWaterhouseCoopers. The company said it had 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., 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. It said: "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". 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. It said: "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. The losses incurred by the company reflected the poor level of corporate governance within its top management. 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. China Aviation Oil, formerly regarded as one of the leading Chinese firms to list in Singapore, supplies one third of China's jet fuel needs and has a monopoly on such imports into the mainland.

The fallout from the disaster at China Aviation Oil was being felt in the subsequent days by other mainland firms which are publicly traded in Singapore. Most Chinese-listed stocks took a beating as investors bailed out on worries about their level of corporate governance. In morning trade on Dec. 1, several Chinese stocks were among the top 40 losers on the Singapore exchange. Among them were China Petrotech, which fell 5.16% to 46 Singapore cents, and Hongguo International, which lost 4.55% to 21 cents.