Melbourne: As rock bottom commodities prices and overcapacity weaken balance sheets at beleaguered commodities firms, trade insurers fear further pressure from payment delays and defaults in China and India, particularly in metals.
A blowout in payment times and rising insolvencies at manufacturers in Asia would put more pressure on small and medium-sized metals traders, many of which are based in the regional commodities hub of Singapore, insurers and bankers say.
Russian commodities trader Gunvor Group said last week it has started to dismantle its Singapore-based metals business, citing weak profitability and increased risk, including counterparty behaviour.
Payment times for metals are already rising from China and India, industry sources said, as overcapacity in commodities like steel and aluminium deepens a four-year old price slump that has left a majority of metals producers under water.
"Oil and gas may have hit the headlines across the world, but we think metals will be the key sector that will cause underwriters more sleepless nights," said Michael Lum, an underwriter for specialist insurer Beazley, which manages Lloyds' syndicates.
"A lot of these (Chinese) smelters that were economically viable when commodity prices were high are high cost producers and when the prices do drop some will have nowhere to go."
New non-performing loans held by Chinese banks more than doubled in 2015 from the previous year, while India's banking sector, dominated by two-dozen state-run lenders, is suffering from its highest stressed-assets ratio in 13 years.
Trade insurers provide certainty for global markets by insuring up to 90 percent of the value of a transaction, paying out if buyers don't pay or suppliers don't deliver.
Insurer Euler Hermes said it expects days sales outstanding, a measure of time it takes for firms to pay invoices, to rise in China to 81 days in 2016, from 77 in 2015, and sees corporate insolvencies jumping 20 percent.
"In the commodites space, the highest requirement for our product for credit insurance in the past 12 months tends to come in metals," said Gordon Cessford, Euler Hermes' Asia Pacific Regional Commercial Director.
"Trade financiers see that as more risky, and so therefore they look to lay off that risk with the insurance market."
A rising tide of unpaid debt is expected to spill into Singapore, the brunt of which will be borne by small and medium sized traders.
"Most of the larger trading houses would have the ability to sell (debt) off to a bank, and therefore get liquidity. The expectation is that some of the smaller trading houses may find it difficult to find that level of financing," Lum said.
Trade insurers were also viewing paper transactions between traders as less attractive than business that was clearly part of the supply chain, Euler Hermes' Cessford said.
