C1 Energy (Shanghai) – Sep 1, 2009 －－－Fuel oil hedging business is expected to be affected not much by the State-owned Assets Supervision and Administration Commission's latest announcement on derivative contracts of state-owned enterprises, C1's survey found.
A domestic news agency citing unnamed sources reported earlier that the SOEs are allowed to unilaterally terminate derivative contracts with six foreign banks that provide over-the-counter commodity hedging services. The report said that the SASAC, China's SOE watchdog, has informed the financial institutions in written letters that SOEs reserved the right to default on those derivative contracts.
It is unknown which SOEs and foreign banks are involved for the time being.
A Singapore-based fuel oil swaps broker said the announcement is yet to impose direct impact on fuel oil swaps market. Wildcat hedging between spot traders and investment banks were seen much less after the Lehman Brothers Holdings filed for bankruptcy, and most market players were apt to make deals though powerful agents like the New York Mercantile Exchange, the broker said. On the other hand, about 80% of market players participating in swaps trading were spot traders and only 20% was investment banks at present, down 15 percentage points from 2008, noted the broker.
The SASAC may just aim to confine big bets of SOEs, considering China Aviation Oil and Shenzhen Nanshan Power's bet on derivatives, according to a source with one domestic oil giant. The problem is how to define hedging and speculative trading, because hedging is necessary in international oil trading, the source believed.
Although it is unknown how many SOEs had signed oil derivative contracts now, the announcement still had influence on oil market, said a source with one investment bank. Most Chinese enterprises entered into long positions and some with short positions chose to make delivery, wary counterparties could not fulfill contracts, according to the source. However, it may not restrict Chinese traders participating in hedging in the future, because the letters just aimed at contracts inked earlier, the source opined.
Subsidiaries of some SOEs suffered loss both abroad and overseas because of betting derivatives, revealed a source with a fuel oil trading company with Chinese capital. However, according to past experiences, investment banks may make a concession with the Chinese government's involvement, although it is of no legal effect to terminate contracts unilaterally, the source deemed.
