International Trade Seizing Up Due to Banking Crisis

Discussion in 'Economics' started by m22au, Oct 10, 2008.

  1. m22au


    Now it's not just about the financial system imploding - some effects are being seen on international trade.

    I have been more than a tad concerned about near-paralysis in the money markets and imploding equity prices. But this e-mail, from a well connected international investor not prone to alarm or (normally) the use of capital letters says that the banking crisis is staring to bring international shipping to a halt.

    By way of background, letters of credit of various sorts are essential for trade. For instance, imagine the difficulty if you are, say, a Chinese manufacturer who wants to sell his wares to buyers overseas. How can he be sure the goods he ships will ever be paid for? Imagine the considerable difficulty and cost of chasing a deadbeat in a foreign country. Letters of credit. issued by banks, assure payment. They can also serve to finance the shipment (ie, fund the inventory while it is in transit).

    Not only are banks now leery of lending to each other for much longer than overnight, they are also starting to refuse to honor letters of credit from other banks. From the above-mentioned reader:

    At the end of the day, if every counterparty is bad then you don't have a market and you don't have an economy. I spoke to another friend of mine this afternoon, whose father has been in the shipping business forever. Pristine credit rating, rock solid balance sheet. He says if he takes his BNP Paribas letter of credit to Citi today for short term funding for his vessels, they won't give it to him. That means he can't ship goods, which means that within the next 2 weeks, physical shortages of commodities begins to show up. THE CENTRAL BANKS CAN'T LET THAT HAPPEN OR WE HAVE NO ECONOMY, LET ALONE A CREDIT SYSTEM.

    We spoke later in the evening and said he had heard of another instance of a trade transaction failing, different parties entirely, this a shipment of coal, again due to the unwillingness of the seller's bank to accept an LC from the buyer.

    Update 12:10 AM: Confirmation comes from the Financial Post, "Grain piles up in ports" (hat tip reader Vox Sanus):

    The credit crisis is spilling over into the grain industry as international buyers find themselves unable to come up with payment, forcing sellers to shoulder often substantial losses.

    Before cargoes can be loaded at port, buyers typically must produce proof they are good for the money. But more deals are falling through as sellers decide they don't trust the financial institution named in the buyer's letter of credit, analysts said.

    "There's all kinds of stuff stacked up on docks right now that can't be shipped because people can't get letters of credit," said Bill Gary, president of Commodity Information Systems in Oklahoma City. "The problem is not demand, and it's not supply because we have plenty of supply. It's finding anyone who can come up with the credit to buy."

    So far the problem is mostly being felt in U. S. and South American ports, but observers say it is only a matter of time before it hits Canada.

    "We've got a nightmare in front of us and a lot of people are concerned it's going to get a lot worse," said Anthony Temple, a grain marketing expert based in Vancouver....

    Access to credit is key to the survival of maritime trade and insiders now say the supply is being severely restricted. More than 90% of the world's trade by volume goes by ship...

    "The credit crisis has made banks nervous and the last thing on their minds is making fresh loans," Omar Nokta, an analyst at investment bank Dahlman Rose, said in an interview with Reuters.

    While shipping has always been a cyclical industry whose fortunes rise and fall with the global economy, analysts said the current crisis over the drying up of credit is something they have never seen before.

    Jason Myers, head of the Canadian Manufacturers and Exporters, said exporters across Canada are getting caught up in the turmoil as customers delay payments, forcing them to shoulder the cost.

    "What some companies are saying is we can't pay you until our customer pays us, so it becomes a question of who bears the financial risk and the cost," Mr. Myers said. "We're hearing about it more and more."

    What that means is that manufacturers are getting hit as revenue slows and longtime customers disappear from the order book altogether. As profits decline, investment in product development starts to fall, too, he said.

    The Canadian Wheat Board, one of the world's biggest grain marketers, has yet to refuse a customer because of poor credit, according to a spokeswoman. "As of this moment we haven't run into that problem," said Maureen Fitzhenry,
  2. Daal


  3. This is absolutely scary stuff. I have seen this only once before and it required the Government to provide the letter of credit.

    If international trade stops countries will go under!

    Global Loan Crunch Hampers Commodities Trade in Korea (Update1)

    By Jae Hur

    Oct. 10 (Bloomberg) -- The global financial crisis has hurt the commodities industry in South Korea, Asia's fourth-largest economy, as banks reduce financing and the currency tumbles to the lowest in a decade.

    ``It's getting worse and worse as import costs are surging everyday because of the plunging won and expensive credit,'' Lee Won Jae, an analyst with SK Securities Co., said by phone from Seoul today. ``Local banks are reluctant to provide new financing for imports.''

    South Korea buys most of its raw materials overseas, from copper and grain to oil and coal. The won, Asia's worst performing currency, plunged as much as 50 percent against the dollar this year to a level last seen during the Asian financial crisis, when the nation had to take out a $57 billion emergency loan from the International Monetary Fund.

    Trade in industrial metals including copper, aluminum and zinc is worst affected as some small- and medium-sized companies have found it tough to open so-called letters of credit for import financing from local banks, Lee said.

    The won plunged as low as 1,485 yesterday, the weakest since April 1998. Local money-market rates have risen as banks become increasingly reluctant to lend. Korea's Kospi stock index fell as much as 9 percent today and has tumbled 35 percent this year to the lowest since 2005.

    Grain Financing

    South Korea's imports of copper, aluminum and metal products totaled 3 million metric tons or $15.9 billion in 2007, with copper's share 870,000 tons or $6.7 billion, according to data from the Korea Nonferrous Metal Association.

    ``Even if you can get financing, the costs are very expensive now,'' said Park Yang Jin, business department manager at Daehan Flour Mills Co., Korea's largest milling wheat importer. ``Despite lower world prices, our import costs are surging and we can not pass this increase onto consumers.''

    In grains, the credit crunch has driven South Korean livestock feed importers to make the most use in a decade of the U.S. government-backed export credit guarantee program.

    The U.S. Department of Agriculture has allocated $600 million to South Korea in the year started Oct. 1, up 21 percent from $495 million the previous year and 50 percent from $400 million two years ago. The 2009 allocation is the biggest since 2005. The country got as much as $1.1 billion in 1998.

    The 2009 allocation to South Korea is the largest for a single country among the total $3.5 billion under the Commodity Credit Corp.'s Export Credit Guarantee Program.

    Government Guarantees

    ``Since 1999 our usage of the program had fallen,'' said Kim Chi Young, director with the Korea Feed Association, the country's biggest feed-grain importer. ``That changed from early this year. To use the program, domestic importers will seek more U.S. corn and soybean meal.''

    South Korea's usage of the credit program to import U.S. wheat, cotton, feed grains and oilseeds jumped to $455 million in the year ended on Sept. 30 from $127 million the previous year, according to the USDA data. Of the total, feed grain imports surged to $260 million from $12.5 million and wheat imports to $164 million from $88.7 million.

    The country imported 9.1 million tons of corn for food and animal feed in the year ended Sept. 30 and 3.1 million tons of wheat for the year ended June 30, according to the USDA data.

    Freight Trade

    The slowdown in commodity trade has spilled over into the shipping market, said Park Dong Il, vice president at STX Pan Ocean Co., South Korea's largest bulk-shipping line.

    The Baltic Dry Index, a measure of shipping costs for commodities, fell 9.4 percent in London to 2,503 points yesterday, the lowest since June 2006, on weaker demand from Chinese steelmakers and a global credit squeeze. It's 79 percent off a May 20 record.

    Japan's biggest export auction for scrap steel drew no bidders yesterday for the first time since the monthly sales began in 2001. Kanto Tetsugen, the Tokyo-area scrap dealers' cooperative that holds the auction, will export no metal in November, Keiko Ueno, a spokeswoman for the organization, said.
  4. Futures charts might show a widening spread. We might have a situation where coffee sells for $ 0.10 / pound in Columbia and $ 100 / pound in New York, because ships can not transport coffee.

    What if oil does not move from Saudi Arabia to USA this winter?