SEOUL - South Korea's grain, metal and oil importers are struggling to keep commodities flowing into Asia's fourth-largest economy as they face a constricted global credit market, a domestic dollar squeeze and tumbling won revenues.
Reeling from that potent treble whammy, raw material buyers say their plight is worse than the woes facing other big importers from Japan to Europe, but has been forgotten by a government focused more on its export-oriented firms and on taming the domestic turmoil caused by the global crisis.
As a result, some importers are considering running down inventories or tapping government stockpiles to keep production going, one of starkest signs of how the worst financial crisis in 80 years is starting to take a toll on commodities trade.
"Measures? What government measures? Commercial banks have virtually stopped extending trade financing support," said one official at a major copper concentrate importer, who asked not to be named because of the sensitivity of the issue.
"We are hanging on to just one or two state banks for financing and tapping overseas banks mostly... If the current situation continues, importers will in the end have no choice but to cut purchases."
South Korea is the world's fifth-largest importer of crude, third-biggest buyer of corn and a major consumer of base metals, the prices of which have already more than halved since hitting record highs earlier this year as a global recession takes hold.
A deterioration in imports would not only add to the market gloom, but could undermine the flow of fuel, steel or food that keeps the economy running, affecting companies from the world's number-four steelmaker POSCO (005490.KS: Quote, Profile, Research, Stock Buzz) to SK Energy (096770.KS: Quote, Profile, Research, Stock Buzz), which operates the world's second-biggest refinery.
A glance at the Baltic Exchange's dry freight index .BADI shows the dramatic impact the crisis is having on global trade of grain, coal and ores -- it's down 80 percent since mid-September.
TRADE FINANCE WOES
At the heart of the problem is trade financing, the lending lines that banks extend to companies to help them manage the cost of buying commodities in bulk for resale on a smaller scale.
The credit crunch has forced banks to cut corporate credit lines dramatically as they struggle to raise dollars and roll over short-term foreign currency debt, most of it linked to trade financing.
In the past two weeks, the South Korean authorities have announced a $130 billion rescue package aimed at easing the liquidity squeeze, secured a $30 billion currency swap deal with the U.S. Federal Reserve and enacted the biggest-ever rate cut to uncork the clogged money market, but funds are still not flowing.
Instead, domestic banks, seen as more vulnerable than most to the global credit crisis and thus ever more risk-averse, have cut trade financing periods from 180 days to as short as 30 days and raised interest charges they demand over LIBOR by around 3 percentage points on average, traders said.
"Without trade financing, companies have to mostly rely on cash to run their businesses, and that's exactly what is happening now, with banks simply refusing to offer credit lines," said Hong Sung-soo, deputy general manager at Korea Feed Association (KFA), the country's biggest feed grain importer.
"If current situations continues, not a few importers may go bankrupt."
Importers are also being squeezed as their won-based revenues are falling even faster than the decline in dollar-based raw material costs as the won endures its sharpest slide since the 1997 Asian crisis, with the effect compounded as importers often settle dollar-based import deals 3 or 6 months later.
The won is Asia's worst-performing major currency this year, and its decline has steepened recently, falling as much as 30 percent since late September before recovering half those losses last week.
That makes October's 22 percent slide in the benchmark Reuters-Jefferies CRB index .CRB of 19 commodities -- its biggest ever monthly decline -- relatively cold comfort.
CHANGE TACK
From refiners to grain buyers, cash-strapped importers are trying a different tack. One popular option is to ask overseas suppliers to use their own credit lines to help finance a deal.
Traders said South Korea's top refiner SK Energy (096770.KS: Quote, Profile, Research, Stock Buzz), for example, may try to rework some of its crude deals, using its leverage as a major buyer to ask suppliers in oil-money rich Kuwait, Saudi Arabia and other OPEC members to help out.
Some Asian crude buyers have already asked Qatar to defer crude loadings to later months as the deepening financial crisis slows energy demand growth and raises financing concerns.
"SK has ample cash but it could change its (crude buying) options or rework the payment date to arrival basis from loading," said Hwang Kyu-won, an analyst at Tongyang Securities.
Grain buyers, who shunned U.S. cereals for the first half of the year as prices soared to record highs following severe flooding in the U.S. Midwest, are being buoyed by increased state support for exports of U.S. agricultural goods.
The U.S. Department of Agriculture has allocated $600 million to South Korea in the year started October 1, the largest for a single country out of the total $3.5 billion under the Commodity Credit Corp.'s Export Credit Program.
The programme guarantees payments due from approved foreign banks to exporters, ensuring trade credit is available.
"We are redirecting our soy and corn purchases to the U.S. markets from South America to take advantage of the programme," said KFA's Hong. "But still it is very competitive to win a portion and without the government help, we suspect importers will take a further blow."
Reeling from that potent treble whammy, raw material buyers say their plight is worse than the woes facing other big importers from Japan to Europe, but has been forgotten by a government focused more on its export-oriented firms and on taming the domestic turmoil caused by the global crisis.
As a result, some importers are considering running down inventories or tapping government stockpiles to keep production going, one of starkest signs of how the worst financial crisis in 80 years is starting to take a toll on commodities trade.
"Measures? What government measures? Commercial banks have virtually stopped extending trade financing support," said one official at a major copper concentrate importer, who asked not to be named because of the sensitivity of the issue.
"We are hanging on to just one or two state banks for financing and tapping overseas banks mostly... If the current situation continues, importers will in the end have no choice but to cut purchases."
South Korea is the world's fifth-largest importer of crude, third-biggest buyer of corn and a major consumer of base metals, the prices of which have already more than halved since hitting record highs earlier this year as a global recession takes hold.
A deterioration in imports would not only add to the market gloom, but could undermine the flow of fuel, steel or food that keeps the economy running, affecting companies from the world's number-four steelmaker POSCO (005490.KS: Quote, Profile, Research, Stock Buzz) to SK Energy (096770.KS: Quote, Profile, Research, Stock Buzz), which operates the world's second-biggest refinery.
A glance at the Baltic Exchange's dry freight index .BADI shows the dramatic impact the crisis is having on global trade of grain, coal and ores -- it's down 80 percent since mid-September.
TRADE FINANCE WOES
At the heart of the problem is trade financing, the lending lines that banks extend to companies to help them manage the cost of buying commodities in bulk for resale on a smaller scale.
The credit crunch has forced banks to cut corporate credit lines dramatically as they struggle to raise dollars and roll over short-term foreign currency debt, most of it linked to trade financing.
In the past two weeks, the South Korean authorities have announced a $130 billion rescue package aimed at easing the liquidity squeeze, secured a $30 billion currency swap deal with the U.S. Federal Reserve and enacted the biggest-ever rate cut to uncork the clogged money market, but funds are still not flowing.
Instead, domestic banks, seen as more vulnerable than most to the global credit crisis and thus ever more risk-averse, have cut trade financing periods from 180 days to as short as 30 days and raised interest charges they demand over LIBOR by around 3 percentage points on average, traders said.
"Without trade financing, companies have to mostly rely on cash to run their businesses, and that's exactly what is happening now, with banks simply refusing to offer credit lines," said Hong Sung-soo, deputy general manager at Korea Feed Association (KFA), the country's biggest feed grain importer.
"If current situations continues, not a few importers may go bankrupt."
Importers are also being squeezed as their won-based revenues are falling even faster than the decline in dollar-based raw material costs as the won endures its sharpest slide since the 1997 Asian crisis, with the effect compounded as importers often settle dollar-based import deals 3 or 6 months later.
The won is Asia's worst-performing major currency this year, and its decline has steepened recently, falling as much as 30 percent since late September before recovering half those losses last week.
That makes October's 22 percent slide in the benchmark Reuters-Jefferies CRB index .CRB of 19 commodities -- its biggest ever monthly decline -- relatively cold comfort.
CHANGE TACK
From refiners to grain buyers, cash-strapped importers are trying a different tack. One popular option is to ask overseas suppliers to use their own credit lines to help finance a deal.
Traders said South Korea's top refiner SK Energy (096770.KS: Quote, Profile, Research, Stock Buzz), for example, may try to rework some of its crude deals, using its leverage as a major buyer to ask suppliers in oil-money rich Kuwait, Saudi Arabia and other OPEC members to help out.
Some Asian crude buyers have already asked Qatar to defer crude loadings to later months as the deepening financial crisis slows energy demand growth and raises financing concerns.
"SK has ample cash but it could change its (crude buying) options or rework the payment date to arrival basis from loading," said Hwang Kyu-won, an analyst at Tongyang Securities.
Grain buyers, who shunned U.S. cereals for the first half of the year as prices soared to record highs following severe flooding in the U.S. Midwest, are being buoyed by increased state support for exports of U.S. agricultural goods.
The U.S. Department of Agriculture has allocated $600 million to South Korea in the year started October 1, the largest for a single country out of the total $3.5 billion under the Commodity Credit Corp.'s Export Credit Program.
The programme guarantees payments due from approved foreign banks to exporters, ensuring trade credit is available.
"We are redirecting our soy and corn purchases to the U.S. markets from South America to take advantage of the programme," said KFA's Hong. "But still it is very competitive to win a portion and without the government help, we suspect importers will take a further blow."
