22/11/2008 (The Star Online), Petaling Jaya - Malaysian crude palm oil (CPO) exporters are in a quandary as the global financial crisis and the plunge in CPO prices have made it difficult for foreign importers to obtain letters of credit (LCs).

Industry players said that prices of CPO quoted in contracts or LCs were much higher than the current market price of the commodity, making foreign banks in importing countries more cautious about extending credit facilities. The price of CPO fell from RM4,330 a tonne on March 3 to RM1,460 yesterday.

Mohd Radwan Alami, the group chief executive of Alami Vegetable Oil Products Sdn Bhd, a palm oil trading company, said many importers had opted to default on their contracts as the price of CPO had dropped sharply.

Hence, some importers of Malaysian commodities faced difficulties obtaining credit line from their banks.

Radwan told StarBiz that if banks did not extend credit facilities to buyers, they could not open LCs.

An LC is a contractual undertaking on the part of an issuing bank to pay the seller (exporter) according to the instructions of the buyer (importer) against delivery of certain documents and upon fulfilment of certain terms and conditions.

“Some foreign banks affected by the credit crunch are asking their customers to come up with the total value of the LC as opposed to 10% to 20% deposit previously.

“The foreign banks there are jittery since if the prices quoted on the LCs are higher than the current selling price, their customers would not be able to repay the credit extended,” he said.

Radwan said Alami Group had encountered such cases on a small scale but it was a major problem for the industry.

Infinity Logistics and Transport Sdn Bhd, which ships palm oil for its customers, also said more importers were finding ways to default on their contracts.

“Whether it’s the banks or importers, nobody wants to receive goods that have lower current prices than that quoted in the LCs. This is especially so now when commodity prices are on a downward trend,” managing director Chan Kong Yew said.

According to a source in the palm oil industry, defaults on Malaysian and Indonesian palm oil contracts are currently estimated to involve 1.5 million tonnes of CPO. Both countries produce 80% of the world’s palm oil.

This may lead to a deferment of palm oil shipments and a re-negotiation of import deals, particularly with China and India.

Commenting on the issue of LCs, HSBC Bank Malaysia Bhd’s trade and supply chain director Vivek Gupta said there were instances where an importer might get a court injunction to stop its bank, which opened the LC, from making payment.

This might be the case during volatile commodity prices or tight credit situations, he said.

“The importer may find itself in financial difficulty and wants to renege on its payment obligations despite documents under the LC being compliant.

“We have effectively managed to secure payments for exporters despite such injunctions by using bank-to-bank relationships,” he said, advising exporters to be selective about the right trade and supply chain bank.

OCBC Bank (M) Bhd head of global trade finance Chuang Boon Kheng said that to be more secure, local exporters could opt to have the LC confirmed by their banks in Malaysia by paying a fee.

“Thus, the confirming bank here will honour the LC by making payment if the Malaysian exporter can present documents in full compliance with the terms and conditions of the LC.

“The Malaysian exporter then has the benefit of payment commitments from two banks: the overseas issuing bank and the local confirming bank,” he said.