Oil Trader’s Financial Difficulties Caused by Virus, Lawyer Says

(Bloomberg) -- Chinese oil trader Hontop Energy‘s financial difficulties are due to a collapse in demand because of the coronavirus but it expects to recover once refining picks up again in China, according to the company's lawyer.

Singapore-based Hontop, which purchases oil on behalf of private refiner Shandong Tianhong Chemical Co., went into receivership last month. Local bank DBS Group Holdings Plc appointed a receiver “over specific charged assets which mainly relate to one trade transaction” financed by the lender, Kelvin Koh, a partner at TSMP Law Corporation, said on behalf of Hontop. DBS declined to comment.

“The receivership is attributable to the effects of COVID-19 epidemic, which has heavily impacted Hontop's China-centric oil trading business,” Koh said in an e-mailed statement. “The COVID-19 containment measures have depressed demand for oil products and led to logistical restrictions in Shandong.”

Hontop's troubles have reverberated across the world of oil trading where many Western merchants and oil companies like Trafigura Group and BP Plc have built teams over the last five years that are dedicated to supplying smaller Chinese refiners, known as teapots. And as the coronavirus epidemic threatens profit margins and coincides with a broader credit crunch in China, traders and bankers are increasingly wary about their exposure to the refiners.

Many of those teapots have suspended operations as fuel demand cratered, including Shandong Tianhong, according to Koh. Both Hontop and Shandong Tianhong are units of Chinese conglomerate China Wanda Group, which itself was reported to be facing financial difficulties.

Hontop temporarily stopped trading in late January as the virus began to eat into demand amid an industry-wide liquidity crunch, Koh said. The trader's cashflow will recover once Shandong Tianhong resumes refining, which it plans to do in March “to meet the anticipated recovery of demand for oil products in China”, he said. Hontop remains in operation and continues to be run by existing management, Koh said.

Tianhong purchased 300,000 barrels of crude two weeks ago and has a monthly import quota of 3 million barrels of crude, according to the lawyer. That “will provide a stable and sustainable platform for Hontop's trading operations in the aftermath of COVID-19,” he said.

To contact the reporter on this story: Alfred Cang in Singapore at acang@bloomberg.net

To contact the editors responsible for this story: Alexander Kwiatkowski at akwiatkowsk2@bloomberg.net, Alaric Nightingale

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