China will punish officials who broke rules and caused a US$550 million loss at China Aviation Oil (Singapore) Corp, which supplies almost a third of the jet fuel on the Chinese mainland, the state assets commission said.
A strategic investor is being sought to help resolve the losses, which are being investigated, the State-owned Assets Supervision and Administration Commission said in a statement. The commission controls the Singapore unit's Beijing-based parent China Aviation Oil Holdings Ltd.
China Aviation Oil (Singapore)'s "crude oil index futures operations constituted a violation of rules and breached the bounds of its authority," the statement said. The losses "will have to be resolved in accordance with commercial means."
Du Yuanquan, a spokesman with the state assets supervision commission, said the company seriously violated the decision-making process and made wrong judgments on the trading.
Du said the losses will be dealt with in accordance with relevant commercial laws in Singapore. The Singapore company is now looking for investors to cover its debts.
China Aviation is being investigated by the Commercial Affairs Department, Singapore's white-collar crime unit, stock exchange and central bank after racking up the city's biggest derivatives-trading loss since Nick Leeson lost US$1.4 billion at Barings Plc in 1995.
China Aviation had also gone to the Singapore High Court yesterday to seek more time to pay up its debts. The court had initially set next Monday as the deadline for the restructuring plan.
"The court has given us six weeks' extension and six months to call a creditors' meeting," China Aviation's lawyer, Patrick Ang, said after an hour-long hearing.
Deloitte & Touche Financial Advisory Services is working on the restructuring plan along with a special task force appointed by the company's parent, China Aviation Oil Holdings Co.
"It's do or die," for China Aviation Oil (Singapore), Chris Sanda, an analyst at DBS Vickers Securities, told Dow Jones Newswires. "The creditors want the money and they want it now."
The Singapore subsidiary had sought court protection from creditors, which had demanded payment as its losses ballooned.
Also attending the court session yesterday were lawyers for the creditors, which include Mitsui & Co Energy Risk Management, Sumitomo Mitsui Banking Corp, Fortis Bank SA and Barclay's Capital PLC.
Its suspended chief, Chen Jiulin, was arrested on Wednesday after he returned to Singapore from China. He was later released on bail. The CAO did not say if Chen would be charged.
China Aviation began losing on oil derivatives in the first quarter of this year but continued to gamble that crude and jet fuel prices would fall for the rest of the year. Benchmark crude prices instead closed to an all-time high of US$55.17 per barrel in late October.
The firm's US$550 million loss from oil trading may give pause to the Chinese government's efforts to encourage the use of global futures contracts to hedge price risks, investors said.
China Aviation's losses "will lead to more control on overseas trading until they get to the bottom of what happened," Lu Yizhen, head of research at Efund Management Co, said.
The Chinese government allows 26 companies to trade futures overseas, including the nation's biggest oil producer PetroChina Co and metal maker Aluminum Corp of China Ltd.