Mitsubishi Corp. will shut its Singapore-based oil unit after saying a rogue trader lost about 34.2 billion yen ($314 million) in unauthorised transactions.
Japan’s biggest trading house will liquidate Petro-Diamond Singapore Pte. after it closes out oil and fuel contracts and settles debts, the company said on Wednesday, without providing a firm time frame. Remaining Asian oil trading operations will return to Tokyo, Chief Financial Officer Kazuyuki Masu said at a briefing, declining to comment on the number of affected employees. Mitsubishi also cut its full-year net profit forecast to 520 billion yen, from 600 billion yen as of August.
The announcement ends weeks of speculation over the fate of Petro-Diamond amid signs counterparties had become increasingly wary since it revealed in September that an employee had racked up losses on crude oil derivatives. While Petro-Diamond is just a tiny part of the massive trading house, the biggest of Japan’s so-called sogo shosha, Mitsubishi’s dramatic decision shows it wants to draw a line under the incident and contain any further damage.
The loss has joined a list of infamous oil trading busts. Metallgesellschaft AG took a $1.2 billion loss in 1994 when a hedging strategy failed. In 2004, China Aviation Oil suffered its infamous $550 million blunder, when the company fell afoul of a surge in prices.
|Metallgesellschaft AG||$1.2 billion||Oil hedging strategy failed||1994|
|China Aviation Oil||$550 million||Wrong-way speculative oil trades||2004|
|Mitsui & Co.||$81 million||Hidden bad naphtha trades||2007|
|Unipec||$656 million||Wrong-way bets on crude oil||2018|
|Petro-Diamond||$314 million||Unauthorised oil derivatives trading||2019|
The trader, identified by Bloomberg as Wang Xingchen, said through his lawyer in September that he was acting on his managers’ orders and that the losses resulted from “premature” settlement of the derivatives positions. Wang was hired by Petro-Diamond to help expand its business with Chinese counterparties, especially independent refiners — known as teapots — that are an emerging force in the country’s massive oil industry. Wang couldn’t immediately be reached for comment via his lawyer in Singapore.
Mitsubishi previously said that the trader manipulated data in Petro-Diamond’s risk management system so that the transactions looked like they were related to real deals with customers. After recognizing that they could result in a loss for the company, it closed the derivatives positions, it said. The trader was fired on Sept. 18 and reported to police the following day, it said.
The incident raised questions about the rigor of risk management at Petro-Diamond, though Mitsubishi said the unit had sufficient internal controls in place. In its statement on Wednesday, the company said any of its subsidiaries, as well the parent group, that are “engaged in derivatives transactions are expected to tighten their risk management and are committed to preventing any recurrences of this incident.” Shares rose as much as 3.7% in Tokyo.
Petro-Diamond, which has led Mitsubishi’s overseas oil business, was established in 1989 and trades petroleum products including oil, naphtha, gasoline and fuel oil, according to the company’s website. Mitsubishi also has separate natural gas and metal trading operations in Singapore.
Petro-Diamond will fulfill its remaining contractual obligations for crude, naphtha and petroleum product trades, Mitsubishi said. The parent company will continue its overseas oil operations “once it has reconfirmed that its risk management systems are both sound and thoroughly enforced, taking all possible measures to prevent similar incidents from occurring in the future,” it said.
Little seemed out of the ordinary at Petro-Diamond’s office, decorated with orchids and looking out over Singapore’s iconic Marina Bay, shortly after the announcement was made on Wednesday. Employees quietly walked the halls and took smoke breaks. An official declined to comment beyond what was in the press release.