Indian methanol importers to feel brunt of LoU, LoC ban starting April

SINGAPORE (ICIS)–Methanol importers in India are expected to feel the full brunt of the central bank’s recent decision to discontinue Letter of Undertaking (LoU) and Letter of Comfort (LoC) once new spot discussions begin and as cargoes start to be loaded for delivery, according to market sources.

The ban, announced on 13 March this year, have resulted in large swings in domestic ex-tank prices of methanol in India’s west coast.

Prices surged from India rupee (Rs) 26.25/kg ex-tank India on 12 March to Rs30.13/kg ex-tank India on 19 March before softening rapidly to Rs28.50/kg ex-tank India on 23 March.

Market participants attributed different reasons to the sharp uptrend in prices during the week ending 16 March, such as rising prices in the key China market, and a delay in vessel discharges caused by port constructions and dredging.

However, most market players stated that the main reason for bullish sentiments was caused by the RBI’s decision to ban the financial instruments.

Following the ban, speculation on its impact cause some panic among the buyers, while sellers took advantage and raised their offers repeatedly in order to recoup their previous losses as they were still holding on to high-priced materials.

A price correction was then seen in the following week to 23 March, as differing opinions were heard among the Indian importers on the situation.

One group did not expect much fallout, with only the smaller, less established importers with bad credit history affected, while the larger importers would still be able to obtain their letters of credit (LC) and finance their purchases with their better cash flows.

They also did not expect the restriction to be in place for long, as they felt that RBI will lift it once they had completed their investigation into the recent $2bn bank fraud scandal.

“RBI depends heavily on the issuance of LOUs and LOCs for their business so they will remove the restriction soon,” an Indian importer said.

However, an Indian methanol distributor said that many players across the trade industry are appealing the restriction and there remains uncertainty on whether if it would be lifted soon or would remain for the long term.

Other importers were pessimistic as they felt that this restriction would have widespread repercussions across the entire Indian trade industry and not just the methanol market.

All importers, no matter large or small, should see their costs raised and cash-flow plans disrupted from this sudden announcement.

Importers would have to secure alternative methods to complete their international purchases, such as obtaining letters of credit or giving cash in advance.

Most importers would likely have to ask for longer credit duration in their negotiations from local branches of foreign banks, as it is harder now for them to secure cash flows from local state banks.

For now, they are unable to identify how much higher their interest and cost would be following the ban.

“I estimate the interest costs to increase by 1.5-2% per transaction,” a major importer added.

Focus article by Kite Chong