GTR editor Rebecca Spong asks who will step in to finance the growing demand for commodity finance.

Commodity finance attracts new players

As European banks struggle with a lack of US dollar liquidity, who will step in to finance the growing demand for commodity finance?

And unfortunately for the majority of European banks, this is the one thing they are distinctly lacking.

At a recent Exporta conference, one of the speakers remarked that many continental European banks now prefer to lend in euros, only lending in US dollars to core relationship clients.

But in an industry fuelled by US dollars, this lack of liquidity is likely to cause problems among commodity traders, particularly the smaller companies.

As refinancings begin to hit the market in the coming months, commodity trading houses will be anxiously looking around to see who can fill the void left by the European banks which had previously dominated this market.

Yet it is seems that there are quite a few players waiting in the wings to support the flows of commodities.

Capitalising on their steady source of US dollars, US banks are looking to move into the commodity finance market.

Banks such as Citi, JP Morgan and Bank of America Merrill Lynch are all said to be considering increasing their presence in this market, with some banks’ plans for the roll-out of new commodity finance teams more developed than others.

Regional banks are also keen to take advantage of the absence of the European players.

Just this week GTR received a press release from Ecobank’s commodity finance team promoting a client event they held in Geneva. The event was apparently held with the intention of advising its clients, “How they could take advantage of the vacuum created by the withdrawal of European banks from US dollar-denominated funding of commodities imports and exports in and out of Africa.”

Chinese banks are also moving in. In Brazil, bankers report that Chinese banks are directly financing flows of soy beans and other soft commodities and are working with a Brazilian or Latin American banking counterpart, cutting out any involvement of a European bank.

Any bank involvement in the financing of commodities could potentially be usurped by the growing power of the larger trading houses themselves.
For instance, Trafigura, one of the world’s largest commodity traders, is looking to double the size of its fund management division over the next few years.

Galena, Trafigura’s fund management subsidiary, is reportedly looking to raise an additional US$300mn before the end of the year specifically for its commodity trade finance fund.

But the European banks will not wholly retreat from this market without a fight.

In a banking and insurance CEO conference held in October, a Société Générale presentation stated that its natural resources (under which commodity finance falls), infrastructure and export finance departments remain “sound core franchises” of the bank.

It added that these divisions have “leading positions with capacity to adapt efficiently to structural changes such as dollar scarcity".

So perhaps it is too early to call time on the European banks’ presence in the commodity finance markets?

Yet it cannot be denied that for institutions armed with enough liquidity and a talented, experienced team, the current environment offers a huge opportunity to carve out a significant market share while the European banks are busy solving other problems.

Is it the end of European dominance of the commodity finance market?

Will the new players be committed to this market? Or retreat if the going gets tough again?