As concerns for geopolitical problems and counterparty risks grow, GTR and Standard Bank gathered a group of corporates to discuss how they’re managing their physical and financial supply chains.


Roundtable participants

  • Jean Craven, head of corporate finance, ETG
  • Frances Geldenhuys, structured trade finance, Standard Bank
  • Ralph Gilchrist, principal, Enko Capital
  • Peter Gubbins, co-founder and director, GTR
  • Greg Lotis, chief executive officer, Metmar Trading
  • Shannon Manders, editor, GTR (chair)
  • Jeff Midzuk, structured trade and commodity finance, Standard Bank
  • Gwen Mwaba, structured trade finance, Standard Bank
  • Don Oliphant, managing director, South Africa, Drum Commodities
  • Ryan Stokes, structured trade finance, Standard Bank
  • Willem Wessels, chief financial officer, Grocat


GTR: Are you seeing any material changes in terms of your trading patterns in Africa and beyond, into other markets?

Craven: Our company trades more than 70 different commodity lines – most of which grow on the continent, except tobacco. We are involved in both directions – import and export – in about 27 countries. As everyone would expect, we have seen an increase in capital in-flows over the last few years. There has certainly been a large increase in the commodities we trade in Africa, India and China, so we have seen a lot of south-south business increase, both from an export point of view and, subsequently, on the import side, such as fertilisers – inputs that are drivers of these growth commodities.

We have seen an increase in trade on the back of a growth in investment in a lot of support sectors to our value chain. There is a lot of liquidity that has come to the market via banks that are placing more business and a lot of new funds out there. Certainly, Africa is still globally where the yield is, so it is a consequence of people chasing yield as well as your big economies looking for resources.

Lotis: I suppose our trend has changed quite dramatically over the last 10 years in the sense that in the hard commodities space we used to be about 90% exports and 10% imports. The product mix has changed, but I think other things have also changed. A lot of the exports we used to do are just no longer manufactured here, and that has now become, let us call it a merchanting business. Things have definitely changed over the years.


GTR: Where your production or your destination geographies are changing, how are banks assisting you with your trade financing needs?

Lotis: It has been quite well supported, without question. As long as you stick to the basics in terms of risk, it has been handled very well, and probably better now than it was 10 years ago, from our perspective. A lot more South African banks are now more active in commodity trade finance, where before it was BNP Paribas and similar players. In the last few years, all the major South African banks seem to be really getting involved in commodity trade finance.


GTR: With the increasing risk, are you looking to increase your work with insurers and perhaps development organisations?

Wessels: Yes, from that point of view the big thing is if you trade any commodity now, funding is as much a part of the deal as the commodity. Obviously, you need to lay off that risk and also get it to an acceptable level for a bank to do all its checks and balances. I think as a commodity trader a big part of your role is basically to give the bank an acceptable risk so they can fund you, because banks tend to be a bit skittish for Africa.

Gilchrist: We come from a slightly different point of view. We are not primarily involved in trade finance; we are investors in businesses that need trade finance and our main experience has been in the agricultural space in West Africa. The investment potential we see there is huge, particularly at the smallholder level, where there is a lot of scope to increase production. They need financing, and the challenge there for us over the long term will be, as you say, to lay off the financial risk to intermediaries who are prepared to see that smallholders are not necessarily as risky – if properly organised – as the companies themselves. That is going to be the big change that we will face.


GTR: Have you started doing business with alternative, non-bank financiers?

Gilchrist: Yes. We typically start with development finance institutions (DFIs), which tend to be at the forefront of this kind of thing and they have a slightly higher risk appetite. Once they have provided the first flow of capital the intention there is really to take that to the commercial banks and say, ‘This may not be as risky as you think’. Certainly, the funding requirements are going to be considerable.


GTR: This question is directed at the bankers: what risk evaluation criteria do you use when assessing an application for trade finance from one of your partners?

Midzuk: When doing our evaluation, we consider the business as a whole and its ability to trade through rough times. We realise that in Africa, issues arise that some banks do not always think of as giving cause for concern, whether it be on the supply side, the logistics process, or in regard to payments of receivables. So we confirm that clients that have access to the necessary liquidity and a thorough understanding of trading in Africa and have the track record to work with us through difficulties that may arise – we evaluate their ability so as to get through the tough times. We focus a lot on management capacity and whether the client has the right ‘hands on the ground’, people who understand their role and the underlying business so they are alert to the circumstances in which potential challenges could arise, and can mobilise the necessary resources if there is a problem.

So for Standard Bank, we look at risk on a holistic basis. We look at the various players in the trade cycle, including suppliers, logistics providers, service providers, collateral manager and offtakers. We want to make sure that there is a solid chain to support the trade cycle. These links do come under strain on occasion, but we want to minimise the likelihood of this and put in place backstops if they do come under stress.

Mwaba: Standard Bank recognises that in the past the tendency was to base our lending criteria upon deferring to the balance sheet of the borrower. Increasingly, over the last few years the bank recognises the risk that is inherent within the trade cycle itself and other risks associated with the actual commodity that we have been asked to finance. That is not to say the bank places no reliance at all on the balance sheet. The structured trade transactions are primarily considered as self-securing and self-liquidating. The bank also takes a view on the borrower’s suppliers, the nature of the commodity to be financed, the offtakers and agreed terms of trade.

As Jeff has correctly pointed out, the bank also considers the logistics chain and the risks that are involved in the movement of the commodity to the end buyer. In doing so, the bank is able to provide larger trading lines to the same company who previously would have only been able to secure much smaller facilities as a result of deferring solely to the size of the company’s balance sheet.


GTR: Let us speak to the factors that impede a company’s ability to trade on the continent. How are you developing strategies to work around these problems?

Lotis: Probably the big issue we have is the cost of logistics at the moment; not just in Sub-Saharan Africa but in South Africa. We have a strange situation at the moment. In one of our businesses we are shipping 20,000 tonnes a month of product from Polokwane to China in containers. That really just should not happen. It should go by rail to the port in bulk and it should go in a bulk vessel. That is the way these products should move. It is not cost effective to take it in containers but it is cost effective to take it on the next leg, from Durban to China for example. It costs you maybe US$15 a tonne from Durban to China, and it costs you US$40 a tonne in bulk. To transport by rail, South African transport is very expensive. For example, we do business where moving the material out of Cape Town to China is cheaper than moving it from Cape Town to Johannesburg. It just does not make sense.

Craven: Why is it so expensive? Is it inefficiency?

Lotis: I would not say it is inefficiency. The rail network should be moving bulk goods around the world, not by road. Just drive to Durban to see how much material is being moved by road. It is expensive and, of course, the truck drivers are not happy about a lot of things and fuel and operating costs are high, so it is very expensive to move products around the continent. When you talk about Sub-Saharan Africa or moving material for example from the DRC, through Dar es Salaam or through Durban, you have got maybe a six-day transit. That one truck can maybe go twice a month back and forth.

Craven: Who is paying for it ultimately? The producer or the offtaker?

Lotis: The customer is paying for it ultimately, but it is all about net returns back to the producer. Certainly, for me, logistics is impeding the growth of the business, and unfortunately, I do not see it getting better. Spoornet have said for years they are putting so much more into logistics, but they are really going into the bulk commodities, like iron ores and those sorts of things, where they can really make a decent return out of it. Everybody else is left behind, I think.


GTR: Whose responsibility is it to address these issues?

Lotis: It is very difficult for me to answer that. I think it needs a co-ordinated effort, especially from the government, because the government owns Transnet Rail Freight (TRF). Until that gets more competitive and more efficient, those costs are going to continue increasing and I think it is going to certainly impede trade out of South Africa and Southern Africa.

Oliphant: Transit time down to the port of Durban could be anything between 28 and 30 days. The customer offsets that time period just by moving by road, which takes them five to six days for the same load.

Every trader in Africa and every one of them sitting here today will say cross-border regulations are the biggest hassle. To move anything now from the DRC down to the port of Durban – even finding a haulier that is prepared to go up there and fetch cargo – he says: ‘Yes, I’ve got cargo going in, but I’d actually rather just leave empty because the difficulty of bringing the cargo back out of the country. I might get one load a month, so that is no utilisation of my trucks.’ I agree 100%; rail should be the way to go with all bulk traffic.

We get involved with punters who want to move product continually out of the country. They have offtakers, the country can benefit by getting the money coming back into the country but it cannot physically move, or the cost of moving it by road just becomes exorbitant. You just have to go down to the Maydon Wharf area and stand there on any given morning and the trucks are lining up the whole length of Maydon Wharf, just waiting to go into one depot to discharge and there they are being containerised and sent out. Now, in the old days, when there still was a proper rail transport service, those were all rail trucks going in there. You had 10 rail trucks taking up the space of 30 or 40 road vehicles. It impacts all the way through. As you said, the cost of rail was traditionally always a lot cheaper than it is by road. Who can remember the days when fuel was US$20 a barrel? Now it is US$120 a barrel, mostly, and that is what has pushed all the prices of everything up. So the cost of getting anything out of South Africa is massively expensive.

Wessels: I think your export potential is curtailed by the cost. It is fine if you have a product which you have a monopoly on, like a chrome or something like that, which is uniquely South African, but if it is a commodity that is available in Australia, for example, then you are just not competitive. In South Africa in a lot of products there is lots of potential for smaller miners to do it, but they physically cannot. If you deduct the logistical cost and compare it to the international price, then there is nothing left. I think that is a big impediment; the guys cannot move their materials. There is nothing left after you have paid for logistics.

Gilchrist: Does that tempt a pure trading operation into investing into infrastructure like it would not normally have to, for example, if you could rely on rail? Does that ever lead you to think, ‘Right. We have may have to invest in trucks. We would not normally have to do that, but we may simply have to, otherwise we cannot get the product out’. Does that tempt people to diversify up and down the value chain?

Oliphant: I do not think anybody would look at starting to run their own transport fleets, because that is another headache on its own. Leave transport to the transporters; that is my belief. Leave warehousing to warehouse people and analysis to analysis people – leave it to people who are experts in their field. It becomes too expensive in the long run.

Lotis: What has happened though is the other way round, where logistics companies have got involved in trading, as in Grindrod and others for example – not so much traders getting involved in logistics.

Oliphant: A prime example of that is a good few years ago there was a company on the stock exchange, InterTrade – they are off it now. We were involved in moving product from South Africa to Canada. We were moving citrus every year. Eventually it was stopped, because they could land it out of South America in Canada cheaper than we could go to FOB in South Africa. It just kills all the businesses locally. The serious restraint on South Africa is our cost of transport and, even more so, it comes down to productivity in South Africa. Productivity in South Africa is reportedly the worst in the world and among the most expensive.

Craven: We’ve actually bucked the trend. I get Don’s argument that logistics and trucking is a business on its own, but because we do a lot of regional trade, we have actually been forced to move into trucking. I think we have got a fleet of about 7,000 trucks running – I am not sure exactly how many. That has given us the ability to tender maize for the World Food Programme in the horn of Africa last year, and move the maize all the way up from Zambia. We have put ourselves in the position where we are not constrained by third parties and lack of investment in infrastructure.

On the port logistics side as well, we aim to invest where imports are occuring – we have got our own freight-forwarding guys in the ports. For the sake of efficiency, we have been forced. We have invested a lot in these countries. We have to secure our future and that has forced us to go this route, which has paid off, but still the cost remains very high. Perhaps a measure that can alleviate the logistical and infrastructure challenge in Africa is the option for opening up these services for privatisation, which is kind of contra the trend when you think about it – the large multinationals actually owning ports. I think that is the only way to alleviate high costs of moving commodity in Africa.

Oliphant: The privatisation of the port in Mozambique worked.

Craven: It is a good example. That thinking needs to spread. As soon as South Africa is privatised, I am sure you are going to see much better results.


GTR: Moving on to the financial supply chain, and the disruptive effects there: have African and South African banks been constrained as a result of a ratings downgrade? Maybe this is not an effect that you see immediately, but do you foresee a long-term effect?

Mwaba: As an international bank with operations out of London, we have certainly seen an impact from the downgrade of the South African banks. Obviously, the South African banks are constrained by the rating of the sovereign which means the South African-owned banks, regardless of how good they are, cannot be rated better than the country. When the bank is dealing with international suppliers and trade instruments are issued out of London, most international suppliers are comfortable with the South African bank risk as this is viewed as European market risk.

However, we also get some pushback, due to the fact that the larger suppliers have an internal policy to only deal with A-rated banks. This impacts on us as a bank as we then need to go out into the market and get our paper reconfirmed, which is something we prefer not to do, because not only does it increase the cost for our customers, but as a bank we should be acceptable risk. Standard Bank is a good bank: we have the balance sheet, we can support African risk. There are instances where we have leveraged off our good relationships with the larger suppliers, and have asked them to waive those specific policies.

Gilchrist: Surely, within Africa, Standard Bank, must be one of the leading brands? We found, for example, in our business, as you said, that some of the suppliers were not prepared to do trade finance with, for example, Nigerian banks, but when they had Standard Bank they were all happy with that.

Mwaba: The issue does not arise at all within South Africa or the rest of Africa. The issue only comes about when we cross into the western world. Within Africa I think we are seen as the premier bank. When it comes to intra-Africa trade, an LC issued out of South Africa or out of a Standard Bank subsidiary within Africa would be good enough for another subsidiary in another African country without the need for any onward confirmation.

Lotis: That has changed dramatically over the years and has really been a huge benefit to us for intra-Africa trade. Not that long ago, every single LC you received had to go through a London bank. It made it very cumbersome and expensive. It became a big issue to try to get South African banks to accept and confirm and have their own lines between the banks to actually do it internally. Now, it has become – for my business anyway – almost standard. You do not need to go through the big European banks, and the cost, expense and cumbersomeness of it all. So that has been a fantastic thing to see for us.

Mwaba: That is the way it should be. We should be comfortable with the risk within the African continent at least. There should not be that need to have to take comfort from a western market.

Midzuk: I think what also helped accelerate that process was the deterioration in the credit rating of a number of European sovereigns and their banks in the crisis. The rating differential between leading African banks and other banks effectively disappeared. As a result, if you are a bank with a track record of doing successful deals across Africa – and we like to think we are one of those banks – then you can help get the supply chain working optimally after detailed discussion with the client. So for me, the European challenges have also helped accelerate the emergence of African banks concluding innovative trade deals.

Lotis: Historically, as a South African company we always wanted to deal with South African banks. It is much easier. But we sometimes had to go via European banks, and it did not work for us. Now it does not happen anymore.

Geldenhuys: From our side, with the boom of industry and the culture boom that is happening on the African continent, this last week I have had a few requests from international banks asking Standard Bank to actually confirm the LCs for them, because they do not have lines for a particular industry or in a specific African country, whereas Standard Bank does have those lines. We are getting those requests coming in more and more, where they are actually asking Standard Bank to confirm it for them on behalf of the European bank. We are starting to play that middle role between the European banks and the African banks. We do the confirmations for them on the trade lines.


GTR: Are you still able to get the financing that you need? Has the cost of trade finance in Africa gone up?

Wessels: I think South African banks have generally – and especially in the last few years – become very supportive. Previously, they were in Africa but not really part of Africa. Some of the internationals – such as Standard Chartered – were much more eager to deal in these markets. After the crunch happened in 2008, South African banks have really changed their focus. In Africa there is an actual risk and a perceived risk. In the past even South African banks looked at this perceived risk of Africa, not at the actual risk. I have found, especially in the last five or six years, the banks have really started seeing the opportunities and actually partnering up.

That is why the Chinese are so successful in Africa, because it is a co-ordinated effort. You will typically have a Chinese bank, with a Chinese trader, Chinese shipping company – everybody working together. I think from a non-Chinese-banking point of view, if you want to have the same success you need to have the co-operation. You must be able to raise insurance and things from that point of view, you need to be able to trade the products funded.

I have found South African pricing very competitive – especially guys with their offices in South Africa. International banks and South African banks that have a good infrastructure are much more comfortable and their pricing is much more aggressive than, for example, a bank that sits in London that has got maybe a repesentative office here. I like to deal with substantial people on the ground. If there are two or three guys sitting in an office, no matter how good the bank is in London or in Hong Kong, you will never get the pricing that works for you. I think you have to be close to where the risk lies to be able to price it correctly and I think sometimes because of the perception, international banks, not being here, misprice the products.

Craven: I agree; the SA banks certainly have come to the party. In the past the French or European banks have been active in Africa, above the Limpopo. I think some of our credit committees in SA are starting to see that it is not all that dark and gloomy up north. Given that there is a bit more pressure from foreign banks looking at business in SA – just look in Johannesburg how many foreign banks have set up office in the last 10 years – there certainly is slight pressure on the pricing side. That has come down. Corporate governance one would think has improved a bit on the continent in the last 10 years as well. There is definitely more liquidity; more openness to do business. Some of the banks that have got offices locally have got the appetite advantage, they know the country well, and then, a lot of the banks in Johannesburg are doing the suitcase banking thing. Overall, it is favourable I would say.

Lotis: The one thing that is still an issue is our very archaic system of foreign exchange control. I think that is an issue for everybody that does business in Africa. It has got slightly better. We do not need to fill out F178 forms like we used to, but it still gets well controlled and the responsibility is now on the banks to make sure that everybody complies. For example, to do funding in dollars at a very low interest rate, you have to go through all of these approvals. If you want to make any equity investment into Africa you have got to go through all these approval processes. I must say, so far down the line in 2012, this system is the same system that we had in the 1960s, maybe slightly relaxed. It is just archaic and restricts us being able to make decisions quickly and move efficiently.

Craven: Besides regional exchange controls, there are also still a lot of legal barriers. You have a lot of legacy legal systems that still date back from the colonial days. Combine that with inefficiency, legal bills and Basel; banks have to incur a lot of costs that are passed on to their clients. Legal costs and legal implementation is a barrier to finance.

Oliphant: We have certainly seen financing becoming very freely available into Africa. People are realising the returns that they are getting out of Africa are a lot better than they could get in their own backyards.