Australia is a mining and agricultural powerhouse, exporting a gamut of raw goods that are fed into supply chains around the globe. A depressed local currency has helped fuel global appetite for its exports. But its trade performance is highly dependent on China, which buys more than a third of Australia’s exports. As a result, companies are exploring new markets or trying to develop sometimes overlooked trade ties with Southeast Asian neighbours.
GTR assembled senior trade and export finance bankers at Westpac in Sydney to discuss trends in the Australian trade finance landscape, global interest in the country’s critical mineral deposits, and how the currency, and even the weather, are shaping trade flows.
Roundtable participants:
- Jacob Atkins, senior reporter, GTR (moderator)
- Gemma Blake, head of trade finance, lending and natural resources finance Australia, Deutsche Bank
- Amanda Copping, chief investment officer, Export Finance Australia (EFA)
- Erica Kim, trade and working capital product manager, NAB
- Travis Muscroft, head of trade and supply chain products, ANZ
- Adam Rowe, head of trade finance, Westpac
GTR: Starting off with a big picture view, how do you all see the current trade environment and outlook in Australia? Is the slower economic growth in China and the stimulus the government is injecting into the economy having an impact on Australian exports?
Kim: Our transaction data shows that some of the export markets have been very resilient and been able to find new markets outside of China. The weak consumer confidence and price deflation in China, and predictions that economic growth is likely to slow over the next three years, will definitely have a huge impact on Australian exporters because of its importance as a trading partner.
So far there’s been some mixed impacts in agriculture. For example, after China lifted its ban on imports of Australian wine, the number of exporters picked up, but the transaction data has been fairly flat, meaning that there is still uncertainty about the sustainability of this demand. On the positive side of the business, there’s still a lot of demand from China for Australian wool and dairy exports considered as premium products, and resources exports are still strong.
Muscroft: I would describe the environment as challenging, but not dire. Many of the supply chain challenges we had during Covid have abated, but perhaps not all. Improved relations with China are helping a number of our commodities exports, so that’s positive, as is our recent currency position. But those positives are probably offset by lower commodity prices.
For Australian importers, of course, the opposite is true; their ability to pass on currency-related price increases into Australia, where there’s already a cost of living issue, is challenging.
On the broader trade environment, you’ve got slowing China growth, there’s geopolitical risks that are probably more acute than they have been in quite a while, and the change in administration in the US is a big factor, making it a pretty complex environment out there. The Trump administration’s position on energy and resources might trigger supply chain diversification; the US might step away from its climate commitments, and there are implications for regulation and compliance, and sanctions on Russia.
Blake: I have a slightly different view, coming from the perspective of a global bank. China obviously remains one of our biggest trade partners, and will continue to be so for the future. Australia is making a lot of efforts to diversify its trading relationships, particularly with Southeast Asia and India. It’ll be interesting to see how those corridors shift over time, but at present, China’s still consuming the largest amount of iron ore, coal and gas. Which means as its economy slows, there’s definitely a big impact. Iron ore prices in particular have a big impact on the federal government’s budget, so that ultimately results in a big effect on the country.
Maybe there’s a short-term opportunity for Australia with tariffs from China on US LNG and coal imports, which certainly gives Australia an opportunity in the short term to export more to China, but in the long term, tariffs may contribute to a further slowdown in China, which will ultimately impact Australia.
Rowe: The agriculture sector has had a really good two or three years due to high rainfall and good growing conditions, so we’re seeing greater opportunities to support our customers exporting agricultural products into countries other than China, such as Indonesia, Vietnam and India. We’ve also been helping clients take agricultural commodities out of Australia into regions which traditionally may have sourced from other areas, for example, North Africa and the Middle East.
We’re seeing a bit of a pickup with respect to our export business, which is a new focus area for us, and something that we’ve been expanding. The business here at Westpac has been targeted towards supporting import flows. But in the last 12 months, we’ve been trying to shift from a documentary business focused on assisting importers with letters of credit (LCs) or guarantees, to more of an export focus.
Copping: We work across sectors and with businesses of all shapes and sizes, and from that can see some clear trends. We’re continuing to see strong interest from Australian businesses in overseas export opportunities, but we do recognise there are some challenges. China remains Australia’s largest export finance market and the government has stated that the removal of the A$20bn in trade impediments [imposed by the Chinese government in 2020] will lead to significant opportunities for Australian exporters. But we expect that some Australian exporters may see lower demand for their exports, especially commodities, if the Chinese economy continues to slow.
But in terms of broader opportunities, Australian exports are very diversified, and we are seeing growth across different markets, especially those in Southeast Asia such as Indonesia, the Philippines, Thailand, Vietnam, Malaysia – they have strong domestic consumption and are creating the global demand for goods and services that is generating opportunities for Australian exporters.
GTR: Are you seeing any interesting new trade corridors between Australia and other countries? Or are there any that have perhaps declined?
Copping: It’s definitely Southeast Asia where there’s a lot of new opportunities, across a full range of products from retail, goods, services and agri. There’s also a focus on critical minerals and commodities being exported to the region, but also to countries such as Japan, South Korea and the US. We have a heavy focus on facilitating finance into those markets, for critical minerals and other commodities.
Kim: We can see a few countries where trade has picked up, and India is one of those based on the free trade agreement between Australia and India. Trade flows with India in industries like textiles and agriculture have been a good growth area in the Australian market.
Rowe: On agriculture, there are countries that would normally have taken produce regardless, but now, as their middle classes grow, are becoming more interested in sustainability and in being able to track quality to specific farms or regions. Take India as an example, which buys Australian chickpeas and pulses. They’re becoming a lot more selective about the counterparties they’re dealing with and want to visit the farms where these commodities are being grown or processed. For us, that’s a really good development, because it allows the farmers who are adopting those sustainable processes to add a premium.
Australia has always had a strong reputation, climate and environment, and now I think there’s an added premium for quality and sustainable farming practices. Our customers are asking us to incorporate sustainability into their financing and operations, because then they can then sell it not just into Southeast Asia, but also to the EU, which has greater requirements for sustainability and accreditation.
GTR: Travis mentioned earlier that the Trump administration has a very different approach to sustainability and ESG. Do you think that may flow into getting less demand from customers for those products; that it might essentially go out of fashion?
Rowe: At Westpac, we consider renewables to be an important part of the future energy mix. Our teams across project finance, structured trade and asset finance are all looking to continue to support renewable and sustainable projects. So regardless of what happens in North America, we will continue to see sustainability as a key opportunity to assist in the carbon transition.
Kim: A lot of sustainability financing is driven by corporate clients, who want to do it in order to meet regulatory, internal or corporate governance requirements. That’s where the bank has an opportunity to develop products in the trade finance space.
GTR: The currency is a big topic in Australia right now, with the Aussie dollar hovering around US$0.62 [at time of the roundtable]. Obviously that’s great news for exporters, but broadly speaking, what has the impact been?
Rowe: Exporters are happy, but for importers, it puts pressure on their margins. It’s costing more for them to buy, and financing costs are still a significant part of their day-to-day operations from a working capital perspective. We’ve seen them look to source from different areas to take advantage of better margins and more economies of scale. For example, we see customers import from Eastern Europe, which may not have been a traditional market, as a way of trying to cut down on costs – but then they get stung on greater transport costs. There’s a fine balancing act that I think importers into Australia still need to run. It’s not going to get any easier.
Muscroft: If you think of the composition of the Australian trade economy, there is a concentration of large exporters in Australia who have quite strong negotiating power. For them, the spot price for commodities will often be less critical because of the longer-term nature of their off-take contracts and supporting currency hedging strategies. So even if currencies move against them, the impact is softened.
On the import side, speaking from ANZ’s perspective, we have a much higher portion of smaller and mid-market customers who tend to be importers, and these customers are less likely to have long-term off-take contracts and longer-term currency hedging strategies in place, making them more susceptible to currency movements.
For these reasons, a depreciating Australian dollar is more challenging for importers in Australia than what it might be for the larger exporters when the Australian dollar is appreciating.
Rowe: And as a consequence of that, Travis, we don’t want to see those SME businesses adopt riskier financing alternatives in an attempt to reduce financing costs. They are traditionally the larger users of documentary trade products, but if they continue to come under cost pressures, they may decide not to pay the LC cost, and to move it to open account. But that then increases their risk significantly, particularly if they’re in a region they may not know very well, don’t know the local business customs, or may not have a long track record with a particular counterparty. We see it as a concern if those financing cost pressures push them towards riskier transaction structures.
GTR: Have there been any trends or shifts in what trade products or structures are being offered or what corporate clients are asking for?
Kim: There are a few things happening at the moment. In the SME segment, we are closely looking at trade finance tenors, which are an indicator of how the working capital cycle is faring. That’s been stable over the last few years, which means there is a healthy working capital cycle. There is strong demand for liquidity solutions to help clients meet their day-to-day cash flows. We also see an increased demand for LCs and standby LCs (SBLCs) due to geopolitical tensions and risks, instead of a shift to open account.
Copping: A trend we’re seeing is that customers want to work with us to help with liquidity, both in terms of tenor, but also how we can provide working capital.
Another focus we have is digitisation. Given everything that’s going on in the world, we want to be able to receive and provide information and updates quickly and have a good customer interface and response time.
Thirdly, we’ve already talked about exporters looking at new markets, and we are seeing a lot of questions and requests for assistance to understand some of these new markets better. Companies want to know what we’re seeing in particular countries and industries, and want us to provide financial assistance through confirming LCs and risk participation agreements as they look to enter new markets. Bangladesh is a good example of a country we are receiving those types of queries about.
Muscroft: We’re also definitely noticing demand for advising and confirming LCs as companies seek secure terms to enter these new markets. Elsewhere, there’s increasingly a conversation with our large, sophisticated customers about end-to-end payables: dynamic discounting, supply chain financing and the use of cards.
In Australia, changes to the thin capitalisation rules that limit the deduction of interest expenses have triggered conversations with our multinational corporate customers about how they capitalise themselves and structure their borrowings. The rule change means, for example, that instead of borrowing inter-company from a parent, it may now be more advantageous to bring capital onshore and borrow locally.
Rowe: An interesting recent development is the expansion domestically of structured trade opportunities that are more akin to financing that you see in Europe, Africa and Asia. More deals are being structured off the back of long-term supply contracts from projects, offering prepayments and the ability to structure a trade facility over a number of months underpinned by an amortising delivery schedule. That’s something which is structured regularly in Asia, but it’s a new development here.
I think it’s the bifurcation of traditional project finance and structured trade which is driving a need for more specialist, trade advice and structuring capabilities. Previously, a producer or commodity trader may have financed everything with a corporate loan at very thin margins. Now we’re noting a more structured environment where there’s more due diligence, the need to show reserves, how they’re going to produce it and what their production risk is. In trade, we’ll provide an amortising loan, but we’ll provide it with a larger borrowing base capacity based on monthly reports and collateral management.
Blake: We’re seeing an increased demand for bank guarantees and SBLCs. Project costs are increasing because of inflationary pressures and as a result, companies are needing higher guarantee lines to be able to support their business. Projects typically take a number of years to complete, so the limits build. The growing demand for those products is also driven by the increased cost of capital, meaning companies are looking to substitute where they can with SBLCs. For example, to boost the internal rate of return in the renewables space, companies are funding the debt first, equity second, and bridging that time between the two through an SBLC.
GTR: The regulator in Australia has also increased the capital requirements on some guarantees, meaning they’re higher now than in the EU. Has that helped you sell more of those products?
Blake: It’s not across the board, it’s helping us a little bit in select pockets.
GTR: There is significant appetite overseas for investment in Australian critical mineral projects, have local banks been tapping into that and taking advantage of export credit agency (ECA) cover?
Copping: Australia has around 31 critical minerals identified by the government, and five that are classified as strategic. Critical minerals financing is a core part of EFA’s business, and we have a specific mandate from the government to provide financing for that, both in terms of commercial activities, but also on behalf of the government and through the government’s critical minerals financing facility that we are responsible for.
So far, we’ve supported financing for Iluka’s rare earth refinery in Eneabba, the Arafura rare earths refinery and lithium projects such as Pilbara Minerals.
But as we all know around this table, critical minerals projects face a number of challenges. They are often very complex technically. They have a long ramp up period. Critical minerals markets are often opaque, with no open market pricing, and some projects only have short-term contracts with limited visibility of possible long-term offtake agreements. On top of that, like all mining projects, they are very capital-intensive. That means there are particular risks that EFA is well-placed to take, but similarly to other ECAs as well. We’ve been looking to crowd in both ECAs and private sector finance into critical minerals. We work with everyone around this table to provide opportunities for financing.
It also means that you tend to see quite a stacked financing structure at a project finance level, with a number of different financiers. Taking the Arafura deal as an example, you have commercial banks, international ECAs, EFA and the [government-backed] Northern Australian Infrastructure Facility and National Reconstruction Fund Corporation. Having some kind of dedicated government financing entity makes sure that the risk is allocated according to the party best placed to manage it. It also depends on the product: lithium has got broad support from commercial financiers, but it’s much harder to get them in on rare earths, given the nature of the market.
Blake: Everything Amanda said definitely resonates. It’s very challenging, from our perspective, to find a bankable project. ECA support is absolutely critical at the moment, particularly for the rare earths. Strategically, the world is talking about diversification of risk from China in terms of these minerals – but one thing I haven’t seen yet is people willing to pay a premium for that.
Copping: On a more positive note, we are pleased to see so much international interest in Australia. When we meet with our counterparts around the world, critical minerals are always on the agenda. They want to talk to us about how we manage to get some of the financing off the ground in Australia, and what they can do to be involved directly or with banks.
GTR: Last year the Attorney General’s department released a consultation on adopting the Model Law on Electronic Transferable Records (MLETR), is that something your banks are contributing to? Is the use of digital documents such as electronic bills of lading something your trade customers are seeking?
Kim: There is interest across all different types of trade customers globally, but there are still competing priorities internally for those clients, and we don’t see it as being one of their top priorities unless there is a critical benefit for them.
Currently, eBL [electronic bill of lading] adoption rates in Australia are very limited, because apart from the major international commodity traders, the majority of our clients do not have much interest in eBLs and I’ve seen little demand from local customers.
In Asia, we see a little bit more demand from mining or commodity trader treasurers, but it’s still not a common request. There are also some interoperability challenges among the eBL providers and integrating with banks, because in my experience changing systems in banking can be very challenging.
Muscroft: It’s typically the more sophisticated, multinational customers that operate in multiple MLETR-enabled markets that are most interested. MLETR is an important foundation for enabling Australian trade digitisation. But the hard work of making MLETR a reality in Australia is still ahead of us. More broadly, the global trade digitalisation journey is going to be a series of reforms on a country-by-country basis. We see a role for importers, exporters, governments, financiers and fintechs to play in bringing it to life, but it will be a long journey.
I think the utopia of a fully integrated global trade ecosystem is something that’s important to aspire for, but, in practice, it will be fragmented, it will continually evolve, and is unlikely to have a clearly defined finish point. Notwithstanding, having a clear legal framework that operates in a global context is an important part of this journey.
Rowe: I agree with Travis – it’s a huge and time-consuming effort, because you need to have everybody buy into it at the same time, which I believe is going to be the biggest impediment. You’re going to have counterparties who still elect to receive a physical LC and have it in their hands. So how do we avoid a situation where we’re creating more problems for ourselves by having some customers operating digitally, some still on old school hard copy documents and others on a hybrid of both? This is exacerbated as banks’ back offices aren’t as well-resourced as they once were, and the sector has lost those document checking skills. In my opinion, we’ll need to build out middle and back offices to trust and understand the new processes that digitisation will require.
