Sofia Lotto Persio reports from the GTR Global Commodity Trade Finance conference in Lugano, discussing the impact that a turbulent year has had on banks and commodity traders.
It’s been an eventful year for the commodity trade finance community in Switzerland. The fall in commodity prices, the Qingdao fraud scandal and the continuous retracting of banks from the business have sent shockwaves through the industry, with many talking about having reached the end of the commodity super-cycle.
The mood at the GTR Global Commodity Trade Finance conference in Lugano at the end of September was one of resilience against the challenges brought about by commodity price levels, upcoming regulatory changes and the rise of Asian competition.
According to Stéphane Graber, secretary general at Swiss Trading & Shipping Association (STSA), the impact of the fall in commodity prices on Swiss traders is a complex matter to assess, depending which aspect of the business is considered. “Pure commodity trader activities were covered against price fluctuation […] On the asset side, so extractive or productive side, we see more turbulent times with difficulties to finance and have a good return on investment,” he told GTR on the sidelines of the event. Graber’s analysis was supported by recent events affecting major commodity trader Glencore, whose short-term strategy in response to the fall in commodity prices – and to refinance its debt – has been to sell off assets and reduce production while waiting for the price to adjust. The company has already applied the strategy to copper and zinc mines, saying that there was “no point” in extracting the metal without making a profitable margin.
In his keynote speech addressing the regulatory challenges of a globalised commodities activity, Graber said that worrying about the rise of Asian hubs should not be as much of a priority as “levelling the playing field” of existing regulations that differ across jurisdictions. He advised traders not to oppose regulation, but instead to keep an open dialogue with the regulators and co-operate with them to try and make regulations consistent with other international environments without penalising the Swiss position.
Despite the emergence of Asia and the Middle East as commodity trading centres, delegates and speakers at the conference were confident Switzerland could remain an important hub. Alexander Peters, Sahara group CFO and Swiss Commodity Club board director, agreed that co-operation was key in ensuring Switzerland’s future as a commodity trading hub. “We all need to work together to create a better and safer environment for Swiss commodity traders, [otherwise] there may be a shift of commodity traders to different jurisdictions where they have better conditions to work and a better, lower price environment.”
“We have seen a shift from Switzerland to the Far East, and whilst that has happened, there is still a lot of expertise in Switzerland amongst the trading houses that is not evident in the Far East,” reassured Philip Prowse, Clyde & Co partner, speaking to GTR at the event. It is this expertise that could make Switzerland a viable jurisdiction for commodity trading notwithstanding what happens to commodity prices. “The fact the price is low at the moment dents the confidence and that makes people maybe slightly more hesitant, but it shouldn’t affect any of the ongoing viability of businesses if they are properly structured,” he said.
Uneasy banking relationship
The bank/trader relationship was a major talking point at the conference. On the one hand, big commodity traders are still receiving support from banks: just in recent months VDM Metals signed a €300mn borrowing base facility with nine European banks, Trafigura closed a multi-currency syndicated RCF and term loan facilities for a total equivalent to US$2.2bn, and Vitol concluded a whopping US$8bn RCF.
However, smaller traders and producers are seeing a decrease in bank appetite for financing the trade of commodities. According to a Clyde & Co report on commodity trade finance called ‘Time to join the club?’ and published in September, in the past eight years banks went from financing up to 80% of the trading of commodities worldwide to about 50% of it. This steep decline has negatively affected SMEs, who find it harder to access trade finance, while opening opportunities for non-bank lenders to fill the liquidity vacuums left by banks. “Fintech could come in and take business away if banks aren’t ready,” warned Dmitri Gainullin, structured trade finance director at Credit Suisse, in the panel on the changing face of commodity ﬁnance.
Banks are slow in innovating, and with 67% of the audience feeling that banks are not adapting to the new needs of traders and producers in a fast and flexible fashion, banks cannot feel too secure in their traditional positions. Crowdfunding or peer-to-peer lending, which was dismissed by the panel as not viable for commodity finance, is instead emerging as a viable alternative, especially for SMEs. Take, for example, Middle Eastern online marketplace for peer-to-peer finance Beehive. The company launched an invoice financing product targeting SMEs, enabling them to list invoices that are due within 60-120 days and to receive ﬁnance within 24-48 hours. Beehive claims to have facilitated over US$3mn in finance for more than 25 small and medium-sized enterprises (SMEs) in the UAE since its launch in November 2014, suggesting that there is indeed a market to provide an alternative kind of finance.
The Clyde & Co survey of traders also found dissatisfaction regarding the financing on offer v. traders’ needs, with a strong demand for more bespoke solutions and relationship banking. “There is real enthusiasm for pre-export structured trade financing, but under half of our respondents found it accessible and the majority of respondents said it accounted for less than a quarter of their funding mix,” explained Prowse. “As demand rebuilds, the time could be right for banks to redress the risk balance caused by over-exposure to synthetic trades and to return to traditional trade finance linked to actual underlying transactions,” he added.
Additional criticism on the way banks are serving the industry came with regards to the new situation in Ukraine. 66% of delegates thought banks were not adapting appropriately, with the majority thinking banks were adopting a “take it or leave it” approach focused only on limiting their exposure. The appetite for commodity business in Ukraine and Russia is still there, with most delegates expressing interest in carrying on their operations in the region. As panellists discussed, while business volumes with Russia have fallen, business is still possible if good political risk cover is found – alas, this is hardly available outside of the export credit agency offering. Compliance is, of course, high on the agenda too, as the sanctions on Russia have increased the need for thorough sanction screening and Know Your Customer as well as your customer’s customer requirements.
Another emerging area of concern for banks and corporates is warehouse financing, the status of which has been affected given recent events in China, in particular. The fraud scandal in Qingdao and consequent lawsuits, the most prominent being the Citi vs Mercuria case, have highlighted the need for more thorough risk management in commodity warehouse deals, with some traders pulling out of the warehouse financing business altogether. Trafigura, the second-largest metal commodity trader, announced in August it would exit its metals warehousing business in China. According to Gregor Boyd, senior associate at Clyde & Co: “The ruling has highlighted the difference between the reality of what is happening in terms of warehouse receipts being presented as good titles and what the contracts require, which should mean the banks should go back and re-check all their contracts,” he said, adding: “There will be more use of third-party collateral management to ensure that in the warehouse things are properly looked after.”
But even that is not as simple a solution as it sounds. Panellist Elena Egorova, head of projects at Drum Risk Management, summed it up: “We want more regulation, or at least standardisation of what the business is and the expectations are.”