Structured trade and commodity finance is finally gaining ground in South Africa, with banks closing more deals with different counterparties. Shannon Manders reports.
With South African trade volumes recovering, structured trade and commodity finance (STCF) bankers across the country are reporting an increase in the number and size of deals as corporates begin to realise the full potential of structuring commodity finance deals.
“There’s so much more in the market now from the bigger guys, who in the past had other sources of financing, such as balance sheet lending. But now they’re wisening up to the STCF option,” says Greg Havermahl, head, structured trade & commodity finance at Rand Merchant Bank (RMB).
Havermahl explains that one of the big advantages that newcomers find in commodity finance is that it matches their working capital flows. “So if the prices go up, the size of the facility also goes up, and I think they like that,” he says, adding that corporates are also increasingly willing to carve out STCF facilities on a committed basis.
“There’s so much more in the market now from the bigger guys, who in the past had other sources of financing.”
South African bankers generally note a growing STCF book over the last 18 months as well as a slightly different deal pipeline to what it was a year ago; many contribute this change to the fact that banks are dealing more with larger counterparts.
“It is more selective and of a better quality. There are larger clients now with larger balance sheets,” says Wayne Khoury, transactor for Nedbank Capital’s global STCF division. As a result Khoury reports, there is more success in terms of deals going right the way through to completion.
Banks are willing to put balance sheet to use for commodity financings as long as the deal is well structured and the risks are properly mitigated agrees Yusuf Khan, Citi’s head of structured trade finance for Africa. “We are certainly seeing this with strategic commodities like oil and cocoa.”
South African banks are beginning to cooperate more effectively with each other when doing business in Africa as they seek to increase their exposure and ramp up their presence on the continent. In the past, syndications all took place in London, and it is only recently that the banks have started to syndicate club deals in South Africa.
“Now that SA banks have started to venture over the border, they’ve started to make friends – because they need each other,” says Donald Stewart, joint head, softs, for Nedbank Capital’s global STCF business.
RMB’s Havermahl believes that past behaviour can be attributed to SA banks’ fiercely competitive mentality. “Unlike in London, we just couldn’t get together with Nedbank and Standard Bank here in South Africa and do a deal for an East African client. The wheel turned slowly,” he says.
South African banks are also developing their appetite for working with African banks on STCF transactions, and viewing them more as clients as opposed to counterparties.
“At the moment we’re restructuring three of our deals in Kenya with local banks, where previously we did it on our own,” says RMB’s Havermahl.
“We have seen that not only in vanilla trade business; we’ve had some interesting leads into places like Nigeria for example.”
Havermahl explains that whereas previously most of RMB’s trade on the continent was limited to trade with a South African leg, the bank is now looking to African banks as clients and offering them services that are not just trade linked to SA but to their global trade as well.
International players are becoming increasingly involved in STCF deals on the continent, with Chinese banks particularly keen on sharing risk with the local banks.
The financial crisis led to a dramatic shrink in South Africa’s trade volumes with traditional partners in Europe, but China-SA trade has been able to withstand the crisis and China rose to SA’s largest trade partner in 2009.
South Africa provides iron ore and other vital resources to China, but also offers a strategic link to the rest of Africa, where China has already been investing heavily in recent years.
China’s participation is being noted on a number of STCF transactions – even those that do not necessarily have a Chinese link – but where they feel they can benefit by funding clients on their non-Chinese trade if it means they build a strong relationship.
“There are two transactions that we’re selling down to Chinese counterparts at the moment, and neither of them has a Chinese leg,” says RMB’s Havermahl. “One is a fuel import into East Africa. But I think the client does have a lot of Africa resources which they export to China.”
RMB is reportedly also looking at a large transaction for fuel imports into South Africa where they’ve seen some Chinese interest.
Standard Bank, with its ICBC counterpart, has also noticed a pick-up in the China-Africa component of the business. “We have seen that not only in vanilla trade business; we’ve had some interesting leads into places like Nigeria for example, and we’ve managed to bank them,” says Craig Polkinghorne, director, global head, STCF.
ICBC is one of three banks that have been increasing their presence in South Africa, together with Bank of China and China Ex-Im.
Citi’s Khan observes that China Exim which set up office in Johannesburg in 2010 has been quite active in funding infrastructure projects throughout Africa on very competitive terms.
China’s involvement in the country reflects growing ties between the two countries.
South Africa is seeking to further cooperation with emerging economies, and in August 2010 South African President Jacob Zuma travelled to China with an aim to strengthening business relations between the two countries. The trip was the last stop of his state visits to all the BRIC countries over the last year of his presidency.
South Africa has expressed its interest in joining the BRICs, and President Zuma is lobbying for membership in the informal grouping, which could help raise the country’s economic and political clout.
South Africa is also fostering growing links with other emerging economies.
Investors from India and Brazil are looking to use the country as a springboard into Africa as they become progressively more enthusiastic about trade with the continent.
RMB is the first South African bank to have a banking license in India. As such, trade flows between the two continents is a top priority for the bank, which finds a lot of “low-hanging fruit” as a result of their presence there. “It’s a two-way street; they want funding from our corporates investing in Africa, but they also want funding for exports to India,” says Havermahl.
RMB has been cashing in on South African gold exports to India. “In the last two months we’ve captured 10% of the Indian gold market – that’s a massive growth area for us,” says Havermahl.
The bank is also very active in the Indian buyers’ credit market, which is assisted by their Indian presence.
The challenge ahead for the export-reliant country is the overvalued rand, which rose 30% in 2009 and as GTR goes to press is up 5% versus the dollar.
Increasing commodity prices also continue to keep bankers on their toes. “We’re watching with bated breath. It’s a good time to be hawkish,” says RMB’s Havermahl.
With First Rand branching out into countries such as Zambia, Mozambique, Tanzania, Ghana, Angola and Nigeria, the bank has been able to establish a local balance sheet and grow both local currency and dollar deposits. “We’re stronger now on local lending where we do have a presence,” says RMB’s Havermahl. “Also, clients who do not have exports they are more willing to do local currency loans, he says, noting that in the past the bank operated fundamentally as a dollar book. GTR
South African project finance bankers highlight access to power, port infrastructure and certainty of rail availability as issues that affect the success and financing of commodity deals in the region.
South Africa posted a R3.6bn trade surplus in September – but this was only as a result of a backlog of iron ore shipments caused by a rail accident. State-owned port and rail operator Transnet reopened its Sishen-Saldanha railroad, which carries about 34 million metric tonnes of iron-ore exports to port every year, in July after a derailment forced a six-day shutdown. As shipments resumed, mineral exports surged by 27% as companies caught up with the glut.
Dilapidated rail lines are also trapping South Africa’s biggest corn harvest in two decades.
South Africa’s 2010 maize crop was its second biggest ever, thanks to good rains and improved seed and technology. But, owing to a strong rand and favourable global weather, maize prices are incredibly low.
Farmers are unable to get the 4.5 million tonne surplus – worth at least US$815mn – to ports, and are holding the country’s rail system liable for the damage to their business.
Transnet is reportedly short of locomotives and unwilling to transport grain as it is less profitable than moving coal. This, together with bumper harvests in South Africa’s neighbouring countries and a lack of new markets to export to does not bode well for local farmers.
“It is imperative that South Africa finds new markets for its maize and surplus food exports,” says Andre Strydom, head, structured trade and commodity finance at Absa – one of the country’s biggest lenders to South African farmers. “The economies immediately north of us are becoming self-sufficient in maize production and are looking for export opportunities further up in Africa.”
South Africa’s grain farmers have been lobbying to convince the government and Transnet to increase export capacity through increased expenditure on railways and port capacity.
“But this will take time to implement, and in the meantime, other uses such as the biofuels industry [the production of ethanol from grain] should be pursued,” says Strydom.
He explains that much of the country’s maize is internally transported by road, leading to road deterioration and ultimately a reallocation of spend to maintain roads. “Improved spend on rail and port infrastructure to accommodate ever-growing maize surpluses should, in my opinion, deliver the best cost benefit scenario over time.”
In other commodities, South Africa could be doing an “enormous amount more” on the coal and iron ore export side, says Brad Breetzke, head, metals, mining, power and infrastructure finance at Standard Bank in Johannesburg.
Breetzke also points to value-adding processes such as beneficiation (whereby extracted ore from mining is separated into mineral and waste), which have up until now been limited in South Africa as a result of poor infrastructure.
Since beneficiation usually involves smelting, which is especially power-intensive, Breetzke explains that South African mines wanting to add value to the minerals onshore, are challenged by the fact that the country does not necessarily have the power solution.
International financiers are becoming increasingly keen to invest in auxiliary infrastructure in order to gain access to commodities on a longer term basis.
Big players, such as China, have the appetite for the end commodity and are ready to conclude deals. They are also looking to partner with other companies.
“A lot of this up until now has been on a bilateral level,” says Standard Bank’s Breetzke. “But it’s now coming to the point where Chinese companies are doing deals with other project companies or developers. It’s the second wave, so to speak.”