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Commodity traders are more cash-rich than ever – but where does that leave banks?

Executives from Vitol and Trafigura have said their access to trade finance remains strong, despite bank nervousness following a string of fraud scandals in Singapore’s commodities sector.

Commodity traders in the Asia Pacific region have expressed concerns that this year’s fraud crisis in Singapore’s energy trading sector is leading banks to restrict the supply of credit to the industry, putting pressure on liquidity.

Christophe Salmon, group chief financial officer at Trafigura, acknowledged at the FT Commodities Asia Summit this week that some financial institutions have responded by cutting their exposure to the sector.

“A number of banks have gone through their client portfolio in order to be more selective, and to cut a number of business relationships which do not make sense,” he said.

However, Salmon said a US$1.6bn financing package that Trafigura agreed with banks across Asia and the Middle East in October – upsized from an initial launch amount of US$1bn – shows that financing options are still on the table for larger players.

Echoing comments made by Glencore executives in August, he suggested financing has become more concentrated at the larger end of the market.

“There is a flight to quality, for sure,” he said. “There is a higher cost of entry to the commodity sector overall, because banks and lenders are being more and more stringent on their requirements.”

Problems in the energy trading market started to emerge in March this year. A demand shock caused by the Covid-19 pandemic, coupled with a drastic drop in oil prices, caused a squeeze on liquidity at many trading houses.

It soon emerged that some traders were being accused of fraudulent activity. Most notably, Hin Leong – previously one of Asia’s largest independent trading houses – collapsed in April with exposures to banks totalling US$3.5bn.

Investigators have since uncovered widespread and systematic fraud at Hin Leong, including financing for fake trades and obtaining multiple financing from different banks for the same transactions. Several other traders face similar allegations.

Some banks responded by cutting their exposure to the sector, notably ABN Amro, which announced it would withdraw entirely from the trade and commodity finance market after writing off over US$600mn due to fraud.

But speaking at the same event, Vitol chief financial officer Jeffrey Dellapina said the impact of those fraud cases does not appear to have been felt equally across the entire oil trading market.

“To suggest that we didn’t suffer any pain isn’t totally correct – there were some issues exposed in the supply chains that do expose us, and we did suffer a little bit of loss – [but] nothing too material,” he said.

“We really don’t think we’re exposed to big cyclical moves, and hopefully our banks understand that and generally support us in a clean, unsecured way. The crisis in itself really was not a liquidity event in any way for us.”

Dellapina added that larger oil traders have benefited from being “a little bit stricter… in terms of making credit decisions” than their counterparts in the banking sector.

Singapore’s minister for trade and industry, Chan Chun Sing, also insisted in an opening keynote speech that the “commodities trading industry has remained resilient”. However, he said there is a “need to enhance the financing mechanism” for some trading houses.

“Many commodities traders rely heavily on trade financing,” he said. “We want to uplift standards for the commodities trading industry to increase banking confidence in the industry.

“There have been isolated cases of mismanagement and reports globally that have reduced confidence among banks that provide financing to commodity trading companies.”

Chan welcomed efforts led by the Association of Banks in Singapore to produce a code of best practice, which he said is due to be finalised before the end of this year.

He also cited a blockchain-based registry of trade finance transactions being developed by a consortium of over 20 banks that aims to eliminate duplicate financing, and said digital initiatives such as Contour are “promising” in terms of reducing fraud risk.

“These steps being taken by the industry will result in a safer trading environment, a more rigorous credit assessment of trading companies, and ensure access to banking facilities that are commensurate with creditworthiness,” Chan said.

“This will not only strengthen the fundamentals of the trading sector, but also Singapore’s resilience, relevance and competitiveness as a global commodities trading hub.”