Asian banks are ready to fill the gap left by French banks in the commodity finance market, according to panellists at the
Loan Market Association’s syndicated loan conference held in London last week.

Historically, French banks have held between 15-20% of the market share in the commodity finance market. But over the last few months, these banks have scaled back, and in most cases pulled out of the commodities space.

However, this current lull provides an opportunity for new players to enter into the commodity financing space, particularly for Asian banks, who are queuing up to enter this area of the market, John Turnbull, global head of structured trade & commodity finance at, SMBC, Europe, said.

“It was previously difficult for new banks to break into the commodity finance space, but this is changing. We’re now seeing some very different entrants in the market, mainly the Asian banks, but we’re even seeing some Australian and one or two US banks coming in too. As a consequence of this pricing might even become more competitive.”

There was a general agreement among the panel members at the LMA conference that Chinese banks in particular were flexing their muscles and preparing themselves to be the next go-to pool of commodity funding. In fact, many of the Chinese banks are already planning their moves over to London to set up bases and make key relationships in the sector.

Simon Tyler, head of corporate banking for China Construction Bank, London, said: “Banks such as Industrial and Commercial Bank of China (ICBC), Agricultural Bank of China, and China’s Bank of Communications are already in talks about their moves over to London and are very keen on developing relationships with the top players. Although it will be a while before this presence is fully realised, partly because they are being very cautious. But slowly and surely as this happens we’ll see them competing with each other as much as with international banks.”

Chinese banks will however meet with a number of challenges in their endeavours, one of which will be the difficulty in opening branches in London and wider Europe due to licensing documentation. But once this happens, Tyler believes the commodities market will begin to see liquidity pouring in.

Asia’s participation may not be enough to sustain the commodities market in the long term though, and SMBC’s Tyler believes that support will be needed from local banks in regions such as South America and Africa to finance business on the ground. Yet he believes that one of the challenges of this local support will be issues with loan structuring.

“A lot of the commodity traders are also tapping their local banks, which can provide them with short-term borrowing, which involves less complex dealings. But over the last year there has been a decline in dual tranche facilities that comprise both local and international financing simply because the priorities of each bank are different.”

He added: “One deal took eight months to arrange because of the discrepancies between the banks, and it’s now been put on hold as a consequence. But saying this, I think that most local banks have access to dollar funding so there is always opportunity for local foreign banks to finance whole US dollar transactions.”

In the meantime, bigger trading houses have been solving their own liquidity issues by funding themselves, and are consequently locking in long-term contracts, SMBC’s Turnbull revealed.

Overall the panellists were hopeful and believed that the future for commodity financing is bright and will continue to attract new investors.

“Commodity finance has tangible assets, and because of all the problems with sub-prime paper over the past six or seven years, this market has definitely become more appealing. Trade finance on the whole is a very low risk market, the default rate is 0.007%, and that’s only for 90-day defaults,” SMBC’s Turnbull noted.

“Adding to its appeal is that commodity price risk can be managed very well, although steel prices stand apart from this. But standing in the banks favour is that they don’t have to take the price risks on this.”

The Loan Market Association also launched its recommended single currency term facility agreement for pre-export finance transactions at the conference, which will include more specific debt sectors.