Banks are being forced to adapt to lower demand for traditional commodity finance facilities, amid an increasingly challenging operating environment and a threat to profitability, industry insiders say. 

Larger commodity traders have increasingly preferred to lean on their sizeable cash reserves and  bumper working capital facilities rather than transactional financing, after a period of record profits and hikes in interest rates. 

For banks that have historically specialised in commodity finance lending, this drop in demand poses a challenge. 

“From a banking perspective, it means less utilisation, less profitability,” said Christine Dirringer, global head of trade and commodity finance at Rabobank, at this week’s Financial Times Global Commodities Summit in Lausanne. “It’s stressful.” 

Dirringer said in Rabobank’s case, strong performance in retail banking and limited opportunities elsewhere – such as M&A and capital markets – have meant executives remain tolerant of a commodities market that is performing less strongly.  

“I don’t think that institutional tolerance lasts forever,” she said. “And I do worry in the longer term there are multiple pressures, particularly on European banks currently, and maybe that that spreads more globally.” 

Regulatory pressures, notably incoming Basel reforms, along with sustainability concerns and the operationally intensive nature of commodity finance, pose a growing challenge to the sector. 

“All these pressures are getting a little more intensified,” Dirringer said. “Does that mean that ultimately just banks drop out? It’s entirely possible.” 

However, shifts in demand also present opportunities for lenders that can adapt. In Rabobank’s case, Dirringer said the bank is responding by “finding places to add value for global traders”. 

“[For] the large traders, it’s not just simple working capital that they’re looking for,” she said. “They’re also making investments in energy transition, and optimising their balance sheet. It’s not just that they’re not borrowing on their main facility and you can’t do business with them.” 

James Lowrey, group head of structured trade commodity finance for Emea at SMBC, said at the same event that banks “must be agile, have a good toolbox of products and solutions, and be prepared to bring those to your customer base depending on what they need”. 

One bank representative told GTR on the sidelines of the event their institution is taking a more advisory role with clients, moving away from pure transactional financing and towards support for longer-term investments, such as upstream or energy transition-related assets. 

They are also supporting clients that could be exposed to market volatility, for instance by protecting their access to liquidity, they said, speaking on condition of anonymity. 

Those views are echoed by commodity trading giants. Jeff Webster, group chief financial officer at Gunvor Group, said at the event that traders see their bank relationships as existing “for the long haul”. 

“You need to maintain those bank relationships, the same as you still need to keep working your muscles, even if you’re not signed up for a marathon,” he said. 

Guillaume Vermersch, group chief financial officer at Mercuria, added that traders are developing “a different level of relationship with these banks”. 

“We are thinking of them more as a partner in a number of discussions,” he said. “It’s clearly a game changer.” 

The discussion comes as the commodity trading market continues to generate record profits. An analysis published by McKinsey last week estimated the sector had generated US$104bn in profit in 2023, an increase of US$5bn from the previous year, but double the figure for 2021.