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GTR caught up with Tan Kah Chye, global head of corporate cash and trade at Standard Chartered, and Stuart Nivison, HSBC’s head of trade and supply chain, Europe at Sibos in Amsterdam to discuss the new landscape in international trade.

GTR: Are trade volumes recovering?

Tan: They are definitely going up across the board. The volatility is very high, but if you look over the past 12 months, it’s definitely an upward trend.

If you look at the trade value, it is a little unusual. It doesn’t seem to follow the historical cycle. It has probably been grossly distorted by restocking in the post-crisis period. I think this could be the “new normal”. And it’s because the supply chain cycle has generally shortened quite significantly.

We have a lot of customers that are telling us that they find it very hard to focus their sales and their inventory levels.
People are dealing with the volatility in consumer appetite by ordering just-in-time.

In terms of trade flows, intra-Asia is definitely leading the group – there is no doubt about it. This is led by strong domestic consumption in China, and India is not too far behind.

Otherwise, the trade flows – even the intra-region trade flows such as in Asia and the OECD market – that has also picked up. So, by and large, it’s a good picture.

Nivison: We had an Armageddon in the fourth quarter of 2008 and the first quarter of 2009. As we got towards April, most companies had run out of stock. It got to the point where they realised that people were still buying, but not at the same level. Stock had run out, and they had to place some orders.

So, the orders started around then, and we got back to a plateau level probably around the second half of last year. There was a bit of nervousness leading up to Christmas over how much stock people would expect to take.

This year has been at a consistent level – certainly for us – above last year. So, we are back to pre-crisis volumes. But I don’t know how much of that can be attributed to underlying market growth and how much of it is business that has moved from banks that aren’t as involved as they were, because obviously a lot of banks have become much more domestically focused.

But we are certainly seeing an increase; we’re seeing confidence back up, and I think that confidence is echoing here at Sibos. This year, the numbers are up, there is a buzz and people are talking about the future, which is encouraging.
And that is the same for the conversations with companies. They’re talking positively about supply chains, new markets, and so forth.

But, we are seeing more smaller, short-dated orders. We’re not seeing the big bulk purchases going through.

So, partly because they’d shrunk the balance sheet, people are not taking huge imports to get that discount. They’re willing to give up the good margin to make sure they’re not overextended.

I would not be surprised as we get into the fourth quarter of this year, as people get a better idea of what’s happening if we saw a surge of airfreight orders. That would be an indicator that things are going quite well. And if there’s a lack of that it probably means that things are selling as expected.

GTR: Is there much volatility in terms of consumer appetite?

Nivison: There’s been a fundamental shift in purchasing – so much of it was driven by debt. There’s a definite change in spending patterns, with people having less of a disposable income and probably going more for the smaller luxuries.
But I don’t see it going to the level that it was at. We’ve reached a new stable level effectively.

GTR: Pricing appears to be on a downward trend – is it back to pre-crisis levels?

Tan: Yes, we are seeing this across the board. My personal take is that it will probably go down by another 10% in the next 12 months or so. I think it will stabilise at that level.

But not surprisingly, banks are all back, well-capitalised and highly liquid. Big or small, they are all back in the market.

Nivison: It’s competitive – there’s no question about it. I would say that – and in part it’s driven by the regulatory issue – there are some real extremes where in some countries it is extremely competitive, and the pricing is very, very low, and for other countries and risks it is high.

So you’ve got these little pockets – the likes of Pakistan, Bangladesh, Central America, Ukraine and Kazakhstan – where they’ve got real trouble getting access to trade finance. That’s causing the WTO some concern, and multilaterals are looking at what they can do about it.

It’s a bit of a polarised form with supply and demand; where there’s a lot of supply it’s very cheap, until that runs out and then demand hits.

There’s no shortage of competition out there. Prices are certainly off where they were during the crisis. I’d say for some of these countries that are perceived to be high risk the pricing is still significantly off where it was. For the countries where there is a large flow of volumes and people are comfortable with it, you’re getting right back to pre-crisis levels – very competitive pricing levels – particularly for good supply chains.

GTR: What about pricing compared to the cost of funds for banks? Are deals being closed for a profit, or are they more relationship-driven?

Tan: I think that stigma has to do with the difference between funded and unfunded transactions.

Transactions like import LCs and guarantees are unfunded transactions, and are not impacted by liquidity. But, for example, open account transactions are impacted by a liquidity premium. And that is a challenge today because there is no single US dollar price. Of course there is still Libor, but Libor is just a group of banks that report their cost of funds.

There’s a huge disparity between banks regarding the cost of funds. Increasingly, a lot of banks are facing the concept of trapped liquidity.

For instance, there is different US dollar pricing between Hong Kong and the US. In Hong Kong, the US dollar you raise is subject to the region’s individual banking law, and you can’t take out the money you’ve raised, so you try to lend as much as you can locally, which means Hong Kong is awash with US dollar liquidity. So the pricing of US dollars in Hong Kong can be lower than elsewhere.

Your ability to raise and take out US dollars depends on whether your bank is a subsidiary or branch, but this trend is creating a liquidity difference, and is creating a lot of distortion in the true free flow of US dollars. Some banks find it hard to compete when they can’t raise US dollars.