Same, but different
This is the fifth anniversary issue of GTR. Yes, it’s only been five years since Global Trade Review hit your desk. Before we hear later on from several market players who were mentioned in that first issue, Rupert Sayer attempts to condense the past five years into two pages of informative summary.
It was only five years ago that Peter Gubbins and I left the trade and forfaiting magazine that we had set up and nurtured for five years at another company and decided that we could only produce exactly what we wanted and the market needed on our own, through our own company, with no restrictions.
We took a leap in the dark, starting off afresh with a couple of laptops in a tiny shoebox office on Lavender Hill, Clapham Junction, London, with only Andy, our faithful sales rep, and Manuel, our yucca plant, as company. (Andy has since set up and grown his own dating agency and shares office space with us – remarkably he’s still single; while Manuel has doubled in size and greets passers by on our stairwell).
The company we set up, Exporta Publishing & Events Ltd, now produces the market benchmark magazine, GTR, has just won the mandate to publish the Berne Union Yearbook, produces around 20 events related to trade and export finance and risk all over the world each year, and is about to launch a new emerging markets-related magazine in the new year.
With 12 staff and an army of freelancers, Exporta certainly has had a swift rise to the top – and we sincerely thank all our supporters over the years.
I remember the first piece of advice given to me when we decided to set up Exporta and GTR: “Concentrate on the quality, and everything else will follow”. We have striven to follow this creed over the years and been rewarded with an amazing response.
What about then
Back in September 2002 the landscape looked somewhat different for trade financiers, although many undercurrents were similar. We reported back then on: economic crisis in Argentina, riots in Uruguay and pre-Lula political uncertainty in Brazil; a resilient Middle East trading environment; Asia hotting up for business, as ever; Africa poised to throw off its risky image and ’emerge’s once and for all? as ever; Russian activity as lively as ever, with Putin seen as a stabilising influence on the markets; Turkey beset by certain economic and political handicaps; and the Dominican Republic all the rage for those trade financiers looking to make a quick buck.
Well, some of these scenarios could easily be apt for today: Turkey, Asia and the Middle East especially. Russia however is looking more shaky, as Putin has displayed to the world his macho defiance to anyone foolish enough to mess with his country – as well as planting flags in the North Pole and played with western-flowing oil and gas supply switches.
The Dominican Republic blew up in the face of quite a few of those trade financiers, while Argentina has made a steady comeback from economic collapse.
In the five years since our first issue there has been, however, a general improvement in risk globally (despite terrorist threats and the Iraq problem) – to the point that most trade financiers bemoan the old days of higher risks and higher margins. This has forced players to be wiser and more innovative with structures, while at the same time, sometimes taking more risk to benefit from higher returns.
Basel II wasn’t on anyone’s lips back then, but of course today has made a big impact on the portfolios and capital requirements of banks. Basel II requires more active management of capital supporting the business and has also brought in more non-bank sources of risk capital such as hedge funds. ‘Know your customer/KYC’, and the Sarbanes-Oxley company standards regulations (passed in July 2002), have also added to the due diligence needed on customers.
“Volatility of commodity prices has increased and against a background of slimming margins requires an increased focus on risk management, too,” adds Paul Schuilwerve, managing director, global commodities group, Fortis Bank, in Rotterdam.
Globalisation and consolidation has continued apace among companies and financial institutions. “National borders and culture are becoming less and less important,” says Schuilwerve. “Global communications allow companies to operate anywhere in the world. Mergers and acquisitions are driving consolidation in the supply chain in order to be more efficient and operate globally.”
That phrase ‘supply chain’s was a specialist term only really used by certain wholesalers and manufacturers back in 2002 – today it is a term that has almost subsumed ‘trade’s itself. Five years ago we were writing about ‘electronic trade’s and ‘e-commerce’; today we speak about ‘supply chains’, ‘supply chain finance’, ‘logistics management’s and the ‘seamless flow’s and financing of goods.
Supply chains have been more and more integrated in recent years and producers and consumers concentrated.
The rise of China, Brazil and India as producers of goods and services, as well as consumers, is a notable trend over the past five years. China has been responsible in most part for the huge global commodities boom witnessed in recent years. Its export credit agency, Sinosure, has also made a big impact on the project and export finance scene.
Commodity producers and traders have been enjoying boom times. Within this backdrop, the role of traders has somewhat changed to providers of additional services such as (pre) export finance, insurance, logistics and hedging risks.
Trading companies run the risk of being squeezed out if they are not able to add value to the supply chain in a market where efficiency has increased and arbitrage opportunities have been reduced.
There has of course been increasing competition among banks for trade business within this environment. To gain market share and beat off the competition, better conditions (longer tenors and pricing) are now being given to borrowers.
As Deutsche Bank’s managing director, structured commodity trade finance, John MacNamara, says: “The first thing that springs to mind is just the size of deals today compared to five years ago. We all thought ourselves lucky and just a little over-exposed to get a US$200mn mandate from the likes of TNK for pre-export finance back then – now the deals are rarely less than a billion!”
The integration of trade finance with other product areas within banks has been another noticeable trend. First, it took place with the merger between trade services and cash management as banks realised there were tremendous similarities and synergies between these two areas. Some banks have gone as far as to re-characterise the whole business as ‘working capital management’.
Then there has been the move of structured commodity finance to become more closely aligned with the capital markets area (eg, just one example is HSBC’s move of its structured commodity finance into its markets division).
“New risk management techniques (eg, credit derivatives, commodity hedges, etc) and the advent of Basel II will accelerate this process further,” says James Parsons, managing director at BlueCrest Capital Management. “In the same respect I also expect to see more banks set up dedicated credit portfolio management units for their overall trade finance exposure and capital.”
On the bigger-ticket side, banks have had to vie for business with export credit agencies and insurers in some cases. “There’s been an improvement in the economies of many traditional ECA markets resulting in better domestic liquidity which is more attractive that ECA financing,” says Charles Carlson, global head, structured export finance and head of European project and export finance at Standard Chartered.
“ECAs are learning the lessons of previous emerging market economic difficulties of 1999, 2000, etc and now are more sophisticated at assessing risk, particularly for ECA-supported project finance transactions, eg, Coface, Hermes and EKN (particularly in telecoms – which has incidentally seen a big return in the past five years).”
On the private insurance side, more ‘per deal’s capacity and longer tenors seem to be available for trade, export and project finance risks now. “Insurers have adapted their products in response to a changing regulatory environment (eg, Basel II),” notes Andrew Underwood, head of political risks at Lloyd’s underwriter Hiscox.
Specialist insurance brokers have greater prominence in the risk syndication/mitigation process now too, he says, while strong demand for structured private obligor cover has led to market expansion in this area and insurance is being more commonly used as a facilitator as well as a mitigant now.
“The rise of technology in trade finance, leading to substantial improvements in access, efficiency, and transparency,” is one major trend over the last five years, believes Parsons.
Most banks now offer internet-based systems for their trade services offering that make the process of obtaining and managing trade finance (such as letters of credit) considerably easier for corporates. The internet has also greatly improved the availability of information and thus transparency for all participants in the market.
Looking forward, still to come will be an expansion of electronic documentation and multi-bank systems, believes Parsons. Swift’s Trade Services Utility (TSU) is one such initiative – covering the growth in open account trading.
Back in five
Technology is an apt area with which to end this five-year look back. If you consider the technological advances in the past five years in medicine, communications, transport and engineering, to choose just a few areas, all this has had a huge knock-on effect on world trade. If you don’t know the difference between a Wii and an i-Pod then so be it; a lot of this might pass you by.
But trade financiers and risk managers will be ignoring the likes of ‘integrated/seamless solutions’, ‘ERP’, ‘supply chain management’, ‘financial logistics solutions’, ‘online interfaces’, and so on at their peril.
Ensuring that trade – the supply chain – becomes ever-more efficient, paper-free, secure, swift and ultimately profitable, is still the name of the game. And the financiers, insurers, traders, brokers and manufacturers who make our world go round will continually be striving to realise these aims. Whether they succeed – I’ll let you know in five years time?