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The global commodities sector has undergone a period of unprecedented turbulence. For some, particularly at the larger end of the trading market, price volatility and shifting trade flows have proven highly lucrative. But for SMEs, access to financing facilities remains limited and is often costly or unreliable. 

Rescom Group specialises in minerals and metals, and is active across mining, processing, trading and shipping. In this Industry Perspective, Hamsika Gopalan, general manager for corporate and trade finance, outlines the various pressures continuing to shape the commodities trading space, and how SMEs like Rescom can thrive in a challenging environment. 

 

GTR: How would you characterise the commodities market at the moment? How is turbulence within the market affecting trade flows, and what does that look like from an SME perspective? 

Gopalan: As the first half of 2023 draws to a close, the economic slowdown continues to put pressure on commodities markets. Globally, inflation has started to ease slightly, but price pressure remains at historically high levels. A combination of high prices and rising borrowing costs risks hampering every business, and certainly makes it more difficult for the SME. Restrained consumer spending and sluggish manufacturing activity, underpinned by weak capital investment, are expected to further reduce demand for energy, metal and agri commodities. 

We live in an interdependent world and no region is self-sufficient. Trade connects the global flow of goods, services, capital, people, data and ideas. However, following the pandemic, Russia’s invasion of Ukraine and years of rising tensions between the US and China, there were speculations we could see a period of de-globalisation, and the rise of ‘friend-shoring’ and ‘near-shoring’.  

Barring a few disruptions in agri commodities, trade flows have actually proved to be remarkably resilient during the most recent periods of turbulence. Ultimately, the challenge is to harness the benefits of being interconnected while managing the risks and downsides of dependency, and this fundamental concept holds true for SMEs as well. 

 

GTR: In an environment of higher interest rates and fluctuating commodity prices, how has the financing situation changed? And again, is this different for SMEs compared to larger businesses? 

Gopalan: The global trade finance gap continues to widen, year after year. It was US$1.5tn in 2018 and is now expected to have crossed the US$2tn mark. And while the effects of the pandemic have receded, newer challenges like interest rates and inflation are emerging. Also, growing pressure around ESG is forcing businesses to contend with climate-friendly practices. Amid these conditions, access to working capital has become difficult, particularly for SMEs. 

Many traditional financiers are either capping their capabilities or scaling back, and in the case of SMEs, we see banks looking to add greater collateral or security for lending, which increases fixed costs. Relatively newer sources of financing, such as hedge funds and asset managers, have stepped in to take advantage of this gap and provide an alternative, but this comes with its own challenges for SMEs, including high rates. 

Additionally, events such as the fraud alleged by Trafigura in the nickel market add to the perception that SME financing is risky. This situation certainly needs to improve as the landscape for SMEs is quite different to that of larger commodities businesses. 

 

GTR: How can businesses respond and adapt to changing market conditions, whether that means shifts in commodity trade flows, wider economic challenges or pressures on the financing side? 

Gopalan: Businesses should look at the potential impact of the energy transition, especially for those underlying metals and other goods that use energy as an input, which will likely face supply imbalances in the time to come.  

In Rescom’s case, our group has a strategic investment in an Indian alumina refinery that produces 1.5 million metric tonnes per annum of alumina. Though its energy needs are currently met by coal, we have commenced the process of gradually transitioning to alternative and green energy sources. Specifically, we have initiated discussions with Greenko for the supply of renewable energy to the refinery. 

We also continue to review supply-related concentration risks, with trends around regionalisation and geopolitical tensions meaning businesses must remain aware of the geographical distribution of commodity sources. 

And in terms of logistics, we have entered into long-term agreements on freight costs to reduce exposure to fluctuations in prices. Having a flexible approach is crucial – that way you can adapt to rerouting flows, leverage assets in storage and blend commodities to meet customer specifications – and the agility we have as an SME can actually be an advantage in this case. 

 

GTR: Specifically within trade finance, do SMEs today have access to both buy-side and sell-side financing products, such as supply chain and receivables financing? Where does credit insurance play a role? 

Gopalan: As mentioned, there is a significant gap for SMEs in terms of availability of liquidity, particularly dedicated annual revolving funded limits. Though a lot of alternative trade funds operate in this space and offer fast turnaround times, they are not always sustainable from a long-term cost perspective. 

Taking on credit insurance on buyers continues to play a major role for traders that sell to end users, but this is a space where one needs to tread carefully, given the noise around claims and potentially fraudulent documentation. 

 

GTR: What is your outlook for the commodities market over the next year, both in terms of economic factors like pricing and demand, and external pressures such as ESG? 

Gopalan: All the commodities we deal with at Rescom are infrastructure-based, so we do not foresee a significant slump in demand in the near term. In fact, the past couple of years have afforded us a great kick-start into the alumina industry. With our group’s 50 years of experience in mining, processing and trading, our CEO, Madhu Koneru, has founded KCap Holdings as an investment arm to leverage our expertise and focus on industry opportunities related to Rescom’s core commodities.  

In addition to developing our coal and barite businesses, we are actively evaluating asset-based opportunities across the value chain in the aluminium vertical, to take advantage of the growing demand for aluminium and help in our move towards stronger compliance with global ESG standards.