Rabobank is a stalwart player in the commodities sector. In this Industry Perspective, Jasper van Schaik, the bank’s global head of trade and commodities finance and Karel Valken, global head of trade and commodity finance (agri), discuss the bright prospects for the commodities market in 2021 despite the ups and downs of last year. They explain how the bank’s increasing focus on sustainability can be good for both the environment and the bottom line.

GTR: How are commodity markets faring today? Are we seeing the start of a new supercycle?

Valken: While supercycle is not a word we use, the Goldman Sachs Commodity Index has increased by 58% over the last 12 months, of which agricultural commodities increased by 40%. So clearly, while we are not speaking about a supercycle, there has been an enormous increase in commodity prices.

We think, on the agriculture side, that this will last for a good period, although it may not be years. If you look at fundamental supply and demand, we see ongoing disruptions to various commodities and in various geographies, which are driving up prices.

We also see that weather events and climate change will continue to be with us on a day-to-day basis, disrupting the fundamentals.

van Schaik: Mobility picking up globally is an important driver because that’s where energy demand was disrupted last year. From a fossil fuels perspective, energy will obviously also undergo significant changes,  but I think that the signs are that 2021 looks very good for overall commodities.

GTR: How have commodity trade finance banks and their clients reacted to the difficulties of the last couple of years? What are they doing differently now?

van Schaik: I think 2020 was a year of big transition for the banking community. The Hin Leong fraud case in Singapore was a big deal for the markets and Rabobank responded by de-risking the overall portfolio and particularly in Asia and the Middle East.

We also adjusted our risk parameters so that we have a better portfolio in terms of counterparts and transparency, and are also more focused on our structures and have a large focus on the return.

In addition to default risk, risk management and capital costs have gone up, so it was very important for our bank and others in trade finance to get the return back again, in order to have longevity and ensure that we are committed to this business.

Valken: While we have transferred our London activities to the continent and moved most of our Shanghai portfolio to Hong Kong, we maintain seven dedicated units globally. So in spite of all the changes, and the rightsizing of our footprint, we are still viewed by our customers as the leading commodities bank.

GTR: What is new in terms of Rabobank’s own commodity trade finance business in particular?

Valken: We have an increased focus on two topics. The first is sustainability, including the energy transition, and the second is innovation.

As a Dutch cooperative bank, we’re very well positioned to take up the mantle of sustainability. That translates into helping our clients and engaging with them on their energy transition and supply chain traceability on different products. We have been quite successful in the last 12 months as sustainability coordinator for billions of dollars in different lending facilities. There are many opportunities arising from that.

On the innovation front we are looking at both internal digital efficiencies to reduce costs, for example through AI and blockchain, while also externally we’ve seen a myriad of initiatives on different platforms for financing, trade optimisation and traceability.

It’s an enormous opportunity at this crossroad of change, driven by these two strategic pillars.

GTR: In which sectors and markets are you seeing new opportunities for growth?

van Schaik: While we already have LNG as a transition fuel, we’re obviously looking at renewables as the end of the transition. There is focus on carbon abatement and recycling, such as used cooking oil, but also investments in bio-digesters, for example. While we’re investing a lot of time and resources into this, not everything will grow big this year, or next year – but we believe it’s going to be very important for the future.

We’re also increasingly looking at climate smart solutions, such as carbon capture and storage, which needs investment. We’re getting increasingly active in traded carbon credits under emissions trading systems; we think it’s going to be more important. There are a lot of initiatives within the bank looking at carbon in the various supply chains of the bank and how to deal with those.

Valken: We have a new initiative called the Rabo Carbon Bank, which is an integral part of the bank. It is looking into all kinds of initiatives and solutions related to carbon, with the common denominator of reducing the footprint of our clients and partners.

Right now we are running pilot projects with six coffee clients, whereby we finance sequestration and get carbon credits in return, which we market in a partnership with Microsoft, among others.