The Asian economic boom and French hiatus have increased bank competition to finance commodity trade in the region. Melodie Michel reports.
Asia has been at the forefront of commodity trading for several months now, and for obvious reasons. The economic boom experienced in China and India has pushed demand for energy, food and metals, and although both countries are producers, consumption is too high to be covered by the domestic market alone.
According to a report published in March 2013 by the Asian Development Bank (ADB), China’s use of primary energy has doubled since the 1990s, and now accounts for nearly 20% of global consumption. In fact, China overtook the US as the world’s top oil importer at the end of last year – a symbol of the global commodities shift. And with recent shale gas discoveries in the US, the import gap is expected to widen further in the near future.
Japan’s liquefied natural gas (LNG) imports soared by 11.7% in 2012 following the Fukushima disaster, and the country is now the world’s top LNG importer, followed by South Korea – between them the countries account for half of the world’s LNG imports. India and China alone consume over half of the world’s coal output, and with the ADB expecting Asia’s share of global energy use to increase to 51% by 2035, demand seems insatiable.
As a result, many commodity traders have readjusted their focus on Asia. Trafigura moved its legal headquarters, along with chief financial officer Pierre Lorinet, from Geneva to Singapore last year, while Cargill and Mercuria have announced the expansion of their teams in the region. This has led to a flurry of commodity finance transactions, with most banks reporting increased activity.
“In the first quarter of 2013, we have seen sustained activity across the board and especially in Asia,” says Dominique Beretti, deputy global head of natural resources and energy financing at Société Générale, adding that the bank has relocated one of its commodity specialists from New York to Singapore.
“We increased our client base in Asia, and we are more present in the market than before, because we have made the strategic choice of pushing that segment. The price environment was favourable for oil… we wanted to develop our soft commodities finance in Asia, especially financing trade flows to China.”
Deutsche Bank has also pushed activity in the region with an increased head count and more investment. “In 2012 we expanded our team in China and invested more in our coverage team to identify opportunities and, so far, our efforts are paying off. Last year we built a robust pipeline of transactions, and at the beginning of this year we closed fairly sizeable transactions, particularly in China. We’re optimistic that our business will continue to be very strong this year considering the growth in Asia for structured commodity trade finance (SCTF),” says Frank Wu, regional head of SCTF Asia Pacific at the bank.
But while Société Générale and Deutsche Bank made an effort to increase activity in the commodity segment, other traditional financiers in the sector hit by the liquidity crisis – namely BNP Paribas and Crédit Agricole – chose to pull back their credit lines. The announcement of reduced lending limits from two of the biggest commodity funders in early 2012 made the industry shiver and put small traders, heavily dependent on bank finance, in a tough position.
But in the banking sector, the news was seen as an opportunity to expand market shares and gain new clients. Banks like Japan’s Sumitomo Mitsui Banking Corporation (SMBC) or China Development Bank (CDB) increased their presence in syndications, capitalising on a strong local footprint and using their high liquidity to ensure import supply.
In November 2012 for example, Abu Dhabi Oil Co. (Adoc) received a US$250mn loan from a syndicate consisting of Mizuho Corporate Bank, the Bank of Tokyo-Mitsubishi UFJ (BTMU), SMBC and the Japan Bank for International Co-operation (JBIC). The deal conditions specified that all the crude oil output produced by Adoc was to be shipped to Japan.
Last year, Société Générale acted as a mandated lead arranger for a three-year US$110.8mn and Rmb780mn dual-currency aluminium pre-financing credit facility for China’s Shandong Xinfa Group. In the 10-bank syndication, three were international, one was Chinese and six were Taiwanese. More recently in February, Deutsche Bank closed a US$240mn-equivalent steel transaction in China which also attracted participation from both Asian and European banks.
However, traditional financiers are now well and truly back in business, threatening the market share acquired by others during the hiatus. Eunice Chin, first vice-president, head of oil and energy at SMBC in Singapore, explains: “There is definitely an increased desire not only from Asian banks, but also from American banks, to get involved in Asian commodity trade finance. During the small window of opportunity there were more local banks coming in that started picking up that space, and now that the French and European banks are back it is more competitive on the Asian market – this is our main challenge.
“SMBC has a global network so that’s not so much of an issue, but we are relatively young compared to the French and European banks which initially dominated this market, and still do. Maybe for other Asian banks the main issue would be the global network reaching to producing countries and giving them the ability to follow the international flows.”
Beretti confirms that some banks have become much more determined to take part in the commodity sector, particularly in America, and that SG now has “new competitors”.
David vs Goliath?
But despite the strong appetite from Asian banks and other new players in the commodities market, it seems like the competition is only felt on one end of the equation, and European financiers do not feel threatened. First, they benefit from a longstanding reputation of expertise in the field, as Beretti points out. “Asian banks have always been blessed with cheap liquidity, but trade and commodity finance requires a lot of expertise. So there are a lot of liquidity pools chasing the commodity assets, and some of the Japanese banks for example have shown an interest and invested in skills and talents, but that hasn’t had a striking impact on competition,” he says.
What also sets European banks aside is their global networks and ability to handle a transaction across the whole supply chain. In a US$200mn deal arranged last year by Deutsche Bank for the supply of steel from Chinese company Tangsteel to European trader Duferco, the bank assisted its client through the whole process, from sourcing to distribution – something that would not have been doable by a local Asian bank.
Beretti adds that trade and commodity finance is perceived as requiring an expert approach to risk assessment and management. “We welcome the liquidity that American and Japanese banks bring to the market, but we don’t fear their competition as a threat. You can’t just hire expertise overnight. It is a culture, and the clients know that.” As a result, even the sudden withdrawal of some European players last year won’t be enough to make commodity traders give up on their long-term relationships.
What is more likely to happen is a diversification to more sources of financing, helping trading houses reduce their reliance on pure European bank funding. This is reflected in the latest revolving commodity finance (RCF) deal signed by Gunvor, arranged by the firm’s Singaporean arm and involving ING, Rabobank and SG, but also Bank of China, CDB and SMBC, amongst others.
ING’s head of commodities group, north Asia, Maarten Koning says: “Especially in the Singaporean market we have seen many international and regional players tapping the syndicated loan market, which is a clear example of a market where international and Asian banks co-operate.”
He also believes that the growing demand for commodities, and therefore commodity financing, means that banks won’t necessarily have to compete. “With some European players becoming less active in Asia and with liquidity more abundantly available in Asia, we have seen local and regional players developing. However, this needs to be evaluated in light of generally higher commodity prices and international trade (including inter-Asia trade).
In other words, there are more players, but the pie has also become bigger,” Koning says.
Deutsche Bank’s Wu also welcomes the arrival of Asian banks on the commodity market, and believes collaboration is needed to strengthen the SCTF sector in Asia. “In Europe SCTF is seen as a key funding activity for the commodity segment. In Asia, the landscape is very different; in many countries, the local banks are very strong, but they have not traditionally been active players on the structuring side of the business. However, we are now seeing more corporates and local banks getting into this field, which is a positive trend. We can collectively grow the wallet size and create a better market position for all of us,” he says.
A matter of time
On the Asian side however, the objectiveis clear. “We hope to represent competition against the French banks, and if each of us does their own little bit, we will be,” adds SMBC’s Chin. In fact, local banks are slowly gaining more experience in the field, and although they are now mainly participating in transactions arranged by European banks, they could soon be found in the driver’s seat.
“For the larger, more sophisticated transactions, Asian banks continue to be more on the participating side, but they are also doing more on a bilateral basis with their own clients and may be using similar structures but on a smaller scale,” says Wu.
And as the financial crisis has prompted Asian countries to look for suppliers within the region in order to reduce their reliance on western markets, a high pick-up in intra-Asia trade is expected, putting Asian banks in an even more favourable position.
The increased appetite from Asian and international banks to take part in commodity trade financing is good news for traders, as it means more pressure on trade finance prices. Both SG and SMBC have noticed a slight drop in price of certain facilities, which they attribute to better US dollar liquidity as provided by Asian and American banks.
Although commodity finance prices are more indicative of overall liquidity in the market than of a particular supply and demand situation in STCF itself, the lower prices observed in transactions should come as a relief for commodity traders, who still face challenging market conditions due to high prices, but also increased competition on the Asian market. “The margin is getting thinner and thinner, but in the commodity market, traders themselves are facing the same issues as us because they have increasing competition in Asia,” says Chin.