The disruption caused by ongoing geopolitical tensions has pushed commodity prices to an all-time high – and market players are flocking to the Middle East to reap the rewards. The team at First Abu Dhabi Bank (FAB) provides an overview of the current state of play in the commodities market and how taking a broader approach to ESG can future-proof business operations.

 

The global commodities landscape has been transformed in recent years. An ongoing trade war between the US and China has reshaped global business, the Russian invasion of Ukraine continues to disrupt supply chains, while regional uncertainties in the Middle East and the impact of the Red Sea shipping crisis are being felt around the world. As a result, commodity prices have skyrocketed: gold and copper have both recorded all-time highs, while oil remains close to US$90 per barrel as of press time.

Naturally, this disruption has sent shockwaves across the Middle East – a region whose commodities and energy markets are central to the global economy. But with disruption comes opportunity. Faced with an all-new operating environment, First Abu Dhabi Bank (FAB) – one of the region’s leading banks – has taken a fresh approach to commodity trade finance, capitalising on the increased demand for both hard and soft commodities. And with one eye on the future and a strong ESG strategy in place, FAB is well-positioned to sustain its seat at the head of the table.

 

Fuelling the Middle East

Commodities are the beating heart of the Gulf Cooperation Council (GCC) economy. The region’s GDP is largely based on the hydrocarbon processing industry (HPI): it houses five of the world’s top 10 oil producers and accounts for around 26% of overall global production. That said, demand for commodities in the region is not just limited to oil production.

“As global efforts towards sustainability and the energy transition gain momentum, GCC countries are increasingly looking to diversify their economies beyond HPI,” says Anirudha Panse, managing director and head of trade finance product innovation at FAB. As a result, the region has started to embrace softer commodities – the non-oil trade in the UAE was close to AED3.5tn last year.”

Positioned at the crossroads between the East and the West, the GCC also represents one of the world’s largest commodities trading hubs. With its strategic location, world-class infrastructure and business-friendly policies, the region – most notably the UAE – has become one of the leading centres for global trade. With several commodity prices at an all-time high, the Middle East is set to record growth of 2.3% in 2024.

“On the one hand, geopolitical tensions have created a lot of disruption, but on the other, they have presented a lot of opportunities for the region,” says Panse.

Looking to take full advantage of the upside, market participants have flocked to the Middle East, jockeying to set up shop in a region that is perfectly poised to reap the benefits of a disrupted market.

 

Breaking new ground

Reflecting the market dislocation, many regional commodities players have been looking to explore new geographies with the aim of securing commodity supplies for the longer term. This trend has been accelerated significantly by the pandemic. In recent times, for example, FAB, with its growing international market share, has been seeing increased connectivity with Africa.

“We are seeing a lot more demand coming in from Africa, not only from the regular relationships between the regions, but also by way of strategic investments from the Middle East into the continent,” says Jean-Christophe Desaintfuscien, managing director, head of GTB complex solutions at FAB.

While doing business in emerging markets can be perceived as riskier than in more established geographies, they can also offer significant opportunity. Although overall funding needs are generally lower – many of these traders are generally cash-rich – banks like FAB still have a leading role to play. As clients continue to expand into new territories, more are coming to FAB looking for support in mitigating risk performance and payment. With traders increasingly acting as lenders in transactions, they are now looking to banks for refinancing – so they don’t have to carry the burden of the risk themselves.

“Traders are no longer hesitating to deploy their own capital. This is a relatively big shift in mindset that has resulted in significant profits over the past two or three years. Yet, to balance the increased exposure, many still turn to us for refinancing solutions that help manage their risk effectively,” says Desaintfuscien.

Given the shift of physical players entering the Middle East, FAB also has a role to play in supporting SMEs, which continue to face obstacles in accessing the liquidity and financing they need.

Panse adds: “FAB has been exploring various tools when funding SMEs, not least insurance structures, which look to offer liquidity to smaller players on the back of insurance coming in.”

As well as providing financing, FAB has also taken the lead in providing insight into the potential long-term risks of not implementing a solid ESG strategy. The bank has been working with SMEs and smaller players within the ecosystem to help them fully understand that if they do not operate sustainably, they will face significant challenges going forward.

 

An all-inclusive ESG approach

FAB is a leader when it comes to sustainability in the GCC region. Taking a proactive approach, the bank has identified eight of the highest-emitting sectors of those it finances that contribute to around 90% of all emissions, including oil and gas, aluminium, cement, steel, power generation, agriculture and aviation. The bank aims to be a trusted partner for clients in these sectors and help them with their transition.

“While oil and gas are often the focus, the transition goes far beyond these sectors, as evidenced by our approach,” explains Ana Guyatt Del Rio, head of GTB ESG and overdraft product at FAB. “Oil-driven economies must not only phase out fossil fuels but also address other challenges such as water scarcity and dependency on food imports. The transition is about building resilience, diversifying the economy and supporting SMEs.”

ESG considerations impact multiple factors that affect commodities prices, such as weather, demographic and economic trends, demand patterns and supply chains. As the calls intensify for ESG as a core practice to be at the centre of trade finance, FAB has been looking at more sustainable financing solutions.

“Incorporating ESG into scenario planning and long-term strategies is crucial. Companies that fully integrate ESG can unlock value through improved market positioning, efficiency gains, and cost reductions, while also protecting their businesses by mitigating and adapting to ESG risks,” adds Guyatt Del Rio.

Looking to support the region’s ESG ambitions, FAB has increased its commitment to US$135bn-worth of sustainable financing by 2030. In transaction banking, FAB is helping customers become aware of ESG risks and opportunities, supporting them and their supply chains in their sustainability journey.

 

FAB: A one-stop-shop for commodities

In an ever-changing market environment, FAB has proved itself as a reliable provider of consistent liquidity for its clients. Rising commodities prices resulting from geopolitical tensions have pushed many market players to look elsewhere for their supply – yet FAB has stood firm, capitalising on its position in the Middle East, the global trade centre for commodities.