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Commodity finance failing to deliver

A funding crisis is developing in the commodities market as producers and traders, particularly of the small and mid-sized variety, struggle to access the type and volume of finance they were able to ten years ago, according to a new trade-finance report from international law firm Clyde & Co.

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Comments (3)

  • Armin Eckermann
    Armin Eckermann, Eckermann Partners 23 November 2015

    Interesting article, just read and like to add a few ideas. Sure, Kris and Paul are pointing out ‘hysteresis’ in banking industry and that traders don’t get the full support of the last decades commodity boom any longer. What I see is that most European banks are still restructuring, looking for more capital and bank’s shareholder need to digest the new regulatory regime and the cost related to it. A kind of nostalgia displayed on the trader’s side is quite normal and understood. But banks have evolved and become more risk averse, less international, and view politics and regulation in a very different light. 10 to 15 years ago, we believed the market can handle a wide variety of issues, even political issues. Today, we are in a very different environment. We point to politician to provide us with solution to international problems (i.e. Ukraine, Iraq, Syria, Paris) we have not seen for a long period of time. The war torn regions are approaching us and terrorism is guiding people and markets in the immediate future. So called alternative investors, like trade funds, etc, are not less risk averse and if they like risks, they don’t command the volumes which big banks used to carry 10 or 15 years ago and the smaller banks which are still around lost their risk appetite to participate. Let us face it, the hand-made structured commodity trade finance products of the turn of the century until 2008 were costly but the prices (fee and interest income over capital employed) they got from the market made it worthwhile the effort. Today’s cost side looks different, you must tell your decision makers in any bank that not only the cash can be generated and converted back into the currency of the loan for repayment over time, no, you must tell the decision maker that the reputational risk in today’s environment is almost zero and who can make that statement? How much will KYC and compliance help to assess this risk? Sadly enough, it points only into one direction, more of the old established same and less of the new un-established business. Entrepreneurial spirit is out and has been low in banking most of the time.

  • Paul van Heerde
    Paul van Heerde, ING Bank 20 November 2015

    Agree with Kris, but would like to add the changed market circumstances. Commodity prices have come down substantially due to overproduction/supply and the less rosier outlook for the chinese economy, having been the driver of price and volume increases over the past decade. Consequently (trade-) financing requirements at large have come down as well. So, yes..banks in general have post-crisis become more quality aware but not as dramatic as the Clyde & Co's report suggests.

  • Kris Van Broekhoven
    Kris Van Broekhoven, Citi 11 September 2015

    I am not surprised that the smaller traders long for the good old days when access to finance was much easier than it is today. Commodity trade bankers don't feel any different, especially since there is a general consensus that commodity trade finance did not play any part in triggering the financial crisis, yet the industry suffers from the consequences of regulatory change that is meant to prevent another such crisis. I also agree banks - at least those who will have decided by then that commodity trade finance is a business that fits their model - will return. What people have to realise though is that when they come back, it will not be on the same terms as we had in the good old days. Once regulatory change has settled, banks will have new rules to comply with and those will determine what business will look like when it comes back. The way things look at the moment, the most competitive pricing will come with the tightest structures. And the quality of the trader's balance sheet will always remain a factor for banks to consider when selecting their clients and pricing transactions. The latter is likely to favour the larger players and hence more consolidation of smaller players in the industry may be required.

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