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Expert opinion
17 June 2020

Commodity traders feel pricing pinch

Middle East & Africa, Americas, Asia-Pacific, Europe
Managing Editor
Trading houses fundraising activities in the Covid-19 epoch have been few and far between, as record-low oil prices and an increase in the cost of trade debt impact the number of commodity finance transactions globally.

Commodity trade finance deal flow has been squeezed to a trickle during a period of unprecedented challenges for the sector. For once, it is not hyperbolic to claim that 2020 has been the most disruptive year for global commodity finance markets in decades.

Brexit; the Russia-Saudi oil price battle; trade wars; and a string of corporate defaults, liquidations and fraud issues would each merit a TXF conference on their own. But then the true impact of the Covid-19 crisis manifested itself and amplified each of those issues.  

For example, producers and traders looking to tap international debt markets are now faced with a ‘Covid-19 premium’, which according to one trader, is to the tune of an extra 70bp on the cost of commercial bank debt.  

At the beginning of the pandemic, there was a surge in corporates accessing liquidity without repricing. Major trading houses, such as Glencore, drew down on existing short-term debt facilities, or refinanced revolvers in their bid to avoid an uptick in pricing, which many other traders were hit with from mid-April.

Is this the reason why commodity finance deals have been few and far between in the coronavirus epoch? In part, yes. Record-low oil prices played their part, too, as depressed commodity prices often spell lower fundraising needs for traders. Last month, TXF’s commodity finance survey respondents on average said that oil producers will have to pay buyers to stockpile the surplus oil for another four months. This is obviously a direct consequence of significant oversupply as the Covid-19 crisis continues to constrain oil demand globally.

Metals prices rally - so will traders funding needs balloon?

If low oil prices traditionally dampen oil traders financing needs, then conversely higher metal prices should mean both metals producers and traders’ fundraising needs are set to balloon. Why do I posit these basic economic fundamentals of commodity finance? 

Well, with a spectacular rally in the prices of industrial raw metal in the last month - for example, iron ore has increased from $80 a tonne to over $100 while copper prices are up nearly 25% - this is good news for active commodity trade banks based on this economic dynamic. While some investors admit it is still “too soon” for a commodity boom, the surge in metals prices is remarkable though. Especially given the global economy is only just reopening. 

It is tempting to see parables here. Perhaps the metals rally is a template for the post-virus economy, in which supply bottlenecks push prices up as activity gets going again. Perhaps it shows how mindlessly the ocean of liquidity created by the Federal Reserve and the European Central Bank has washed into financial markets of all kinds. For the “too-soon” school it is a sign that optimism is running ahead of reality. Perhaps it is.

Either way, a number of commodity-linked corporates in Russia have been sounding out bank appetite for structured financings, as well as looking to close normal syndicated loans. Eurochem, Novolipetsk Steel, and Suek are all expected to close deals in H2, for example, despite the wider margins. So, the increase in the cost of commodity finance deals is clearly not putting off Russian corporates, as metals producers and traders are buoyed by the rise in metals prices. 

But there are still fears of a potential resurgence of Covid-19 outbreaks, which would cause commodity prices to plummet again, as investors are forced to look towards supply-and-demand fundamentals in a more forensic manner.

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