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12 January 2024

Rising challenges demand vigilance as commodity finance enters 2024

Agri/Soft Commodities, Metals and Mining, Oil & gas
Middle East & Africa, Americas, Asia-Pacific, Europe
As the commodity finance industry enters 2024, TXF takes a look at the results of its industry research report to assess the biggest challenges and trends facing traders in the year ahead.

2024 is set to bring forwards a range of new challenges for the commodities industry according to the latest edition of TXF’s industry research report. The annual survey, compiled with responses from 130 commodity finance professionals, reveals widespread uncertainty around pricing and access to funding heading into the new year.

It is a testament to the underlying confidence that the market has in oil & gas that respondents see it as both the most volatile and the most resilient sector in the industry. In spite of the continued rollout of renewable technology, it is a given that demand for fossil fuels will remain high. 

Geopolitical issues may threaten security of supply – 31% of respondents stated that OPEC+ will definitely use aggressive measures to maintain high prices and a further 54% considered this to be a possibility. Since the initial publication of this report, conflict in the Middle East has spilled over into attacks on crucial trade routes through the Red Sea. However, respondents clearly feel that the size and the maturity of the oil & gas sector will allow it to absorb these shocks. While profits from energy trading may continue to fall, this is more a reflection of the unusual conditions of the past two years than the market’s present fundamentals.

Supply chain risks are not limited to the oil & gas trade. Every trader has been forced to grapple with disruption in some measure as a result of the COVID-19 pandemic and Russia’s war in Ukraine. 61% of respondents answered that supply chains are now broadly stable with only a few areas of concern. This mirrors widespread confidence in the world of international trade that bottlenecks have eased significantly. Yet it would be a mistake to assume that those issues are now in the past.

The publication of the World Economic Forum’s Global Risk Report for 2024 this week offered a reminder of the dangers that still exist. Live conflicts in Eastern Europe and the Middle East already hold the world’s attention and growing tension between China and Taiwan could cause a separate flashpoint. 

The WEF placed extreme weather as its second greatest risk over the next two years. For soft commodity traders and producers this will come as little surprise given the increasingly unpredictable impact of climate change on crop yields. Trade through the Panama Canal has also been severely impacted by low water levels in recent months, forcing many ships to find alternative routes at great expense. Longer shipping journeys have a knock-on impact on costs across the supply chain. 18% of respondents listed weather disruption as a significant threat to global supply chains.

On a related topic, 68% of respondents listed grains as the soft commodity that will see the biggest price increase over the coming year. India, one of the world’s largest grain producers, has imposed a ban on the export of wheat since 2022. The government sought to replenish stockpiles and bring down prices in the wake of Russia’s invasion of Ukraine, which took two major agri-producers out of the market. Despite the time that has now elapsed, analysts have predicted that the ban will remain in place until India’s election later this year.

Resource nationalism is now a familiar aspect of international politics as producers in the developing world look to secure more value from their exports. 2023 saw Chile’s President Gabriel Boric announce plans to nationalise the country’s vast lithium reserves while Indonesia has taken steps to secure downstream investment in its metals business with bans on the export of raw minerals. 27% of respondents in TXF’s report see this trend definitely increasing in 2024 while a further 60% said it is a possibility.

The fortunes of the metals markets are difficult to divine. Almost half of respondents argued that price rises among the base metals will continue over 2024. This is no doubt based on the expectation that shortages of supply will continue to grow. Speaking at the Future Minerals Forum in Saudi Arabia this week, Jeremy Weir, CEO at Trafigura, said that commodity prices are currently not high enough to incentivise investment in new mines. Given the lengthy timescale required to deliver a functional mine after first discovery, new investors cannot rely on the promise of future price rises. 

The case of cobalt offers an exemplar of this point. While the market was experiencing serious shortages just five years ago, a glut of investment in China now means that the cobalt market is comfortably oversupplied. A number of survey respondents expressed concern about heavy-handed government intervention that could encourage similar results elsewhere.

As one respondent put it, “metals and mining is less predictable, as it is somewhat dependent on China. The demand is also less straightforward to predict, as it can change more quickly.” The changing attitudes to lithium in 2023 demonstrate this. Its position as a key battery metal has driven interest as investors look towards new commodities that will drive the energy transition. However, prices fell from a record $80,000 per tonne in December 2022 to below $30,000 in April 2023 as the market reacted to changes in the Chinese government’s EV subsidy policy.  

The rest of the year was largely characterised by fuller inventories and fewer orders. Analysts are now confident that prices better reflect lithium’s cost curve rather than hype and expectation. Further, a major breakthrough in the development of technology for a sodium-ion battery by Northvolt may have an impact on the lithium-ion battery’s status over 2024.

The rise of new financial products is another sign of the industry’s efforts to meet the energy transition head on. Sustainability linked loans and carbon credits are now familiar stories in the news cycle. Yet on the evidence of this report, there is still a gap between expectation and impact for these products.

Three quarters of respondents said that their bank does not currently engage in the trade of carbon credits. There is some optimism that this will change in 2024 but many banks have reported that they are struggling to move past initial conversations. Media coverage around carbon credits has largely centred on questionable verification practices and stranded assets. It remains to be seen whether this product can convince banks and customers of their efficacy in 2024.

SLLs have now entered the mainstream, with every major trader committing to environmental and social KPIs on their major debt facilities. 65% of bank respondents stated that they offer a discount of less than five basis points on sustainability-linked products. While it is true that any kind of discount can support greater ESG-friendly investment, there is lots of room here to incentivise more ambitious action with generous pricing mechanisms. 

TXF thanks all those market participants who took the time to respond to our questionnaires and requests for interviews. As ever, TXF’s Intelligence team welcomes your comments and feedback on the report.

Dive into the TXF Commodity Finance Report 2023 for a deeper understanding of these, and many more, findings!

If you are an TXF Intelligence subscriber, login and access the report here.

If you are not currently a subscriber, you can request a copy of the report here.

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