Opportunities in the Global Commodities Finance market

Transcription

1 Opportunities in the Global Commodities Finance market In the build up to the 10 th Anniversary Global Commodities Finance Conference in Geneva we asked some of our key speakers the most pressing questions in the market today. This e-book contains what they had to say. 1 Tom Barnes, Euromoney Seminars t/ f/ e/

2 Table of contents: These three key questions will be answered by the following speakers: How is the commodity finance market reacting to regulatory constraints, commodity price fluctuation and demand from developing countries? How is the role of the larger commodity trading houses in the market evolving in the wake of lower liquidity? Are the capital markets a viable solution? How do you feel the market has changed and evolved in the last decade and what can we expect in the next 10 years? Pages 3-4: Edward George, Head of Soft Commodities Research, Ecobank Pages 5-6: Simon P Tyler, Head of Corporate Banking, China Construction Bank (London) Ltd Pages 7-8: Jean Craven, Director, Export Trading Group Pages 9-10: Rouben Indjikian, Lecturer and consultant on commodities and founder of UNCTAD's Global Commodities Forum 2 Tom Barnes, Euromoney Seminars t/ f/ e/

3 Edward George, Head of Soft Commodities Research, Ecobank Dr Edward George heads the soft commodities desk in Ecobank s research department which covers fixed-income, currencies and commodities. He covers all aspects of supply/demand for soft commodities in Middle Africa, with a focus on cocoa, coffee, cotton, sugar and grains. Edward is also a specialist on Francophone West Africa and Lusophone Africa, and is the bank s expert on intra-african trade and trade finance. Edward works closely with the corporate bank and trade finance teams, and regularly visits soft commodity producers, processers and traders across Ecobank s 34-country African footprint. Prior to joining Ecobank in March 2011 Edward worked for The Economist Intelligence Unit (EIU) for seven years as a Senior Editor in both the Commodities and Africa Departments. He was responsible for producing and editing reports on Lusophone and Francophone Africa, as well as on 25 industrial raw materials, food, feedstuffs and beverages. Before joining the EIU, Edward worked as a freelance writer covering the politics and economics of Sub-Saharan Africa. A linguist by training, Edward is fluent in French, Spanish and Portuguese and holds a PhD in Political Science from the University of Bristol. His PhD thesis on the Cuban intervention in Angola was published as a book by Routledge in 2005 and came out in paperback in December How is the commodity finance market reacting to regulatory constraints, commodity price fluctuation and demand from developing countries? The proposed Basel III regulations have the potential to impact negatively on trade finance. Coupled with increased scrutiny of the financial sector and stricter KYC and AML requirements, new regulations have become a bigger impediment to trade finance than tariff barriers, because of the administrative costs and time delays they involve. Commercial banks have long argued that trade finance should never have been included under Basel III, as it overwhelmingly short-term, self-liquidating and unleveraged. A key concern is the liquidity coverage ratio (LCR), which requires banks to hold sufficient high quality assets to cover stressed outflows for over 30 days. Trade finance will be heavily penalised, with 100% considered under the LCR. However, after lobbying by the trade finance community the Basel Committee has made some concessions, including the waiving of both the one-year maturity floor for certain trade finance instruments under the advanced internal ratings-based approach (AIRB) for credit risk, and the waiving of the sovereign floor for certain trade finance related claims on banks. More recently the Basel Committee issued new guidelines on the LCR which are favourable to short-term trade finance, permitting banks to hold fewer liquid assets to cover their trade finance facilities. But the Basel Committee is refusing to budge on the Leverage Ratio, which could make some trade deals impossible to finance. 3 Tom Barnes, Euromoney Seminars t/ f/ e/

4 Perhaps of greater concern is the tightening of KYC and AML regulations. The demands on clients, especially from the OCC, are rising fast, and this is preventing some banks from having large operations in LICs where the costs of compliance outweigh the profits from low-value transactions. This will change the pattern of business, pushing more trade to open account, and many banks will find it hard to continue trade financing activity, especially in developing markets where the perceived risk is high. New regulations have greatly increased the costs, time and risks of structuring trade finance deals in Africa, with the result that major international banks will not consider deals worth less than US$10m-20m. This has denied financing to hundreds of small operators from cotton farmers in Burkina Faso to cashew processers in Mozambique even when the commodities they produce have been commanding record prices on international markets. The key problem with KYC is inconsistent and conflicting requirements resulting from standards being drawn up by multiple authorities and jurisdictions, but there is no central body like the Basel Committee to rule on KYC/AML. How is the role of the larger commodity trading houses in the market evolving in the wake of lower liquidity? Are the capital markets a viable solution? The trade finance market has responded to the withdrawal of commercial banks from the trade finance space by adapting pre-existing trade finance models. These include pre-payment arrangements, ownership structures, such as Forfaiting and Repo, and trading houses financing their own suppliers. Of these the latter is perhaps the most interesting, with trading houses using their own resources to finance their most trusted suppliers, or persuading their banks to do so, and also taking increased risk participation in trade finance deals. Under this system the trading house pays the supplier for the goods and takes delivery of them, selling them on to the end buyer, and making its profit by receiving a promissory note, or discounted bill of exchange, of greater value than what it paid to the supplier. The trading house protects itself by taking security over the goods in transit and by being named on the insurance as the loss payee. But traders financing their own deals, their suppliers and even other traders is nothing new. Prior to the Russian crisis in 1998 this was the predominant way that trading houses financed their trade. But following the crisis and the surge in commodity prices which required increasing amounts of capital to finance deals they were forced to look for alternative sources of finance and started their complex relationship with commercial banks. Going forward we are likely to see a rebalancing of the relationship between commercial banks and trading houses, with each sharing risk participation and the strongest trading houses financing many deals by themselves. 4 Tom Barnes, Euromoney Seminars t/ f/ e/

5 Simon P Tyler, Head of Corporate Banking, China Construction Bank (London) Ltd Simon Tyler has a long history in the field of Commodity and Trade Finance. He began his career at the Chemical Bank of New York in London back in the 1970 s where he was a Credit Analyst in the Commodities team. From Chemical Simon moved to the First National Bank of Minneapolis, for eight years, where he developed the bank s business with European based commodity houses and corporate companies as well as the big Upper Mid West names. In 1986 he moved to Bankers Trust but in 1990 they altered their business strategy and, along with Adrian de Young, he moved to Rabobank to establish the Food and Agri Trade Finance desk there. Simon spent many years at Rabo helping to build the banks reputation as a soft commodity bank as well as an agricultural financier. Simon joined the newly opened London office of China Construction Bank late in 2009 to help the bank understand international trade and commodity markets and to develop relationships with commodity houses and corporates that have Chinese import and/or export flows How is the commodity finance market reacting to regulatory constraints, commodity price fluctuation and demand from developing countries? Regulatory constraints across the board are becoming more onerous. Basel 3 has, as yet, uncertain implications for the way we treat documentary and trade business and requirements for increased capital ratios mean that banks have to reduce balance sheets just when they need to be lending more. This is particularly bad for small and medium sized companies who already find it difficult to source financing. The major companies have less of a problem because banks will always try to maintain relationships with the better capitalised names. There has always been price fluctuation and volatility in commodity markets and it is something that banks continuously have to come to terms with. Fund investors add to the liquidity and volatility and there is ample evidence that some are currently losing their enthusiasm for commodities. China and the Far East are driving demand and will continue to do so for the foreseeable future - even if their growth rates fall of a little. The shift in business and finance from Europe and the 5 Tom Barnes, Euromoney Seminars t/ f/ e/

6 US to Singapore, Hong Kong and Shanghai is already noticeable. Next will be Africa where many countries have strong growth rates, improving affluence in the populations and a wealth of natural resources. How is the role of the larger commodity trading houses in the market evolving in the wake of lower liquidity? Are the capital markets a viable solution? The larger commodity companies are still supported by their banks and do not have a problem with liquidity. Some have even reduced or scaled back their syndications this year. Many have also diversified their funding base through bond and capital markets. How do you feel the market has changed and evolved in the last decade and what can we expect in the next 10 years? The past ten years has seen a great deal of change in the market and a huge amount of consolidation. The 'middle market' has all but disappeared and it is no longer possible just to trade commodities and remain profitable. Companies must add value via managing logistics, storage, production etc. Now it is not just the middle market but the large names that are merging or being taken over. When and where does it finish? Consolidation has not been limited to the corporates. Many banks have merged or failed reducing the number of players in commodity markets. It is to their credit that the large companies have maintained their liquidity. Ten years ago the largest banks in the world were American and European. Now they are Chinese and there are four Chinese banks in the top ten. There are no Europeans - unless you count HSBC. 6 Tom Barnes, Euromoney Seminars t/ f/ e/

7 Jean Craven, Director, Export Trading Group Jean Craven is a director and head of corporate finance at a Singaporebased emerging market agricultural supply chain company, Export Trading. He commenced his professional career in the accounting sector, in 1995, in South Africa. Thereafter, he acquired one of the first agricultural seats on the South African futures exchange in His company was bought by a listed South African financial services company in Initially establishing himself as a soft commodity trader on the futures exchange, he later incorporated debt solutions in the agricultural sector, in combination with derivative products. In 2001, he was offered a position at a leading South African merchant bank, Rand Merchant Bank, to head up the Soft Commodities desk, where he and his team completed the first grain securitisation in the world. His team also set up Africa s third largest crop insurer. Prior to joining Export Trading in 2008 he was appointed to head Standard Bank of South Africa s agricultural desk, managing both the agricultural derivatives trading business as well as the bank s trade finance treasury division. Jean also sits on the investment committee of Barak Fund Management, an African-based fund-of-funds covering private equity, trade finance and trading. How is the commodity finance market reacting to regulatory constraints, commodity price fluctuation and demand from developing countries? The change in the regulatory environment will overall increase costs of doing business. Increase in financing spread margins due to increased banking capital requirements as well as an increase in legal costs, given more stringent legal opinions on security instruments, driven by Basel III. Commodity price fluctuations have always been part of the market. Financiers are trying to come to better grips around managing collateral risks around price fluctuations. Potential margin calls on physical collateral has become a more common event. Active management of debt portfolios has replaced past passive lending facilities. The increase in demand from emerging markets have forced financiers to include a greater amount of emerging markets in their financing portfolios, having to come to grip with a broader spectrum of weaker economies and gaining and understanding of the hurdles faced in their emerging economies. 7 Tom Barnes, Euromoney Seminars t/ f/ e/

8 How is the role of the larger commodity trading houses in the market evolving in the wake of lower liquidity. Are the capital markets a viable solution? Trading houses in general are diversifying their debt capital supply base by increase their banking portfolios. Local in country banks are playing a larger role in financing trade flows. Raising term debt has also become a viable option, through commercial banks as well the bond capital markets. Trade finance hedge funds have made in roads in the last 5 years. How do you feel the market has changed and evolved in the last decade and what can we expect in the next 10 years? There has been a consolidation in the general market in terms of players involved. Larger traders with increasing larger facilities. The syndication market has grown which has fast tracked new banking entrants into the emerging market space. Speculative trading has been gradually been replaced with increasing trade across large supply chains. Further consolidation in the sector is expected with players investing more and more into bricks and mortar to ensure their sustainability in the sector. Corporate governance and transparencies will increase as to be able to tap into more debt markets that to fuel growth. 8 Tom Barnes, Euromoney Seminars t/ f/ e/

9 Rouben Indjikian, Lecturer and consultant on commodities and founder of UNCTAD's Global Commodities Forum Dr. Rouben Indjikian is an international consultant and a university lecturer on commodities. He had a distinguished career as a high-level official at UNCTAD, where he developed work programs in the areas of trade finance, information economy and commodities. While being in charge of commodities at UNCTAD, Rouben has initiated and organised in 2010 and 2011 the Global Commodities Forum a major initiative to start a policy dialogue between key stakeholders of the global commodity economy. He drafted and led preparation of many UN documents on commodities, including the UN Secretary-General s report on world commodity trends and prospects, chapters of UNCTAD s Trade & Development and Information Economy Reports on oil markets and on use of ICTs in oil sector, as well as reports on energy, commodity finance and others. At UNCTAD Rouben was also instrumental in organising many innovative expert meetings & conferences and leading capacity building projects on trade finance, credit insurance, e-commerce & e-finance, and commodities. Rouben authored and published many articles on above issues and one of the first monographs on OPEC. He is a frequent speaker or moderator at conferences and seminars. How is the commodity finance market reacting to regulatory constraints, commodity price fluctuation and demand from developing countries? Regulations were aimed to address the causes of the financial crisis making banks more resilient and markets more orderly. Regulations of futures markets are seeking greater transparency and extension of rules governing commodity exchanges to OTC markets, which supposed to decrease excessive volatility of prices. At the same time changes in bank regulations, and in particular Basel 2 and 3, apparently may have a negative impact on the availability of commodity finance from banks due to more stringent capital requirements and liquidity rules. So far banks face an alternative of either to increase capital or diminish balance sheets. Hopefully due to various communications Basel committee will introduce changes improving the availability of commodity finance. Finally further increase in trade volumes of developing countries means more demand for commodity finance. The latter will be supplied by international banks, ECAs and development banks, and increasingly by maturing national and regional 9 Tom Barnes, Euromoney Seminars t/ f/ e/

10 banks. Non-bank financial institutions will also compete for their respective roles as suppliers of commodity finance while liquidity at the disposal of trade partners could equally be a notable source of it. How is the role of the larger commodity trading houses in the market evolving in the wake of lower liquidity? Are the capital markets a viable solution? Liquidity issue needs further clarification. While banks face problems with liquidity, participants in futures markets might be a source of ample liquidity provided that their earnings expectations are high. Moreover, larger commodity trading houses are themselves becoming a major source of liquidity due to the increase in their cash flows and volumes of operations. Financial instability and low interest rates have increased the trading houses propensity to stay liquid and even provide credit to trading partners or potential partner companies. Financial innovation and competition from non-bank sources are also providing financing to traders and producing companies. Capital markets are willingly accepting corporate bonds floated by major trading houses. Additionally non-bank sources including various funds and institutions as well as individual investors are increasingly financing smaller traders, which have less access to financing provided by banks. How do you feel the market has changed and evolved in the last decade and what can we expect in the next 10 years? The international commodity trade finance markets were active during the commodity boom cycle of the last decade. In 1990s the need to provide financing to companies from risky commodity exporting countries was triggered the development of structured commodity finance techniques, based on the management of transaction-related risks rather than the state of balance sheet of the commodity supplier. However, increased profits of commodity exporting companies didn t decrease their demand for international credit for mainly two reasons. First, they could continue borrowing in international markets at much lower interest rates than in domestic markets. Moreover, apart from the interest-rate arbitrage, exporting companies were also interested in recourse to offshore financing, with a view to optimizing their tax structures. Trends recently observed, including recourse to innovations in financing structures and to new commercial techniques for managing risks, are likely to be reinforced in future owing to demand for financing generated by increased trade flows in commodities. 10 Tom Barnes, Euromoney Seminars t/ f/ e/

11 Find out more... The 4 speakers who have contributed to this e-book will be joined by over 250 top bankers, lawyers, producers, traders and insurers already attending. Too hear more about these questions and other speakers click here to view the conference program or to register your place, visit the event website. An Excellent event. A must in commodity finance Andre Roscoe, Vale Certainly the best panels and highest level analysis every year Matteo Somaini, Duferco For more information please tbarnes@euromoneyplc.com, call (UK) +44 (0) or visit the event website here. 11 Tom Barnes, Euromoney Seminars t/ f/ e/