The supply chain crunch needs liquidity to oil its wheels. Will the current commodities price surge be enough to lure lenders back into the trade finance business?
Trade finance is the lifeblood of the commodities sector.
Without access to regular lines of credit, the industry would not be able to generate the capital needed to purchase, store or transport raw materials.
During the pandemic, many lenders chose to scale back their exposure after a series of fraud scandals and heavy losses.
Now, however, with commodity prices surging in the wake of the war in Ukraine, many lenders are returning to the market, their confidence restored.
Renewed calls from commodities traders for extra liquidity to help them overcome hurdles like post-pandemic supply chain disruption has also been a factor.
Unlike two years ago, many financial institutions are beginning to see the strategic importance of keeping the wheels of international trade turning.
After all, these shipments of grain, fuels, metals and minerals are staples that the world has come to rely upon in order to sustain everyday life.
As a result, many have seen large international banks’ efforts, alongside several Japanese financiers, to buy out commodities trading units from their European counterparts, or set up branches in important trade centres like Amsterdam.
For example, the Credit Suisse Group recently expanded its lending facilities to agricultural traders after opening a commodities desk in January.
That is not to say that the sector remains risk-free.
There has been a lot of price volatility subsequent to the conflict in Ukraine, which has discouraged more conservative lenders.
This may have been brought on by financiers’ concerns over possible effects to other parts of their businesses.
However, these price swings also offer opportunities to make money via trading and arbitrage, if handled correctly – an opportunity that some lenders are keen to cash in on.
Jean-Francois Lambert, founder of consulting firm Lambert Commodities, said: “Suddenly it’s a different market. Commodities are not only buoyant, but they are totally strategic…[with] companies reshuffling their supply chains.”
While several European banks have closed their commodities desks, others, like Amsterdam-based ING Bank, have chosen to stay, but have made their lending criteria a lot stricter in a bid to avoid big losses.
Fraud remains a big problem within the industry, albeit one that is being addressed through the introduction of fintech security checks and thorough vetting processes to rule out practices such as duplicate financing.
It is early days, but many in the trade and export industry see this as a sign that the trade finance gap will begin to narrow, especially with newer types of lenders entering the market.
And with governments and non-governmental organisations (NGOs) also working hard to encourage more trade via various partnerships, multi-lateral trade deals, and development programmes, the future is beginning to look a lot brighter for the trade and exports sector.