The world economy was profoundly impacted by the events of 2020, so much so, that the full extent of its impact is yet to be determined. In a panel moderated by Christine McWilliams at TXF’s Global Commodity Finance Virtual 2021, which TFG partnered with, this impact was discussed at great depth, looking at how to navigate commodity trade finance in a post-COVID world.
The panel identified the current macro themes in commodity trade finance, including:
- Increased oil prices
- Increased corporate prices leading to reduced profit margins
- Trade of sugar, soy and corn increased, being traded at an all-time high
- Increase in volatility prices benefiting the traders
- Increase in uncertainty
Cost of capital continues to rise
Price volatility in commodity markets has been no surprise as a result of geopolitics, COVID-19 and supply-demand shocks, and although this may positively impact traders in the short-term, the balance-sheet repercussions are likely to hit traders in the long run. Volatile prices often result in higher cost of capital from lenders and therefore a squeeze on what’s already a low margin business for commodity traders.
As the markets continue to shift, so do clients’ preferences for products. Clients have been focusing more intensely on diversification of liquidity, selling their receivables to banks, and entering repo transactions with banks. As a result, markets saw a surge in structures such as Revolving Credit Facilities (RCF) and commodity swaps.
Drive towards transparency and collaboration in commodity markets
TXF’s Global Commodity Finance virtual highlighted the significant shift away from ‘business as usual’, in part due to the growing appetite for responsibly sourced finance, but also, due to changes in liquidity sources and the need to mitigate against the string of high profile commodity fraud cases over the past 24 months.
Conscious collaboration, on both the lender and borrower side, has taken centre stage in ensuring the stability of the commodity finance markets. This change was driven by both the COVID-19 pandemic, as well as a continued desire to innovate and digitalise commodity trade finance. From a consumer perspective, demands for increased transparency and trust; such as sharing information along the supply chain, continues to force the industry to change. Business-to-consumer (B2C) companies have been pushing for this as well, as they are aware that their consumers are demanding the sources of certain goods, such as coffee and cocoa. This is expensive. Joining the dots between farmers, miners and global value chains requires continued investment into digitalisation and operations, so any tool to drive efficiency and bring down the cost of commodity trade finance is now being seriously considered.
As a result, banks continue to change the way they do business, which includes:
- Reviewing their credit and risk policies
- Pay extra attention to exercising the LIBOR transition
- Understanding the corporate governance and standards amongst traders
- Reviewing internal compliance policies
- Obtaining more control over the goods being financed (AML, CTF, KYC, KYG)
Digital platforms are becoming more relevant as a tool to mitigating risks associated with fraudulent or duplicate documentation. These platforms allow for the complete life cycle of documents to be traced, as well as for their verification. As a result, the fruitful collaboration between banks and business continues.
New ways of working – transactional due diligence
In a ‘work from home’ environment, banks had to rapidly move their employer base to a remote working environment, whilst at the same time, ensuring due diligence processes were maintained without halting transactions. This is a theme that is growing in importance, but also shows commendable actions from financial institutions in such a short period of time.
Musings from the commodity trade finance industry
The panel considered the following when looking at the future of commodity trade finance:
- Transparency and trust is crucial for business relationships, especially at a time where borders remain closed and the transfer of goods restricted
- Liquidity, in a crisis-high price environment, must be prioritised
- The strategic priority for lenders and traders should be trade digitalisation
- Efficient communication, can have a direct impact on improve efficiency