Will buoyant commodity prices lift all structured commodity trade finance ships?

Will the rising tide of commodity prices lift all ships of structured commodity trade finance? Or are too many of those commodity ships already holed below the water-line? Time to catch the tide.
John MacNamara
John MacNamara
CEO, Carshalton Commodities

After a distinctly challenging 2019/2020, commodity prices have been back on the up for the last few months. What does this  mean for the structured commodity trade finance (SCTF) market?

More than a dozen sizeable commodity traders have failed over the last 18 months, relatively quickly on the heels of the 2015/16 commodity price downturn which prompted its own wave of debt restructurings, and now a number of funds join the collapse. The direct correlation between low commodity prices, and increased discovery of fraud, also of financial insolvency, among commodity corporates, has not helped.

I’ve always said we need at least a half decent crisis for people to be willing to give us structure, security and pricing, in return for finance, but the current wave of ensuing arbitration and litigation engulfs banks, funds and insurers in doubt about the product.

Part of the challenge is that, as world trade in goods these days moves increasingly to open account, at the same time, regulators require their banks to prefer forward looking balance sheet modelling to the traditional risk mitigation techniques of commodity trade finance.

Accelerating the latest squeeze was IFRS 9 implementation in January 2018, requiring early recognition of impairment, with the Basel committee going the same way on ‘Non Performing Assets’. This has largely robbed the banks of any incentive or inclination to try to workout problem loans, as revenues are put to ‘zero accrual’ while Risk Weighted Assets are inflated by downgrading, to exceed the actual exposure. Even insurance payouts are now poorly treated in the bank’s balance sheet so long as a restructuring is on the table. Increasingly banks simply sell the exposure.

The regulatory outlook is no better with the draft of ‘Basel IV’, out since 2018, which demands a ‘one size fits all’ 120% weighting for commodities finance. Combined with an effective abandonment of regulatory recognition of transactional collateral since around 2015, this has pushed many high-profile erstwhile long-standing ‘commodity’ banks to exit the sector since 2020, taking a number of insurers and funds with them. All will miss the sort of infrastructure for collateral management and workout we used to take for granted from the old commodity banks, but at least Fintech in trade promises solutions to the universal fraud challenge.

The commodity price cavalry cometh?

Commodity prices took an almighty battering even before COVID-19 came along to torpedo all previous forecasts, but now ‘Dr Copper’ is double the levels of a year ago, at over $9,000 pmt. At the beginning of April 2020 we were looking at $80 iron ore (down from $123 in July 2019), yet we see $168 at the time of writing, so again the price has doubled. With crude oil, I concede we all had a moment of panic when US prices actually went negative last year, a development never before seen in recorded history, but today’s Brent crude price in the $60s means that pretty much all producers are again profitable. Agri commodities are not quite double: Soya is at $14 compared to around $8 a year ago; sugar is around 16 cents per pound up from 10c a year ago (and saw 19c this February) so Agri/Softs maybe have further to go to catch the rest of the commodity complex. Volatility, meanwhile, has been good for many traders, with the survivors meanwhile posting record results.

Looking at equity prices, non-oil equities have gone up tremendously well. One outperformer, who I’d probably better not name, but they’re in Ukraine, is up by 84% year on year. The oil sector rather lags this stock market enthusiasm. Last year’s negative prices clearly still weigh upon the sector, as does the prospect of ‘electric everything’ by 2025/35/40/60 – depending on whos’ hype we believe. However, I see the reports of the death of oil as rather exaggerated. The same was already said of coal in the 1990s, and that has also doubled in the last 12 months.

Too soon to celebrate another supercycle in SCTF?

This week already Al Jazeira pronounced the new commodity supercycle, which is a bit like hearing it from a London taxi driver. The first two supercycles in my lifetime were 30 years apart, so to see a third only another six or so years later feels instinctively a little early, but who knows? I hesitate to forecast, but commodities lead every cycle, and we already had the down-cycle last year. This year we get stimulus packages in the US, EU and elsewhere, and let’s face it, China seems to have been back to normal service for some time, which means being pretty much half of all commodity production and consumption all on their own.

Abandon ship, or set sail?

If history teaches us anything about commodities, it is that next year we will still need them. There will be trade, only the level is open to dispute. There’s certainly been an inflection point which has seen many banks, also funds, ‘retire hurt’ from the game. The distressed debt sharks certainly smell blood in the water, and I have to concede they have a great business model given high recovery rates in the non-synthetic SCTF business.

Conversely, I do see ‘market opportunity’ opening up before us, rather like in 1999/2000. Successive tsunamis batter the market, leaving many high and dry, exposing the shamsters and the shysters who had collected like so many barnacles on the bottom of the business, blinking in the light, but people still need to import, and export, physical commodities. That will still require finance, and insurance. I put money on the cost of both going up, tenors coming down, and structures getting stronger. Much better to enter the SCTF market just after a crisis, than just before one. For a while there will even be less competition. For those still onboard, it’s time to catch the tide.

More BUlletin Publications

Charting a course forward


Charting a course forward: Navigating AI, digitalisation, and economic support amidst unprecedented global change

This May edition of the BUlletin offers fresh insights on embracing and implementing digital strategies, adopting AI tools to enhance efficiency and security, supporting the Ukrainian economy by helping keep trade...

Celebrating 90 years of supporting trade and investment


Celebrating 90 years of supporting trade and investment - 1934 - 2024

Reflecting on Berne Union’s origins and celebrating its achievements. What does the future hold?


Climate Working Group: The continuing momentum for change


Climate Working Group: The continuing momentum for change

The Berne Union’s Climate Working Group is proving a helpful forum for sharing good practice. How is it progressing, and how can our industry continue to help with this initiative?

Claims: Controling Chaos, and Risk Versus Reality


Controling Chaos, and Risk Versus Reality

In this edition we explore BU claims data and its relation to predicting risk since the pandemic, we also feature a broker's eye view of the state of the CPRI market, the bold restructuring of Denmark's investment and export financing with EIFO, how EDC is looking at ESG risks and ...

Landmark modernisation for OECD Arrangement


Landmark modernisation for OECD Arrangement

A bold agreement for the Arrangement marks a positive development for our industry. Also featuring
digital access to export finance for China SMEs, challenging the 'China debt trap' narrative for Africa,
insolvency trends, analysing service ...

What's on the horizon for 2023?


What's on the horizon for 2023?

The pick of key issues to look out for in 2023 – from macro trends, potentially choppy seas for smaller ECAs,  possibilities for using Islamic finance in the renewable energy transition, China’s reopening, a bumpy CPRI outlook, and reinsurance complexities. 

Authors look at...

Digitalisation as a business leadership imperative


Digitalisation as a business leadership imperative

Technology-driven trade and client interaction are nothing new. But increasing investment in digitalisation of fundamental business processes and decision making is driving a new way of looking at trade finance and risk underwriting. Authors highlight successes and challen...

Mobilising Africa's Potential


Mobilising Africa's Potential

Despite the challenges there are many positive opportunities emerging for Africa today

Curated by the BU Sub-Saharan Africa Working Group, authors for this special edition of the BUlletin explore areas of growth and the role of different sources of international finance tapping this

Ripples and After-effects


Ripples and After-effects

exploring the multiple secondary impacts of both the pandemic and the war in Ukraine

from sovereign risk in Africa, to energy security, political violence and the private CPRI market

Shocks and Short Circuits: The Rewiring of Global Trade


Shocks and short-circuits: The re-wiring of global trade

The bright shoots of economic growth are under threat once again
Assailed by commodity supply shocks and political instability exacerbated by the war in Ukraine
Contributors this month look at the complex impacts on trade and investment across developed and...

Diverging Risk


Some predict that 2022 may finally bring us beyond the thrall of the COVID-19 pandemic

But the events of past two years have brought significant divergence of risk across economic and geographic boundaries

Authors this month look at how this is playing out in a range of cases

New Foundations


If the global economy is truly on the road to recovery how can we build the surest path to sustainable growth in our new net-zero world?

New foundations in tech, data, and cooperative frameworks may help guide us into the next phase

Illuminating Climate


Now widely recognised as an economic as well as environmental imperative
The momentum to tackle climate change is building
Changing perspectives, policy, products and processes across the export credit industry

In search of claims


Where is the avalanche of claims and insolvencies expected to emerge from COVID-19?
The picture so far is uneven across geographies, sectors and business lines
And for the future? Well, it depends...

Cross-roads for Africa's recovery


The economic impact of the COVID-19 pandemic on Africa has been considerable and the path of recovery depends on maintaining the support of local, regional and international stakeholders. But which approaches can best build upon the opportunities presented by growing intra-regional trade, and investment in sustainable infrastructure?

Navigating the Brave New World of Trade


With the wounds of the pandemic still under triage, a rebound in trade could the best hope for governments and businesses alike.
But trade is under immense pressure from myriad directions.
How can we maintain supply of finance, in the face of growing demand and irregular patterns of risk?