Banks step up trade finance amid global commodities boom

“Suddenly it’s a different market,” said Jean-Francois Lambert, founder of consulting firm Lambert Commodities. “Commodities are not only dynamic, they are totally strategic at a time when countries and companies are reshaping their supply chains.”

Trade finance is the lifeblood of the commodities industry, which needs access to hundreds of billions of dollars in credit to finance the purchase, blending, storage and transportation of commodities. With prices soaring amid war in Ukraine – and supply routes disrupted by conflict and the pandemic – traders are clamoring for extra funds to pay for shipments of grain, metals and fuels.

“Now the commodity trade finance industry is booming, who’s going to say, ‘I’m just going to give it up?'” said Eric Li, research director at analyst firm Coalition Greenwich. “They want to make money – they want to go where the income is growing.”

Commodity trading houses saw their profits soar as they capitalized on wild price swings and arbitrage opportunities. Yet the war has also boosted volatility and undermined liquidity in derivatives markets, prompting lenders to be cautious. Some, like BNP Paribas SA, have continued to withdraw from commodity financing. Others, like ING, have maintained a presence.

“We can grow a bit, but it won’t be huge,” said Maarten Koning, head of trade and commodity finance at the Dutch bank, one of Europe’s largest lenders in the sector.

ING said in 2020 it would be “stricter” in lending to the sector and closed its Latin American unit the same year. But the bank has since started again elsewhere, hiring “almost a football team” in the United States, in Geneva and at its headquarters in Amsterdam, Koning said in an interview.

ING’s overall lending to the commodities sector is increasing but remains below 2019 levels, he said, adding that customers are now making much more use of the lines of credit already provided.

“Now it’s like a scarce commodity and people are more cautious,” he said.

Revenues increase

Banks’ revenues from commodity trade finance lending rose on an annualized basis in the first quarter, Coalition data showed, and the year will likely end above 2019 levels, Mr. Li.

Two years ago, several European banks said they would shy away from commodities as financial strains faced by many trading houses were leading to losses for lenders. Yet some of these banks are still important players.

“Whoever funded it back then is still funding it,” Li said. “They all say they’re selective; what they mean by that is that they want to do business with the biggest customers in the segment.

Japanese banks are among those closing the gap since their European peers retreated. MUFG, the country’s largest lender, is expanding its commodity trade finance business with a new office in Amsterdam, it announced on Friday. The bank has also agreed to buy the commodities finance unit of BNP Paribas in the United States as the French firm withdraws from the sector, people familiar with the matter said.

Dutch bank ABN Amro Bank NV also said last week that, although it has ended most of its commodity trade finance business, it still offers so-called repo products – offerings that help traders mitigate high inventory holding costs.

Former ABN Amro and BNP Paribas bankers have been hired by Credit Suisse Group AG, which extended its loans to agricultural commodity traders in January after opening an office with the new recruits, according to a person familiar with the matter. .

For now, most banks remain wary. Since the start of the war in Ukraine, extreme movements in commodity prices have become more frequent, and some outside the industry have expressed concern about the risks of contagion present in trading.

Those risks are keeping lenders on their toes even as prices firm, according to Lambert of Lambert Commodities.

“Banks follow their customers with pragmatism,” he said. “That doesn’t mean they’re going back to raw materials with a vengeance.”

(By Archie Hunter, with help from Jack Farchy and Isis Almeida)

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