A path through the zigs and zags: TXF Commodity Finance Report 2019

"Commodities tend to zig when the equity markets zag." That was Jim Rogers, the US investor and commentator. He's not wrong at the moment amid trade wars and global geopolitical instability. Uncertainty abounds. To make the path through the zigs and zags of financing commodities a little clearer, TXF has just released its annual Global Commodity Finance Industry Report. This is a deep dive analysis into the state of the industry and shows what the experts in the sector think.

This year's edition of TXF’s Commodity Finance Market Report has the insights of 173 traders, bankers, alternative financiers, lawyers, brokers, borrowers and insurers via a two-part survey with in-depth interviews.

The majority of participants were traders and bankers (38% and 35% respectively), with alternative financiers, lawyers, brokers, borrowers and insurers representing the remainder. Over two-thirds of respondents’ companies were headquartered in Europe, with the rest split across Asia-Pacific (12%), the Middle East and Africa (11%) and North America (7%) (figure 1).

Respondents were in general agreement that all regions in the survey were ‘more’ rather than ‘less’ likely to experience change in business over the next 12 months, bar North America, which was predicted to be just as likely to enjoy the ‘same’ amount of business as is to experience ‘more’.

Naturally, most participants were focused on the energy sector (55%), followed by about one-quarter working mainly on agriculture/soft commodities and one-tenth on metals and mining.

Structured trade vs unsecured debt 

Overall, the market has favoured structured commodity trade finance - pre-export finance (PXFs), securitisation, borrowing base loans (BBLs) - in the past 12 months over taking the unstructured route - revolving credit facilities (RCFs), bonds and unsecured debt.

BBLs were the most popular type of borrowing/lending, with one-fifth of participants opting for this structure, closely tailed by PXFs (18%), RCFs (17%) and unsecured debt (16%), showing that unstructured lending still has a place in the commodity market.

Looking forward 

BBLs are forecast to remain the most popular form of commodity finance lending/borrowing, with 53% having predicted an increase in volume and 46% having said the same about PXFs. Bonds and securitisation, which were the least favoured transactions this year, were selected as most likely to remain the same (figure 2).

Most respondents saw commodity prices on the rise over the next 12 months in the energy, agri/softs and metals and mining sectors at 60%, 57% and 65% respectively.

Sentiment was positive when asked if participants were expecting to expand their business to new markets, with around two-thirds (58%) intending to do so. Brazil was the preferred recipient country, followed by Egypt, Indonesia, China, Russia and Iraq respectively. Of these countries, the biggest challenge was considered to be legal/regulatory landscape.

Trade tech 

The most used technology in commodity trade finance was electronic tracking of goods/cargo, closely trailed by electronic bills of lading.

Blockchain was predicted to be the most used technology over the next 12-24 months (17%)– excluding 33% who said they are not using any of the mentioned technologies and 50% who opted for ‘other’. Nearly two-thirds consider blockchain to be ‘somewhat important’ in the future, and a third cited it as ‘very important’.

Participants were split in half when asked about their attitude towards the importance of a digitised supply chain, with 44% reporting that it is not currently important versus 41% who consider it to be a high priority (figure 3).

Sustainability

Unsurprisingly, almost every participant considered sustainability to be of importance the commodity finance world: nearly two-thirds (63%) selected it to be ‘very important’ and a third (34%) though it to be ‘somewhat important’.

Interestingly, there was a lack of precise understanding towards what defines sustainability, with a variety of answers ranging from ‘compliance and regulatory change are the driving force behind sustainability’ to ‘sustainability is a cultural and behavioural change concept’.

The greatest challenge to sustainable business is measuring the social and environmental impact that commodity finance-related business is having on the market.

For more information on this research or to discuss any research ideas you would like to see TXF undertake, please do not hesitate to contact tom.parkman@txfmedia.com. TXF Essentials subscribers can access a condensed version of the report by clicking this link, but please ensure you are logged into www.txfnews.com first.

 

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