Top takeaways from TXF APAC Virtual

On 17 March 2021, TXF welcomed guests to its first commodity finance event of the year, our virtual TXF APAC conference. Eight months later we once again found ourselves uniting the Asia-Pacific commodity finance crowd at our TXF APAC virtual event, this time for our final commodity finance event of the year. The ability to gather the industry multiple times a year is one of the many benefits of virtual conferences, but I digress.

With the two events neatly bookending the year, we were provided the perfect opportunity to reflect back and take stock of how far we have come in such a short space of time. This year was always going to be one to watch following the turbulent market events of 2020. How was the commodity finance sector going to emerge from one of the most destabilising periods in its history? Would the APAC region be able to restore standards and regain the industry’s confidence? Last week’s event provided us with the answers to these key questions and here are the top takeaways:

Traders make hay as volatility continues

Commodity traders thrive on volatility and if there is one word which describes the past two years then it is ‘volatile’. Last year saw many traders achieve record profit levels as they cashed in on fluctuating commodity prices brought about by supply and demand disruption as well as unique contango opportunities. This year has seen many traders go one better and achieve even higher levels of profit as they make the most of resurging economies sending commodity prices to their highest levels in 10 years.

Good things come to those that wait

Whilst some leading banks exited the commodity trade finance market in 2020, others held fast and redoubled their commitment to the industry. These banks are now seeing their patience rewarded as they reap the profits generated by increasing volume and line utilization from traders, as a result of rising commodity prices. Only time will tell if those banks who were quick to exit will lick their wounds and re-emerge in search of a piece of the pie.

The ‘flight to quality’ remains prevalent

Despite some industry figures raking in revenue,  others continue to struggle as the liquidity crunch continues to take hold. The industry’s ‘flight to quality’  has seen  banks take a more conservative approach to lending as protective instinct against the major fraud and default events which occurred in 2020.

With banks diverting capital away from the bottom 20-30% of clients and channelling it towards their larger, more credit worthy clients, many small and medium sized traders have been struggling to secure much needed liquidity. This has opened the door for alternative financiers  to step in and provide other funding options at a relatively more competitive price level than pre-2020. However, this does not solve the problem as funds remain unable to compete with bank pricing.

Uncertainty surrounds the sustainability timeline

Even with all the carrot and stick approaches in the world, a solid timeline for achieving sustainability within the commodities industry remains unclear and much depends on the implementation of clear and consistent standards. The timely announcement from COP 26 that the global accounting standards bodies have agreed on an international accounting standard for carbon will provide a cause for optimism and will go a long way in laying the groundwork towards more accurate tracking of carbon emissions.

On a more controversial note, the cost of sustainability must also be considered, as well as  the effect on developing economies as they are denied their right to an  industrial revolution. It is important we put in place a ‘Marshall Plan’ for the energy transition to ensure a suitable replacement is in place before we begin phasing out coal and risk potential supply shortages and the dangers which come with that.

Private insurers remain resolute

The private insurance market remains resolute in its support for the trade and commodity finance market and is proving an essential tool for traders navigating the current liquidity crunch as well as banks looking to increase internal counterparty limits and obtain capital relief. Underwriters are also supporting the market by providing credit cover for derivatives and commodity price hedges.

Don’t sleep on carbon

Carbon represents an important business opportunity for commodity players and it is essential that companies form a carbon strategy sooner rather than later.

All of the sessions from TXF APAC 2021 can now be viewed on demand via the event platform. Access to the event platform is free for all TXF Commodity Finance members and can be registered for here. If you would like more information on TXF membership please contact membership@txfmedia.com