Key takeaways: TXF Geneva – Commodity finance & natural resources

Back in early October 2021 the TXF Geneva Commodity Finance conference was the first physical event we held following the 20-month hiatus due to the Covid pandemic – and it was clear then that this particular vibrant market community was super keen to be face-to-face once again and discussing business in such a format. Roll on one year to 2022 and that sentiment has ballooned significantly. TXF Geneva has grown exponentially every year since we started the event back in 2016.

This year, with over 300 registered, we had a very healthy split of commodity producers/traders (both large and small) and financiers. The latter ranging from global and local banks through to non-banks – and a diversified selection of funds or what is often referred to as alternative financiers. Insurance brokers and underwriters were also in good numbers. Legal eagles and collateral/inspection managers were represented in more select groups. But also in increased numbers were firms providing technological and practical/logistical solutions to producers, traders and financiers.

Overall, it was a conference with a buzz, with plenty of networking and function sessions alongside the formal conference of plenaries and workshops. And above all, it was a conference where existing relationships were reaffirmed, new relationships aplenty established and business/deal discussions in full flow! Here we highlight some of the top takeaways from the event.

Sustainability is increasingly well-embedded within commodity finance

Compared to many other asset classes, the commodity finance sector has broadly embraced sustainability and the spectre of ESG (environmental, social and governance). These developments are further being embedded with producers and traders now firmly getting behind issues around social and governance – the S and the G, as these can really make a difference to communities and economies. As one delegate stated: “Sustainable finance is now getting linked in all areas of commodity finance.”

The analysis of sustainability metrics has increasingly come under the microscope – but it is the commodity industry itself which has taken this on. Some producers and traders are looking much more closely at what they do with key performance indicators (KPIs) and further questioning themselves as to whether they are ambitious enough. As one speaker noted: “In Africa, having a range of KPIs across ESG allows a better balance of benefits depending on the jurisdiction.”

While great strides have been made in agri-financing for example, much more now needs to be done in some of the ‘dirty’ commodity industries on the ESG front. Recently, some advances have been made in the chemicals sector. Other aspects that need increased attention include increased focus on sustainability benchmarks and standardisation. 

Banks are facing up to a raft of increased costs which ultimately will be passed on to borrowers

The past couple of years has not been kind to banks involved in the commodity sector. Frauds and losses hit nearly all banks and had a devastating impact on the lending market – particularly with two major banks exiting the sector, and some others pulling back heavily. For those that have remained fully engaged much more time and effort is now spent on doing basic and new due diligence along with ever intense compliance requirements. All these measure have led to increased time and resources and the resultant costs of these new procedures. Because of this, the margins for commodity loans in many cases have increased accordingly and the market has fundamentally changed.  

Russia’s war in Ukraine has pushed banks and traders to find new markets and clients

While it is agreed that the Russian invasion of Ukraine has been a disaster for everyone, there is also the consideration that it has created adjustment opportunities for many in the global supply chains. For some, particularly those that had big books and clients both in, and dealing with, Russia and/or Ukraine, new business in that region is not possible. 

Switching to new markets and new clients is not easy – but some banks and traders have been left with no alternative. Traders report that changing the logistics of supply chains can take a considerable amount of time to reorganise, and that replacing Russian product supply chains has brought increased costs because of the disruptions and establishment of those new supply lines.

Some banks are reporting a healthy uptake of new clients, particularly within the African continent. One major commodity bank stated that it has increased its client base by approximately 20% over the past 15 months or so – mainly in metals and oil and gas. This somewhat dispels the myth of ‘flight to quality’. Some of these new clients – particularly those involved in oil and gas production are sourcing commodity bank financing because funds from many ECA and DFI/MDB sources have dried up. Increased due diligence is required and ESG is more problematic in such cases, but returns are good. 

Diversification of sources of liquidity continues for traders

Commodity traders are having to find additional liquidity to meet the demands of the market. This comes about with not only the increased prices for many commodities and the resultant high margin call requirements, but also increased operating costs across the board – from shipping to inspections and other logistics. Consequently, emergency liquidity funding for traders has been prominent earlier in the year, but also continues to be sought in some quarters. 

Traders are also continuing to diversify their sources of financing. Samurai loans – the Japanese syndicated loan market – has become more of a go to for some of the big trader names, for example. And a good number of new banks have entered this market. Similarly, several traders are exploring using export credit agency (ECA) backed credit arranged by international banks where the financing will be used to support the flow of certain commodities to a particular country. Trafigura has already cemented such a deal in October this year – a $600 million Euler Hermes-backed transaction supporting the supply of critical metals to German industries. Other such deals are known to be in discussion.

There also appears to be a growing involvement of so-called alternative lenders with commodity traders for specific trade flows where banks do not want to go. And these deals are with big traders as well as the smaller players. 

Credit insurance is there for commodities, but is much more selective

The credit insurance sector has re-adjusted itself over the past couple of years and overall has become much more discerning in what it will provide cover for. Some brokers/underwrites have backed off, but others have always come in. Brokers and underwriters agree that there is so much business looking for cover that they can largely ‘cherry pick’ which transactions they want to take on. That said, there is  general agreement that capacity in the sector has been growing – although it may not be in the same places that it was a couple of years ago. 

As far as sectors go, the credit insurance market is still very much open to oil and gas, but on the other hand appetite for business in the softs (agri-finance) sector is much less than it used to be. As far as markets/region go, again insurers are increasingly selective and the barrier to entry for many emerging market deals is set quite high and there is a real ‘flight to quality’. 

Brokers and underwriters are adamant that premiums have not increased per se, and that all transactions are taken on a case-by-case basis. The underlying message appears to be that the product and policies work well for the commodity sector. 

Collateral management enters a new era, with technology increasingly being used to make deals more transparent, efficient and safer

Collateral management within commodity trade finance has stepped up a gear with the arrival of new technology and processes to vastly improve the security and transparency of commodities being used as collateral. Veridapt is one company which is leading the charge with developments in this important arena. Changes have come about largely because of fraud cases in the global commodity trade sector, particularly in Singapore. Veridapt is now teamed with the Singapore Trade Data Exchange (SGTraDex) to provide banks, traders and terminal operators with one of the world’s most efficient and transparent tradeflow platforms. In addition, the company has introduced 3-D scanning technology for stockpiles and a multi-faceted approach to security which can be adopted for comprehensive warehouse security. 

Alternative lenders embrace digitalisation as financiers look to bridge the commodity trade finance gap

Non-bank lenders, or so-called alternative financiers have led much of the charge in embracing digitalisation within commodity trade finance. This advancement, particularly over the last couple of years is helping in a small way to bridge the massive trade gap which some predict will reach a staggering $6.5 trillion by 2025. 

One such provider is non-bank trade finance provider Stenn International with its online invoice financing and factoring services. In another example, MatterSphere, a network provider with blockchain technology, is helping alternative investors engage in commodity trade finance by streamlining the transactional process and minimising the risks on the collateral.

Commercial banks are also increasingly employing more digitalisation in their processes, and the uptake of new systems is helping banks to finance more new clients. It is hoped that such measures will help in some small way to bridge the trade finance gap that currently exists. One major bank announced that it was just about to launch a new platform for its back office. Delegates were also reminded of Sucafina’s ESG-linked $500 million borrowing base from last year, where Komgo was the digital agent. 

Expect a tighter market in commodity shipping

Many in the commodity shipping sector are forecasting a tighter market in commodity shipping overall – both with bulk carriers and most tanker classes. Currently, the number of new vessels under construction globally is low, vessels are getting older and there aren’t enough available to meet peak demands in a volatile commodity market. The reason for lack of new builds is lack of funding and technological changes requested by the IMO to meet emissions targets, with many ship owners undecided as to which power/fuel system to employ. Much still needs to be done on the emissions front.

From a bank perspective, checks within commodity shipping have massively increased, and there are various platforms on the scene now but they’re not seen to be totally spread across the sector yet. As such manual checks are still widespread but need to also embrace more sophisticated tools. Overall, the sector is still lagging behind in digitalisation. Komgo automating invoice is one such tool which could easily be implemented. 

In the bunkering industry a credit squeeze continues. Bunkering is always put in the same segment as commodity trade finance by the banks, when it’s not the same size transaction at all. Margins have gone up because of this, and this has been the trend for most of the year. The bunkering market is a good opportunity for mid-sized lenders or alternative financiers to move in.

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