TXF weekly: Another year in commodities and natural resources

As is always the case in an industry that oils the wheels of the global economy, 2022 has been an eventful year in the world of commodities and natural resources. Just as the industry had begun to recuperate from the severe supply chain disruptions, volatility, and plummeting lender appetite caused by the pandemic in 2020 and 2021, Russia declared war on Ukraine in February this year.

What was primarily a humanitarian crisis also sent global commodities supply into meltdown, with Russia responsible for 5.5% of world aluminium production, 11% of global nickel production, 12% of global crude production, and 12.5% of global natural gas supply. On the other side of the coin, Ukraine held 10% of the world wheat market, 15% of the corn market, and 13% of the barley market.

Instantly, traders and banks were left scrambling to diversify their supply chains away from Russia, the dip in supply and surrounding uncertainty causing already rising prices to balloon further. But the commodities industry is an essential and therefore resilient one, and although the rebalancing of such significant portions of global trade flow will take years rather than months, adjustments started immediately.

This diversification welcomes new opportunities within other markets, both emerging and developed, as banks reassess their portfolios. And although critical issues off the back of the war surrounding food security and energy supply initially forced industry figures to adjust their priorities when it came to wider themes like sustainability and digitalisation, these issues have remained on the radar throughout this year.  

Perhaps it is also important to note that 2022 was the first post-pandemic year in which the industry was able to fully return to business travel, face-to-face meetings, and events. As a people-focussed and apprenticeship-and-networking-based industry, the return to physical meetings has seen a return to normality for the commodity trade finance and natural resources crowd.

Amongst the many discussions that we saw take place this year, from TXF’S flagship commodities event in Amsterdam in May, to our first post-Covid return to the Asia-Pacific region in September, to rounding off the year at Geneva Commodities Week in November, here are top takes from 2022, and the trends that will roll into 2023:

Russia’s war in Ukraine has seen the biggest redirection of trade flows in recent history

In the wake of extremely high commodities prices and sanctions and embargoes against Russia, banks, traders, and exporters have been scrambling to diversify the jurisdictions from which they are sourcing their commodities. With the majority of both Russian and Ukrainian supply taken out of the equation, this has particularly applied to European-based traders, but has ultimately affected the entire global supply chain across energy, agri, and metals.

Although it is extremely difficult to find a positive in this humanitarian crisis, it is worth considering that it has created adjustment opportunities for many in the global supply chains, which could be particularly beneficial for emerging markets such as Africa and parts of Asia.

However, there has been significant concern over the ESG credentials associated with the replacement of Russian supply. For example, replacing Russian aluminium, which is relatively green, with much less green aluminium from China is an issue when considering the journey to net zero.

Another concern associated with the diversification of jurisdictions is that although there has been a lot of promising talk from banks when it comes to picking up more business in emerging markets such as Africa, they are not putting their money where their mouth is. What’s more – it would take years for Africa to prepare to produce enough grain and cereals to replace the volume of supply from Ukraine, for example.

However, some banks and traders have been left with no alternative but to diversity, causing a huge and ongoing job for some lenders and corporates this year.

Trade is now a mechanism for fighting war

Tariffs, sanctions, and embargos are now being used as a mechanism for fighting war, effectively weaponizing trade. In other words, the commodities that countries and jurisdictions are trading with one another are now being used to further political motives.

The latest is that oil prices rose last week in early December as vast western restrictions on Russian oil came into play, with Brent crude having risen 1.7 per cent to $86.97 a barrel. EU member states have agreed a $60 price cap on other countries’ purchases of Russian oil in an attempt to limit profits for Moscow’s war on Ukraine.

And new sanctions continue to appear, with The European Commission to propose a ban on new investments in Russia’s mining sector as part of an additional set of sanctions against Moscow designed to further cripple its economy.

New investor appetite is changing in favour of ESG

Demand for alternative financing is rising, despite the inevitably higher margins, with even the big traders tapping into non-bank debt.

To gain confidence and trust from new investors, funds view being transparent about their business models and processes, and providing clarity when explaining the risks involved in a fund’s specific strategy as the most important factors.

Family offices who had previously seen ESG as a box ticking exercise are now beginning to value ESG to a similar level of importance as they value their returns, which could be due to new legislation around carbon accounting and ESG reporting. Regulation is no longer just a bank issue, and this is moulding how new investors are doing business in the commodities and natural resources space.

The energy crisis continues to rock the market

Europe continues to fight an unprecedented energy crisis as demand outstrips supply. The rapid rebound from the pandemic juxtaposed with the major supply disruptions caused by the loss of Russia’s energy mix has sent Europe into turmoil.

With the closing of Nord Stream 1, the largest gas pipeline in Europe, natural gas prices have soared, which has also fuelled demand for oil, particularly amongst industrial consumers. But this is also having a huge effect on domestic consumers, and the situation has forced governments and ECAs to take on a bigger role when it comes to securing energy supply for their respective countries.  

Although governments such as Germany and the UK have implemented price caps, and the EU announced an emergency intervention in September this year, the energy crisis will continue to take significant effect in 2023.

European countries are working towards reducing their reliance on Russian supplies, includes installing new LNG import facilities, improving energy efficiency, and upping renewables, but this takes time, and it is not expected that Europe will fully be able to move away from Russian energy until mid-to-late-2024.

Carbon is the hot new commodity  

Carbon credit trading, and its role in offsetting business’s emissions across both the voluntary and compliance markets was a hot topic this year and given that it’s a relatively new market in the commodities scene, it’s also been a heavily debated topic.

Carbon trading is not just about mandatory compliance, but can be used by traders in the voluntary market to reduce a company’s carbon footprint across the supply chain. There are many complexities associated with the voluntary market, such as different specifications that trade at different prices, and issues related to transparency and integrity. However, there are some mitigators in place such as placing a lock on the first flow of credits from a project to ensure a developer has not double sold the units, and third-party verification.

There is also a lack of global pricing benchmark in the voluntary carbon credit trading space, and some debate around whether the pricing and exposure is high enough to fully utilise the impact carbon credits have on the journey to net zero. Certainly, more momentum is needed in this space in 2023 and onwards.

ECAs are upping support to traders via untied lending

ECAs have been diversifying into new markets through untied lending facilities, which allows for more flexibility than traditional export credits. A prime example of this is Trafigura’s $800 million untied five-year ECA-backed loan underwritten and arranged by Societe Generale and syndicated to seven banks. 

The loan, which closed in October, is guaranteed by German export credit agency Euler Hermes, provided under the country's Untied Loan program to support the commitment by Trafigura to deliver, under a five-year supply agreement, up to 500,000 tonnes of non-ferrous metals into Germany.

Given the role metals and critical minerals are playing in accelerating energy transition, ECAs are now showing a growing interest in securing commodities from major traders on behalf of their respective domestic industries, and we can expect to see more of this type of lending structure in 2023.

TXF Intelligence top trends in Export and Commodity Finance 2022 - Watch our 90 second animation here

TXF journalists have revealed what trends and themes they've identified in 2022 that they expect to dominate in export and commodity finance in 2023 and beyond. Watch our quick 90 second animation to see which ones might impact your business next year.

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