The Commodity Trade Finance Industry Report 2022: A sneak peek

Next week, The Commodity Trade Finance Industry Report 2022 will land on the TXF subscriber-only intelligence platform. The annual research report comprises a deep dive into market sentiment, corporate and banks strategies, and key industry trends, changing with the market each year.  

The year 2020 sent the commodities industry into shockwaves, after being hit with anomalous market conditions off the back of an unprecedented global lockdown. In 2021, although the industry began to recuperate from Covid-19 induced aftereffects, volatility, reduced liquidity, an even greater need for ESG advancements and digitalisation, and the exit of some key central banks meant the industry remained far from stable.

The lack of equilibrium in the market continued into 2022, and when Russia invaded Ukraine just two months into the year, the industry was turned upside down yet again. What was principally a humanitarian crisis also sent global commodities supply into meltdown, with traders and banks left scrambling to diversify their supply chains away from Russia.

This supply shock and surrounding uncertainty caused already rising prices to soar further, particularly within the energy sectors. But the commodities industry is an vital and therefore robust one, and whilst there have been some changes to trade flows, commodity trade and commodity trade finance has continued to service the globe.

The Commodity Trade Finance Research Report 2022 comprised a total of 141 respondents, with just under half (43.26%) of respondents were traders. The remainder of the sample size was made up of banks (34.75%), producers (3.55%), and others (18.44%).

The vast majority of respondents were at global head/director or senior level (43.26% and 41.13% respectively), meaning that they shoulder decision-making responsibilities. To produce inclusive and well-rounded research, the report also includes data from junior and mid-level respondents. But in order to best represent the market, it was crucial to include a high percentage at decision-making level, as it is these industry figures which have the most influence within their respective organisations. Here’s are some of their top insights:

Overall, banks report a more positive market sentiment than corporates

In 2022, sentiment was mixed when it comes to the commodity trade finance industry. The three most popular answers overall were dynamic (38.61%), reactive (24.68%), and positive (20.89%) – which paints a relatively optimistic picture.

However, when the data is cut between corporates (traders and producers), and banks, a slight disconnect can be seen. Although the difference is minor, overall, banks seem to view the market as more positive than the traders and producers. For example, 15.71% more corporates viewed the market as uncertain, compared to 8.87% more banks reporting that the market is positive, with 23.81% more banks considering the market to be dynamic, compared to the corporates.

Three-quarters of respondents said that they have ceased Russian-related activities

Off the back of both sanctions against Russia, and the reputational risk posed by resuming business within the country, almost three quarters of respondents (72.36%) reported that they have ceased Russian related activities and operations altogether, including financing, investing, insuring, brokering, purchasing, and producing.  

Almost a fifth of respondents (17.89%) reported that they had partially ceased Russian related activities and operations, which could represent organisations which have ceased doing business with sanctioned entities, but are still active when it comes to non-sanctioned Russian entities.

Almost a tenth of the sample (8.13%) reported that they have not ceased Russian related activities and operations, which is likely to be accounted for by regions such as China, with 1.63% of respondents reporting that although they had not yet ceased Russian related activities, they were planning to by the end of 2022.

Overall, these data illustrate a significant shift in supply chains, as 92% of respondents have reported that they have either changed their activities in relation to Russia’s war on Ukraine, or that they were planning to change.

There is a level of uncertainty when it comes to the rebalancing of trade flows

Data shows a divisive sentiment when it comes to confidence that the shortfall in softs, wheat, sunflower oil, fertilities and other agri products left by Ukraine can be made up by other countries. Nearly a third of respondents (29.73%) reported that they are confident the shortfall can be made up, with the other two thirds having said that no they were not confident (35.15%), and that they were not sure (35.15%).

Reputational risk is at the forefront of banks’ decisions

The majority (69.7%) of respondents said their bank is now paying much better attention to reputational risk considerations, suggesting that this is something that has become much more important off the back of Russa’s war on Ukraine.

Just over a fifth (21.21%) of respondents said their respective banks are yet to find the balance between doing good business and losing good business, suggesting that for some, the management of reputation risk is very much still a work in progress.

On the other side of the spectrum, some have reported that reputational risk is having a negative effect on business, with 6.06% reporting that they are losing valuable revenue because their respective banks have gone too far with the notion of reputational risk, and 3.03% believing that their bank is paying far too much attention to reputational risk.

RCF cost of debt is likely to rise

The report shows that overall, corporate borrowers can expect RCF pricing to increase going forward, with 37.04% of bank respondents reporting that there will be a substantial increase in price to the borrower, and 40.74% of banks reporting that there will be a small increase. Almost a fifth of bank respondents (18.52%) reported that RCF pricing will remain around the same, and just 3.7% said that there will be a small decrease.

With inflation making its mark on the global economy at a time when the market could be headed for a banking crisis, it is unsurprising that RCF prices are expected to increase. With around the same percentage of respondents saying that RCF prices will increase by a small amount and a substantial amount, is it unclear to what extent prices will rise.

Banks’ approach to ESG has become more holistic

Banks are taking a rounded approach to avoiding carbon emissions, with a huge 63.64% saying that they would only provide financing if all/part of the supply chain had high levels of carbon emission if the deal is for commodities central to green infrastructure and the energy transition.

Supporting this further, 90.90% of banks reported concern to some degree with the emissions of the full supply chain (as opposed to just the first-hand emissions of the clients you directly provide finance for). Overall, it seems as if bank’s approach to emissions throughout the supply chain is becoming much more sophisticated and holistic.   

Over two-thirds of corporates are diversifying away from bank financing

In light of the bank liquidity squeeze, over two thirds of corporate respondents (68.29%) reported diversifying their funding options to cope with evolving market conditions. When taking a look at where this alternative financing is being sourced, the answers were very diverse.

The most popular answers were private equity funds (15.15%), private credit (15.15%), family offices (13.64%), provide equity, direct investments (12.12%), hedge funds (12.12%), and loans from a trading house (10.61%) (figure 37, Q84 corporates only). There was no one source of alternative financing that took a notable majority vote, showing that corporate borrowers are utilising various forms of alternative financing across the board. The only two options that had no votes were mutual funds and pension funds.

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