June 2018

Commodities prices are back up and demand for commodities and their financing looks set to continue as emerging markets develop. But could geopolitics create further shocks? And how come a certain structured commodity finance banker lost all his hair? flow reports on the main themes from TXF Amsterdam 2018

Before the Amsterdam Stock Exchange opened in 1530 it had been operating as a market for the exchange of commodities. Almost 500 years later the Netherlands has retained its position as a global commodities trading hub 1.  According to the Central Intelligence Agency World Factbook, it is the eighth largest export economy in the world, exporting more than €652bn of goods in 2017.

It is therefore fitting that TXF held its fifth annual Natural Resources and Commodities event in Amsterdam, with around 375 (34% of which were corporates) delegates congregating at the Hotel Krasnapolsky on Dam Square on 17 and 18 May 2018. There was a buzz in the air, with more than 50% of delegates polled confirming that commodity trade finance business was well up on last year. Helped by rising prices – Brent Crude spiked at US%80/bbl as the conference opened – appetite for borrowing base, pre-export and prepayment financing is strong with new borrowers and local banks entering the market.

As host and TXF Editor-in Chief Jonathan Bell put it, “Despite ever-increasing levels of competition in the commodity finance market, there appears to be a general feeling of enough volume, and conversation has moved from bank retrenchment to bank reinforcement.”

All for one but no one for all

Frank Gardiner
Frank Gardiner questions the erosion of international rules (source: Deutsche Bank)

Although President Trump’s imposition of tariffs on steel occurred after this event, it was the keynote opening speaker Frank Gardiner who had set the scene of what the new “America First” United States was doing to the world order. The BBC’s Security Correspondent declared, “The big strategic ally of Europe, the US, is becoming a very unpredictable place and it is clearly getting its own way” and cited the US withdrawal from the Paris climate change agreement and the international nuclear deal, and the international nuclear deal complete with threat of sanctions on EU companies that do business with Iran.

“Are we seeing an end to or an erosion of the international rules based on order? He asked. Gardiner remarked on the emergence of more and more single powerful individuals (President Trump, President Putin and Saudi Arabia’s Crown Prince Mohammed Bin Salman being three examples) taking far-reaching decisions “by themselves”, a trait he found “worrying”.

Despite the recent altercation between the UK and Russia over the alleged Russian spy poisoning in Salisbury, Gardiner sees Russia as an ally with Europe in the face of recent announcements from Washington.  “The fact the Iran deal has put America on one side and Russia with Europe on the other is quite encouraging. We need Russia inside the tent,” observed Gardiner, who believes that EU/Russia relations will continue to improve if there are “no further provocations”.

Commodities, said flow’s trade economics contributor Dr Rebecca Harding, have become a weapon of choice, in advance of the latest US$100bn tariff on Chinese imports. With US President Donald Trump having declared that “trade wars are good and easy to win”, her session, presented together with former HSBC commodities chief Jean-Francois Lambert (Lambert Commodities), made it abundantly clear there were no trade war winners. This “great unbalancing of politics and economics”, as states wield trade coercively, could impact trade finance flows, they said. Why? Banks will weigh up the risk of a potentially “sticky trade flow” when making financing decision, and put banking licence retention in a key geography above the borrower relationship.

Figure 1: Oil supply needs to meet long-term demand

Source: 2018 BP Energy Outlook

As for the supply and demand for oil, John Goodrich, Head of Origination West Africa at BP provided a helpful reminder that growth in energy demand from non-OECD countries is set for further rapid growth, driven by increased prosperity in geographies such as China, India and Africa. This demand is being met by increased supply from OPEC and the US, but long term supply will need to increase to meet the world’s demand.

Trader tenacity

At the beginning of 2017, Deutsche Bank, together with TXFData, demonstrated how commodity traders were doing the “heavy lifting” when it comes to financing the small and medium-sized commodity enterprises. They had topped the 2016 borrowing leagues with their large revolving credit facilities, which they lend on to the SMEs, securing their supply chains. In ‘The year of the trader’, we noted that Glencore and Trafigura between them accounted for 12 transactions between them to the tune of US$25bn.

The dominance of the traders in the borrowing league tables was pretty similar in 2017 – with Trafigura and Glencore being the largest single recipients of bank debt in H1 2017, and Vitol superseding Glencore as the second largest recipient by the end of 2017 (see Figure 1).

Figure 2: Top borrowers in 2017

Source: TXF Data

It fell to the trader panel at the conference to share a little more about their ongoing appetite for commodity financing and the practicalities of what happens when prices rise. Representatives from Archer Daniels Midland, Met Group, Gunvor, Gazprom Marketing & Trading and Trafigura did agree that that while increasing oil price was “good news”, bigger lines are needed to finance the flows.  Head of Trade and Corporate Finance from Gazprom Marketing & Trading Ltd, Nataliya Frolova, welcomed the doubling of LNG trade over the past ten years, and also confirmed that non-banks were just too expensive for additional liquidity.

gazprom
Nataliya Frolova of Gazprom Marketing & Trading says non-banks are too expensive as sources of liquidity

As one panelist put it, “When a cargo of oil is worth US$80m instead of US$40m, because the oil price has doubled, you need more bank lines, and we will see traders competing for liquidity from banks. Even a trader such as Trafigura with its 122 banks on board needs regional banks, said Nicolas Jobert, Head of Structured Trade Finance, EMENA for Trafigura. Tawfik Sadfi, Head of Structured Trade Finance at Gunvor agreed with Gazprom Marketing and Trading’s Frolova that banks were the preferred source of liquidity and he believed there was still considerable scope for banks already in the business to increase their secured lines.

A few weeks before the event, telephone research of 60 senior professionals at commodity trading houses conducted by TXF in association with law firm Allen & Overy formed the findings of the Commodity Finance Market Report 2018 . This was released on 17 May and distributes to conference delegates. The research underlined what traders were saying at the conference – the cost of borrowing will increase. “This can be attributed not only to internal market issues – such as banks’ risk perception – but also to external factors such as more widespread interest rate rises,” notes the report.

Producers and the long road to recovery

Mac Panel
Left to right: Pierpaolo Di Fabio, KME Group; Canan Tulum, Petrochina, Alexander Lyubarev, Metinvest; Andrii Okolnych, DTEK; John MacNamara, Deutsche Bank (source: Deutsche Bank

A number of producers rely on access to coal to power their processing works, often vertically integrating coal production into the organization to guarantee low-cost supply. Examples include Chinese aluminium processor Qiya and Ukrainian iron ore producer Metinvest. However, a list of 35 bank coal lending policies from coalbanks.org in the 2018 H1 TXF Chronicle was a reminder that while coal has been a strong commodity performer over the past three years, it will need substitution. Its impact on the environment has raised reputation risk issues for lenders.

This was just one of the discussion points that came up on a panel of commodities producers chaired by Deutsche Bank’s Head of Structured Commodity Trade Finance John MacNamara. “Is electric going to solve everything, is there an electric car equivalent to a coal-fired power station?” he asked. Andrii Okolnych, Corporate Finance Manager at DTEK, Ukraine’s main supplier of energy confirmed that while he did think coal would be substituted within the next 20 years, storage of energy remains an issue and coal is used to cover the peaks. While DTEK is investing in renewables, as yet the output is not predictable enough to cover demand met by coal, he explained.

The importance of geography was underlined when Metinvest’s Aleksandr Lyubarev explained how the Ukraine conflict and resulting sanctions created huge liquidity problems.  “We lost nearly all our trade finance”, said Lyubarev. The company went on to restructure its debt and announced a US$1.592bn in new bonds and secured US$765m in the PXF facility on 24 April 2018. In a press release, CEO Yuriy Ryzhenkov made a point of thanking lenders and investors for “demonstrating their steadfast belief in Metinvest Group’s story”.

TXF top takeaway on this one as a result of the ensuing panel discussion and Q&A session noted that coal would go on being used for decades.  “The financing of coal will move from international to local banks, plus some traders. As clean-fired coal-powered technology improves there will be a major rethink by agencies.” In addition, the increasing pull to sustainability investment within the commodity sector was a common theme in a number of sessions – work underway in the soft commodity sector has now moved along into metals and energy products.

Dry bulk and tanker market perspectives

Shipbrokers Simpson Spence Young’s John Kearney continued the theme of environmental impact by reminding delegates of how the global cap on marine bunker sulphur content is being cut from 3.5% to 0.5% on 1 Janaury 2020. Compliance with this International Maritime Organization requirement means, he said, that ships would need to comply either be switching to ultra-low sulphur fuel oil, marine gasoil or LNG or install exhaust gas cleaning systems (scrubbers). The knock-on effect of this was higher bunkering costs, and general upward pressure on dry bulk and tanker freight costs in 2020.

However, the dry bulk shipping sector has recovered well after a thin period that saw some of the lowest dry bulk carrier rates for 30 years – US$20,000 a day being some way off the boom years of 2007 and 2008 when vessels earned US$100,000 a day. The recent uptick since 2016 has been largely driven by an increased demand in the steel supply sector.

Figure 3: Chinese dry bulk imports by cargo

Source: Simpson Spence Young/ Chinese Customs/SSY
In addition, Chinese consumption in a range of commodities will also continue to strengthen the dry bulk shipping market.  However, warned Kearney, “trade growth could be restricted by cargo disruptions, government interventions and structural actors in the iron ore and coal markets.”

Celebrating success and digging deep

One of the highlights of this event is the recognition of the TXF Commodity Trade Finance Perfect 10 Deals of the year at the industry dinner, where Deutsche Bank celebrated the inclusion of the Shandong Qingyuan Group’s US$650m structured prepayment financing and KAZ Minerals US$500m pre-export finance (see the flow article, Breaking ground and digging deep for further detail on these deals).

Mac_shave
Having raised €26,500 for charity, John MacNamara of Deutche Bank gets a complete shave from TXF’s Dominik Kloiber (who underwent the same thing a year ago). Source: Deutsche Bank

Collective generosity broke new ground when Deutsche Bank’s John MacNamara (Mac) agreed to have his hair all shaved off if delegates pledged/donated more than €20,000 in support of TXF’s chosen charity, UNHCR, the UN refugee agency. This was too tempting for most delegates and a total of €26,500 was raised and it was the clippers for Mac on stage the next morning.

 “Our trade finance business connects countries and societies worldwide as they develop. Sadly, as a consequence of geopolitical disruption, people are deprived of their homes and desperately need the support of charities such as the UNHCR. This small sacrifice of mine is the least we can do, and I am grateful to all those who pledged support on the spot,” said MacNamara. It would appear this is turning into an annual tradition (TXF’s Dominik Kloiber having undergone the Big Shave last year).

Hairless in Amsterdam

As the event drew to a close on Day 2, a number of us were wondering not only what the oil price would be this time in 2019, not to mention if trade wars really are “good and easy to win”, but…who would be next up on stage for the fundraising shave. Time to pass this philanthropic opportunity to other banks, we agreed on the Deutsche Bank tables.

 

A close shave

TXF Amsterdam 2018, Natural Resources & Commodity Finance took place on 17-18 May at the Grand Hotel Krasnapolsky in Amsterdam, Netherlands

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1 The Port of Rotterdam (largest in Europe and 9th largest in the world) confirmed increases in dry bulk (coal, metals, agri) and liquid bulk (crude oil) for 2017. See statement here

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