Commodities traders in search for new lenders

Gone are the days whereby European banks including BNP Paribas and Credit Agricole take the lead in providing commodities finance. Small and mid-sized commodity traders are turning to Asian banks, such as China Construction Bank, and Middle Eastern players like First Gulf Bank, as their traditional creditors’ dollar funding dries up. Edward George, a soft commodities analyst at pan-African bank Ecobank made an estimation that “European banks’ share of the global commodities trade finance business has shrunk from 75 percent to 50 percent over the past few years”.

So, what’s the cause of this significant drop besides a lack of dollar financing? Basel III, a set of stringent new rules governing capital requirements seems to be the culprit. The regulations which will be introduced in phases from next year are asking for higher levels of capital and reserves at bank. And this simply means that commodities lending will become more costly!

With a tougher operating environment, who would expect the number of banks participating in revolving credit facilities to be on the rise? But this is indeed happening – though participation comes from new banks that are smaller than the usual core players. As mentioned by Michael Rolfe, global head of commodity trade finance at UniCredit, “these new players operate on a much smaller scale, often offering just $5 million at a time for multi-million dollar deals”.

A door is open when another is closed! The development of the entire episode has spurred the interest of regional players to enter. These regional players who come from producing regions are not to be taken lightly as they are likely to have good access to dollar financing which can probably solve your woes.

What do you think the future of commodities finance might be? Join us at Commodity Trade & Finance World Asia 2013 to learn about the supply and demand outlook and new commodity trading routes and opportunities!