Commodity finance slump threatens global trading, report says

SEP 7, 20155:07 PM

[GENEVA] Small and mid-sized commodity traders are being squeezed as banks retreat from global trade finance or offer the "wrong type" of loans, according to law firm Clyde & Co.

Trade finance is harder to access today than it was a decade ago, according to 77 per cent of companies and executives surveyed in the report to be published Monday by the London- based legal firm. Bank-led trade finance has slumped by half from a peak of US$14 trillion before the global financial crisis in 2008 to about US$7 trillion, Clyde & Co said. That's forcing traders and commodity producers to rely on a "complex patchwork" of financing to meet their needs.

"That is a massive drop in trade finance, which has meant there is a massive gap for producers, suppliers, commodity traders, logistic companies and purchasers," Philip Prowse, a partner at Clyde & Co, said in a phone interview from London.  Banks which once provided as much as 80 per cent of the financing for the trading of commodities worldwide now account for about 50 per cent, according to estimates from the Bank for International Settlements. That's forced some to seek out alternatives such as private equity, trade-finance funds or credit provided by major commodity-trading houses.

The majority of traders and other respondents to the survey said they can access trade-finance structures such as revolving- credit facilities and receivables financing. These options aren't sufficient as 70 per cent said they would like to see a return to old-style "relationship" banking structures. Almost 80 per cent said they wanted a return to pre-export structured financing and about 90 per cent of respondents to the survey said they wanted more creativity and lending options tailored to their needs.  "Where we are in trade finance today is not really fit for purpose," Mr Prowse said.  Increased regulatory scrutiny and more stringent lending rules, including greater capital requirements for loans as well as bank balance sheet restructuring, have suppressed both the capacity and appetite of banks to lend, according to the report, BNP Paribas SA, once the dominant bank in commodity trade finance, has cut commodity and energy-finance staff in Geneva and reduced or halted credit to some clients.

Emmanuel Rogy, head of energy and commodity finance at BNP, told Swiss newspaper Tribune de Geneve in April that commodity trade finance had become "less important" for the bank. BNP agreed to pay a record US$8.97 billion fine to the US government in June 2014 and pleaded guilty to processing banned transactions involving Sudan, Iran and Cuba.  As banks like BNP withdraw, lenders from the Middle East and Asia are stepping in with trade-finance units. These new options are not seeing widespread adoption or proving entirely satisfactory, according to the report.  The World Trade Organization expects the global population to surpass 9 billion by 2050, with much of the growth in emerging markets in Africa and Asia.

"In order to make sure that population is looked after we need trading relationships to move commodities around the globe from where they are produced to where they are needed," said Prowse. "For trading relationships we need trade finance."

BLOOMBERG