What happened at the Structured Commodity Finance event?

London, 17 April 2018.

Commodity prices have continued to challenge markets in 2018 and we are possibly at the peak of global and Chinese growth. A bearish view on commodity prices was presented in 2018, driven by aggressive US foreign policy on Iran, tariffs on commodities such as aluminium and steel, as well as tensions between the US and China threatening a potential trade war. The end of 2017 and early 2018 saw a rally in Gold prices driven by economic and political instability, as well as Brent price increases as a result of OPEC agreements.

What’s happening in the world of commodity trade flow?

Commodity traders marked the first quarter of 2018 as positive – US banks have enjoyed some tail winds from the interest rate hike at the end of 2017 and general global economic growth in terms of GDP. For commodities and structured finance, there has seen some trade growth as a result of GDP growth amidst challenges from producers sitting on their cash. For banks, as shareholders demand returns on their investments, a retraction from trade finance has continued over questions on profitability and protecting an ever increasing balance sheet which is a scare resource. Alternative finance has also seen growth, particularly in the bond market.

The elephant in the room was the US sanctions list published on the 7th April, as well as the potential of China trade wars which has driven uncertainty in commodity markets. The latest ofac sanctions are very different in nature to the US / Russian sanctions from 2014. Blocking Russian oligarch transactions, accounts and trades from sanctioned entities has proven difficult and disruptive for banks and financial institutions, which could impact markets such as the metals market (where Russia supplies 5% of the global aluminium and steel market) in the mid to long term.

Could the blockchain take over the trade cycle?

It’s estimated that around a fifth of trade finance costs derive from documentation, KYC and compliance – all of which have potential for efficiency and innovation through technologies such as blockchain. 

Packed house at the start of @KNect365’s Structured #Commodity #Finance conference in #London this morning. I’ll be on shortly discussing #blockchain #dlt #cryptocurrencies #scfinance pic.twitter.com/9GZVvVkuPS

— Edward George (@DrTeddGeorge) April 17, 2018

Dr Edward George, blockchain and cryptocurrency expert at Ecobank talked of the value of blockchain in the supply chain and within commodity finance. Given the chronological record of transactions in the blockchain, lack of central authority, enforcement of obeying to rules and the truthful nature of blockchain, George highlighted the potential use cases of blockchain in trade finance.

There are several companies who are disrupting trade and commodity markets right now, including international payments engine BitPesa in Pan Africa and RXIL, The Receivables Exchange of India, disrupting the Bills of Exchange and invoice discounting market for Indian SMEs. 

Can technology change the game?

The potential for disrupting trade flows through technology continues to grow. In terms of commodity trade finance, the future is certainly technology – banks are beginning to team up with smaller partners and also bilaterally investing in technology but there are many complexities and hurdles around cooperation with other banks, creating platforms and meeting compliance requirements.

Compliance and AML checks continue to challenge banks and balance sheets. With banks hiring armies of compliance officers to ensure they are taking appropriate measures to comply with sanctions and AML, the next step is to look at how technology and AI can cut compliance costs rather than employing specialists in the space. 

How are trade flows financed?

The conference also looked at how banks and funds support producers.

From the borrower’s perspective, it always remains important to diversify funding sources to reduce exposure and risk, as well as issues that could arise in the case of repayment challenges and defaulting.

The importance of bank funding in terms of flexibility and the ability to work with Export Credit Agencies (ECAs) is crucial in providing export finance to traders and producers on a mid to long term basis. 

However, alternative finance has it’s advantages in more flexible short term finance, helping producers access quick fixed rate finance for working capital.

As the commodity markets change and grow, it’s certainly time for banks to look at commercial banking from a different lens and fully understand trade flows and trade cycles.

What is structured commodity finance?