By Joe Wallace
European banks have grown wary of financing commodity traders,
raising borrowing costs and endangering smaller firms in the market
for raw materials.
ABN Amro Bank NV is pulling out of trade and commodity finance
altogether. ING Groep NV will likely enforce stricter monitoring
and control over commodity deals it finances to reduce risks, said
a person familiar with the matter. BNP Paribas SA, formerly a
powerhouse in commodity-trade finance, is scaling back, a person
familiar with the company said.
Banks are responding to the rout in oil prices, a spate of
alleged frauds, a drift into riskier forms of lending and investor
pressure over climate change. Their retreat is likely to
concentrate the business of transporting oil, metal and grain in
the hands of large traders that still have access to cheap
funding.
Smaller traders, in contrast, are finding it increasingly
difficult to borrow from banks, prompting some of them to seek out
new sources of financing. That could come from their larger rivals
or from trade-finance funds. Some will be pushed out of business
altogether, according to industry executives, bankers and
lawyers.
"The biggest impact will be on smaller players," said Jarek
Kozlowski, chief financial officer at power-and-gas trader
TrailStone Group. "They will have difficulty finding funding."
Banks fund traders through traditional forms of trade finance
such as letters of credit -- a payment guarantee to suppliers -- as
well as revolving-credit and borrowing-base facilities. In doing
so, they grease the supply chains that ship oil, metal and grain
from producers to consumers. Trading houses rely on borrowed money
because the cargoes they handle can be worth tens of millions of
dollars. Higher funding costs pose a danger because they run on
thin margins.
Commodity trading is already dominated by a clutch of global
players, including European traders Vitol Group, Trafigura Group
Pte. Ltd. and Mercuria Energy Group Ltd., and U.S. agricultural
giants Archer Daniels Midland Co., Bunge Ltd. and Cargill Inc.
Banks will keep competing to lend to large traders, preventing a
large rise in their borrowing costs, said Philip Prowse, a partner
who specializes in commodities trade finance at law firm HFW in
London.
"The big traders are very resilient and will always be
well-supplied by the big banks," said Mr. Prowse. "There will be
very little left for the traders beneath that very large size."
A drop in competition could help boost margins at the largest
traders by enabling them to charge more from oil refiners, copper
smelters and other customers while paying less for commodities,
said Craig Pirrong, a finance professor at the University of
Houston. Doing so could raise prices for end consumers and put more
pressure on commodity producers, such as miners and energy
companies.
Smaller traders are more exposed. Banks have become more
cautious about lending to them since a series of blowups earlier
this year, said Marie-Christine Olive, Citigroup's head of natural
resources for Europe, the Middle East and Africa.
"There's a flight to quality," said Ms. Olive. "How many
[commodity traders] will be left?"
Singapore energy trader Hin Leong Trading Pte. Ltd. was placed
under judicial management in April, owing $3.5 billion, mostly to
banks. Founder Lim Oon Kuin was charged with abetment of forgery in
August.
Other traders to hit financial trouble include GP Global Group,
a trading, refining and logistics company in the United Arab
Emirates. In July, GP said it would restructure after finding
itself "unable to get full support from a few financial
institutions" despite constantly seeking credit lines to fund its
trading activity. An external restructuring officer at FTI
Consulting is hopeful that an agreement with creditors will be
reached, a GP spokesperson said.
Several of this year's implosions -- including those of Hontop
Energy (Singapore) Pte. Ltd. and ZenRock Commodities Trading Pte.
Ltd. -- have taken place in Singapore. That has raised concern
about the city-state's oversight of trading firms.
Regulations designed to make the financial system safer after
the 2007-2009 crisis have made low-risk, high-volume trade finance
less attractive, according to John MacNamara, chief executive of
consulting firm Carshalton Commodities Ltd. This prompted banks to
take greater risks by lending on an unsecured basis, skimping on
due diligence, and insuring a smaller portion of their loans.
"Banks have rather dropped their trousers to get new business in
terms of trade finance," Mr. MacNamara said. "The unintended
consequence of Basel III was we took more risks."
The threat of sanctions has also prompted banks to retreat, said
Mr. Prowse. BNP Paribas shrank its business after pleading guilty
to crimes of violating U.S. sanctions in 2014.
Commodity-trade finance isn't the money spinner it once was.
Revenue has slid over the past five years, and the coronavirus
pandemic dealt another blow. Turnover from commodity-trade finance
dropped to $1.7 billion in the first half of 2020, down almost a
third from the same period last year, according to Coalition, which
tracks data on banks.
Then there is pressure from investors on European banks to
reduce the amount they lend to carbon-intensive industries, a
particular issue for companies that earn most of their money from
coal. Natixis SA, for example, in May said it would withdraw from
the thermal-coal sector in members of the European Union and
Organization for Economic Cooperation and Development by 2030.
Société Générale SA remains committed to the business of
financing natural resources, but it is consolidating in Asia to
serve key clients from Hong Kong, said a person familiar with the
matter. The move was earlier reported by Bloomberg News.
ING is likely to raise borrowing costs and reconsider lending in
the absence of collateral, the person familiar with its planning
said. A spokesman said the Dutch lender currently has no plans to
exit from the business.
Margot Patrick and Julie Steinberg contributed to this
article.
Write to Joe Wallace at Joe.Wallace@wsj.com
(END) Dow Jones Newswires
September 05, 2020 05:44 ET (09:44 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
ING Groep NV (EU:INGA)
Historical Stock Chart
From Aug 2024 to Sep 2024
ING Groep NV (EU:INGA)
Historical Stock Chart
From Sep 2023 to Sep 2024