Access to funding continues to be a major factor in the commodity finance sector according to a report launched today by Allen & Overy and TXF Media. Engaging with 153 participants split 50:50 between commodity traders and other industry participants (banks, insurers, professional services firms, brokers and collateral managers) in major regional markets in Europe and Asia, the survey was conducted to capture the pulse of the industry in order to provide this authoritative Commodity Finance Market Report on the condition of the commodity finance market.
A standout trend is that half of small and medium traders consider restrictions in accessing financial services, especially from banks, to be a major factor in the commodity finance sector.
Commenting on this trend, Amsterdam partner Niels de Ru said: “The survey shows that while only a quarter of larger commodity traders found access to funding to be an issue, half of small and medium traders found it to be a major factor with 40% of them reporting that access to funding has actually affected their market position. 82% of all those surveyed agreed that there is now a two-tier trading system which is regarded as one of the most difficult challenges in the industry and one where an arguably insufficient amount of progress has been made.”
Another trend which has now reached the commodity finance sector is the increasing use of alternative lenders in 2016, aligning it with the broader funding landscape. Results highlighted that despite the higher cost of non-traditional funding, over half of the interviewees (53%) turned to alternative lenders last year. Smaller corporates have been accessing funding via alternative lenders for a number of years, so it’s no surprise that to stay competitive, small and medium traders have started turning to these providers too. It’s well known in the industry that they have a higher risk appetite and a solid understanding of particular markets in which smaller traders want to grow. Corporates continue to remain ambitious in the market and are keen to seek out opportunities to do business in riskier geographies and sectors.
With legal and regulatory hurdles being cited as the biggest barrier to entering new markets, the legal sector is another industry that is benefitting from providing specialist expertise, with alternative legal services proving an increasingly attractive proposition. For both bankers and corporates, the main reason why external legal partners are appointed is for their specialism and expertise in specific markets, commodities, structures and regions. Alternative legal services can provide a cost-effective solution for both banks and corporates. However, corporates are taking greater advantage of these services with 41% stating they have used them compared with just 8% of banks. Large traders are the greatest consumer of these services with 55% reporting that they have used them.
Niels de Ru commented: “Banks are very familiar with contract lawyers as almost two-thirds (65%) stated they used them in 2016, but they could be making more use of the cost-effective alternative legal services model that corporates are taking advantage of.”
In 2016, global commodity finance volumes were USD134 billion, up 19% from 2015*. The results from the survey showed that secured deals now lead the way with a strong return to the market of pre-export finance (PXF) facilities, partly buoyed by the increased activity in Russia since sanctions were first introduced.
Niels de Ru said: “Almost three-quarters (74%) of commodity finance market participants are mainly involved with secured deals and in general they are significantly engaged in more deal structures than they were two years ago.”
This diversification of their financing toolkit helps to act as a buffer against the movement in the market of banks and gives them the flexibility to adapt when necessary.
There is a growing interest in the way technology can make processes more efficient, safer and cost-effective. When asked what form of technology would be used most over the next 12 months, over a third of respondents (38%) said Blockchain. This trend is already visible through a number of cases involving distributed ledger technology in the commodities industry from Trafigura trialling it as a way to settle deals in the oil market in the U.S. to Mercuria’s attempts to use it to create simpler, permanent and public ‘ledger’ of transactions in a chain.
Fieldwork was undertaken between 15 March 2017 and 3 May 2017. Trader respondents all have substantial decision-making input over their company’s funding programmes and the split between SME and large traders was 50:50. Percentages may not always add up to 100% due to roundings.
*TXF Commodity Finance Data Report, 2016