Banks return to commodities finance

The credit crunch that has engulfed the commodities trading industry for the past two years has eased with French banks regaining their appetite to lend to the sector after a large retrenchment in 2011 and 2012.

Commodities executives and bankers in the trading hubs of Geneva and London said BNP Paribas, Crédit Agricole, ING, Société Générale and others were expanding their lending again, after cutting it to beef up their balance sheets.

“French, Italian and Spanish banks felt the liquidity issues of late 2011, but those funding concerns have now substantially dissipated,” Federico Turegano, global head of natural resources and energy finance at Société Générale, said.

The sector came close to panic 18 months ago after BNP Paribas, the biggest lender to the Swiss-based trading houses, announced it would reduce its lending. Others soon followed, leading to nervousness among trading executives. But now bankers and executives said the situation has almost returned to pre-crisis levels.

“The banks want to be again my best friend,” said an executive from a trading house which struggled in late 2011 and early 2012 to obtain credit lines.

Jacques-Olivier Thomann, president of the Geneva Trading and Shipping Association, said: “Banks are better managing their balance sheet to allocate resources to commodity trade finance again.”

Commodity trade finance is the lubricant that greases the wheels of global trade of raw materials. The business, with a turnover of around $1.5tn a year, is seen in the industry as low-return, but also low-risk. Although trade finance and commodities prices are not directly linked, executives believe that the credit crunch did dampened raw materials prices in late 2011 and early 2012.

The credit crunch largely spared the world’s top trading houses, including Glencore, Vitol and Cargill, but hit hard some small and medium-sized companies. Although credit is flowing strongly again, prices are higher than pre-crisis levels.

The retrenchment of eurozone banks in commodities opened the first opportunity for rivals in the US, the Middle East and Asia to enter the sector since the 1970s. JPMorgan and Citigroup, for example, targeted the sector, together with HSBC, Standard Chartered and Singapore-based banks such as DBS.

Timonthy Lane, deputy governor of the central bank of Canada, last September said that the market share of European banks in commodity trade finance dropped to 50 per cent in 2012 as “those banks have had to repair their balance sheets”, down from a pre-crisis level of 80 per cent two years earlier.

French bank executives acknowledge that the higher funding costs they experienced at the height of the eurozone crisis did impact their ability to finance commodity trading at low interest rates. But they argue that they continued to dominate the business. The chief executive of a Geneva-based trading house, said: “We are not back to normal, but it is fair to say that the situation has improved materially”.

Banks are working into a new type of securitised vehicle bundling together loans to commodity trading houses to try expand their lending to the commodities industry.