Commodity Trade Finance

CAIA Zurich

February 2013

Contents

Some statistics about world trade

03

Financing the commodity trade flows

06

Commodity trade finance : the market

08

Why invest in commodity trade finance

12

Contacts

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GALENA ASSET MANAGEMENT | CAIA Zurich - FEBRUARY 2013

Some statistics about world trade I

Source : WTO
3

GALENA ASSET MANAGEMENT | CAIA Zurich - FEBRUARY 2013

Some statistics about world trade II

(*)

Source : WTO

(*) Financial crisis in 2008 led to a general fall in commodity prices in 2009

GALENA ASSET MANAGEMENT | CAIA Zurich - FEBRUARY 2013

The ten biggest traders of world commodities

Trading houses extensively use trade finance structures to finance their physical trading
activities. These can have different forms and are generally provided by large international
banks. These players are at the heart of international trade flows.
Name

2010

Activities

Main Office

Turnover1
Vitol

195

Physical oil trading and refining

Geneva, Switzerland

Glencore

108

Metals and minerals, energy and agricultural products

Baar, Switzerland

Cargill

108

Metals and minerals, energy and agricultural products

Minneapolis, Minnesota

Koch industries

100

Oil refining and transportation, petrochemicals, forestry and paper, and ranching.

Wichita, Kansas

Trafigura

79.2

Crude oil, products, non-ferrous, concentrates and refined metals trading and
transportation

Geneva, Switzerland

Gunvor international

65

Oil trading with emphasis on Russia. Has expanded in power and coal trading

Geneva, Switzerland

Archer Daniels Midland

(ADM)

62

Oilseeds, corn processing, agricultural services, storage and transportation, wheat

milling, cocoa processing and food ingredients business.

Decatur, Illinois

NOBLE Group

56.7

Soybeans, oil seeds, grains, coffee, cocoa, sugar, cotton, coal, clean fuels e.g.
ethanol, ferrous and non-ferrous metals and vessel chartering.

Hong Kong, China

Mercuria Energy Group

462

Physical crude oil and oil products including fuel oil, middle distillates, naphtha and
gasoline. It also trades power, natural gas, coal and biodiesel.

Geneva, Switzerland

Bunge

45.7

Oilseeds and grains, produces sugar and ethanol, mills wheat and corn to make
ingredients used by food companies and sells fertilizer in North and South America

White Plains, New York

Total

865.6

Source: The Telegraph, April 2011,

1
in USD Billions 2 2009 Turnover

GALENA ASSET MANAGEMENT | CAIA Zurich - FEBRUARY 2013

Commodity trade finance : the value chain (simplified)

The different players have different financing needs adapted to their respective production cycles

Producers

Origination

Traders

Processors

Traders

DOWNSTREAMING

Financing

Destination

Post trade financing (short term)

Borrowing base financing (revolving)
Transactional financing (short term)

Pre-payments / Pre-export finance (medium term)

End users

GALENA ASSET MANAGEMENT | CAIA Zurich - FEBRUARY 2013

Commodity trade flows need financing

Lenders

Commodities generate trade flows that in turn generate financing needs at all stages of the
supply chain:
> Producers / exporters
FINANCING NEEDS:
> Trading companies
Pre-payments / Pre-export finance
Transactional financing
> Processors
Post trade financing
> Importers
Borrowing base financing
> End users / distribution

Commodities trade flows intervene at an early stage of industrial processes and economic life in
developed and emerging countries. They are therefore highly strategic for most countries,
industrial companies and end users which makes the financings attached to them strategic too

As a result, financings linked to commodity trade flows have demonstrated a high level of
resilience and robustness, particularly during economic down cycles

GALENA ASSET MANAGEMENT | CAIA Zurich - FEBRUARY 2013

Commodity trade finance : the market

>

Commodity finance is predominantly a bank market dominated by large commercial banks.

European banks are among the top players with global reach (geographies, commodities,
borrowers)

>

Commodity Trade Finance has grown faster than other syndicated financings:

Development of free trade policies

Growing investment and consumption needs in emerging countries

Significant increase in volumes traded and in prices fuel for growth effect

Growing demand for secured assets due to change in risk appetite by banks, new regulatory
framework and constraints on liquidity

>

Despite the credit crisis and tougher regulations several top commodity finance banks have stated
that commodity trade finance remains within their core lending activity. As a comparison these very
same banks have closed or dramatically reduced other lending activities. This demonstrates further
the resilience of the asset class through the cycle

>

Regulatory capital treatment remains favorable when compared to other lending businesses
although at a level higher than historical performance

GALENA ASSET MANAGEMENT | CAIA Zurich - FEBRUARY 2013

Commodity trade finance : challenges

REGULATIONS

ENVIRONMENT

>
>
>
>

Growing capital and liquidity requirements

Restrictions on banking business model and activities
More constraints on accounting rules
Greater scrutiny of regulators and governments

>

Pressure on European banks to reinforce their capital base

and stable funding
Greater defiance of USD lenders vis--vis European banks
Banks seeking solutions to meet their funding requirements
of their USD assets base

>
>

GALENA ASSET MANAGEMENT | CAIA Zurich - FEBRUARY 2013

Trade finance example - Crude oil from Angola to the US

Pre Export Financing example of Angolan crude oil exports to US refineries

Angola

USA

Local
Exporter

Refiner

OPEC member

Largest consumer of liquid

fuels with 23 mbbls/day

7th largest producer with

1.8 mbbls/day

Imports account for approx.

50% of consumption

Crude oil accounts for 90% of

export revenues and 80% of
GDP

Pool of Lenders

Largest importer of Angolan

crude oil with more than
500000 bbls/day

2
Offshore Account

Based on solid track record

of Angolan crude oil exports
to US refiners, a pool of
Lenders will pre-finance
future exports of Angolan
crude oil by a local exporter
(the Borrower) to US
refiners.

The financing is secured as the Borrower assigns the

proceeds of the exports contracts payable in an offshore
collection account pledged to the Lenders.
The actual and future value of the export proceeds (based
on prevailing market prices) shall at all times represent
more than 100+% of the outstanding amounts under the
financing.
Additional security package can include security
interest in onshore current and fixed assets.

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GALENA ASSET MANAGEMENT | CAIA Zurich - FEBRUARY 2013

On receipt of the cargo the

Refiner pays into an Offshore
Account pledged to the Lenders.
The financing is then repeated.

During the whole

transaction price risk
is mitigated.

Understanding the commodity

Understanding and mitigating the risks behind a commodity transaction is at the heart of the
expertise
Mitigants
The risk that an exporter does not deliver the goods in the context of a commercial
contract backing a credit facility

Track Record, contractual terms, capacity and cost

analysis

The risk that commodities price volatility negatively impact the cash flows of a
specific transaction or the value of assets

Overcollateralization, marked-to-market
adjustments or hedging

The risks inherent to the situation of a particular country that may directly or indirectly
negatively affect a transaction

Analysis of commoditys strategic importance,

offshore repayments, political risk insurance.

The risk related to the financial health of a counterparty based in most cases on an
assessment of the business model, balance sheet and income statements and cash flow
analysis

Financial analysis of the company, ownership and

strategy. In-depth liquidity analysis.

The risk that an importer does not comply with its payment obligation in the context of a
commercial contract backing a credit facility

Track record, letter of credit or payment guarantee

Self Explanatory

Track record, insurance

Goods delivered do not comply with contractual specifications in terms of quantity and
quality

Track record, Client/Supplier relationship,

overcollateralization, first class inspection
companies

FX

Self Explanatory

Trade is back to back in USD, offshore repayments

Legal

Self Explanatory

Legal opinions (local and international)

Performance

Commodity
Price

Commodity (Collateral)

Country

Corporate

Payment

Damage or loss of goods

Quality & Quantity

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GALENA ASSET MANAGEMENT | CAIA Zurich - FEBRUARY 2013

Why invest in commodity trade finance

Today more than ever Commodity Trade Finance represents a stable and de-correlated yield
enhancer

12

>

Global commodity trade of strategic commodities will continue to grow fuelled by new
emerging demand

>

The default rate is minimal compared to other debt investments as credit line is secured or
backed by underlying commodity flows. Risk profile is also improved by the strategic nature
of commodities that provide a strong incentive to the parties involved to perform their
obligation even in times of stress: commodities need to flow on a continuous basis

>

Enables to participate in global commodity trade without being exposed to underlying

commodity volatility

>

Tightening regulations are forcing banks to limit the size of their balance sheets and pushing
them to increasingly syndicate their very good quality assets

>

Current risk free levels highly improve the strategys risk return attractiveness.

GALENA ASSET MANAGEMENT | CAIA Zurich - FEBRUARY 2013

Contacts
United Kingdom
Galena Asset Management Limited
Portman House
2 Portman Street
London
W1H 6DU

Tel: +44 (0) 207 170 7917

Fax: +44 (0) 207 170 7800

For additional information

please contact:
information@galena-invest.com

Singapore
Galena Asset Management Asia Pte. Ltd.
10 Collyer Quay
Ocean Financial Centre #29-00
Singapore 049315
Singapore

Tel: +(65) 6319 2960

Fax: +(65) 6734 9448

Switzerland
Galena Asset Management B.V.
Geneva Branch
Rue de Jargonnant 5
1207 Geneva
Switzerland

Tel: +41 (22) 594 6900

Fax: +41 (22) 594 6901

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GALENA ASSET MANAGEMENT | CAIA Zurich - FEBRUARY 2013