In August, European banks ABN Amro and BNP Paribas announced they were leaving the commodity trade financing business. Recent high profile frauds, thinner margins, huge losses and increasingly stringent regulations are some of the reasons why. Recent commodity trading troubles in epicentre Singapore may have quickened the shift in sentiment.
Research by Bloomberg and the Financial Times show that thus far this year, four major Singaporean commodity trading firms have either been overly late on their obligations due to huge losses, or earned the ire of their banks due to dodgy accounting trying to hide them, or been forced into receivership or engaged in outright fraud with trade documentation.
While global commodity traders are likely to remain spoilt for choice on willing financiers, the evolving dynamic adds to the already myriad challenges African banks face doing the business. Higher financing costs eat into already thin margins. Increasingly less willing correspondent banks would ask for more guarantees. More due diligence and expensive fees add to the already high cost structures of many African banks. That said, what do bankers on the ground in African countries think?
Still bright long-term prospects
“The actions taken by some of our European counterparts is not entirely a surprise, especially with regard to the consumer (soft commodities and agriculture) and energy sectors”, says Amish Shunker, head of the trade and working capital solutions structuring group at Standard Bank in Johannesburg. “Over the last 12-18 months, this was in fact something done by a few other names”, Shunker adds.
What is pertinent is that these incidents have forced introspection at global banks, with some choosing to jettison the trade finance business, and the likely consequent reverberations at African banks
According to Standard Bank’s Shunker, “the action is reflective of a change in operating and business models, redefinition of strategy and in some cases a change in leadership.” Naturally, “the oil price decline at the end of February, the COVID-19 pandemic and its impact on market demand and supply chain disruption have exacerbated some of these intentions and actions”, Shunker adds.
A pervasive shortage of hard currency across the continent add to banks’ trade finance woes. Big trade deficits already recorded by key African countries this year point to difficulties. Volatile and bearish commodities markets have not helped either.
Oil traders languished a long time as markets went haywire, with oil prices going negative at some point, before industry cartel OPEC took action. Reduced demand owing to the coronavirus, disrupted global supply chains due to port shutdowns, and diminished production, as factories were shut, were some of the underlying factors.
What is pertinent is that these incidents have forced introspection at global banks, with some choosing to jettison the trade finance business, and the likely consequent reverberations at African banks.
Moody’s Kypreos provides a good synopsis on the current state of play. “With subdued demand and low commodity prices, immediate prospects are limited.” Unsurprisingly, “international/regional banks are reducing their risk appetite in this sector, due to concerns about dollar liquidity shortages in specific countries”, adds Kypreos.
But these are probably short-term jitters. Because according to Moody’s Kypreos’ exposition, “long-term prospects remain robust, as African commodities will be in great demand when the large global economies (especially China) start growing strongly again.”
Still, there are secular structural issues that could weigh on a potential recovery. This is because a “growing emphasis on Environmental, Social and Governance (ESG) considerations may place some pressure on specific commodities (e.g. coal)”, says Moody’s Kypreos.
In general, however, it should not be much of a constraint across the gamut of the continent’s main commodities exports. “Specifically for the oil & gas sector, new Africa findings and subsequent exploitation can have a material benefit to these economies, at least over the medium term”, Moody’s Kypreos opines.
In any case, “since July, there has been an incremental and more pronounced opening of economies, with reference to trade flow”, says Standard Bank’s Shunker. And “while we could very well see a few curtail the extent of their trade finance offerings, I still foresee the continuation of this business in many banks on the continent into the future”, concludes Shunker.
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