03/03/2014 15:32 AST
[SINGAPORE] Competition in the commodity trade finance sector in Singapore is stiffening.
Continued growth in commodity trade flows into Asia, coupled with banking regulations, is fuelling a rise in the use of structured inventory financing in Asia - and propelling traditional commodity financiers ahead of newer Asian entrants.
While traditionally dominated by European banks in the past, banks such as the DBS Group and more recently, Chinese banks such as ICBC, Bank of China and China Construction Bank have also muscled their way into the commodity trade financing business, following the European sovereign debt crisis in 2011 which caused many European banks to rein in their lending.
Since then, the European banks have made a comeback. And in a bid to position themselves to capture future growth in Asia, Dutch banks ABN Amro and Rabobank launched dedicated structured inventory financing desks in Singapore in the second half of last year.
Such facilities give commodity traders access to more liquidity at a lower cost, and could also improve efficiency in working capital management for them, said commodity bankers.
"The growth story in Asia continues," said Stuart Smith, Deutsche Bank's head of commodities in Asia. "That is just tying up more and more global trade finance lines, and people look to the most effective means of applying balance sheet, and the most efficient capital usage."
He estimates that the inventory market is growing at between 5-10 per cent a year, and that there is US$15-20 billion of such financing at any one time.
Commodity inventory financing run the gamut from traders pledging a warehouse receipt for a secured loan to a repurchase transaction where the bank takes over the ownership of the commodities for a short period of time.
The latter, in particular, is increasing in use, because of the benefits it brings about for both banks and their clients. The new ABN Amro desk adopts such ownership structure, through the use of a special purpose vehicle.
"Being the owner enhances the bank's security," said ABN Amro's head of structured inventory product in Asia, Julien Moreau-Pernet.
"On top of that, since the bank's ultimate exposure for fully-hedged repos is to the exchange, the bank needs to allocate less capital under regulatory requirements for these transactions," he said. This allows banks to optimise capital allocation while offering alternative financing, he added.
Ownership of the goods also helps banks steer clear of legal complications that pledges can otherwise run into in certain countries, said L-Thanh Nguyen, head of energy and commodity trade finance in Asia Pacific at French bank Natixis.
"This is because the bank has to go through legal paths, and in some countries, it is more comfortable to be an owner of the goods rather than a secured lender."
For commodity traders, besides the convenience of a just-in-time delivery solution and better management of the balance sheet, such structures allow them access to more liquidity, as banks are more willing to extend a bigger loan against the value of the goods.
The cost of the loan can be reduced by between 10-50 per cent, especially for smaller trading firms that have lower credit rating with banks.
The cost in such structures typically depends on the fungibility of the goods.
Said Mr Smith: "If you want to finance someone's gold, you can do it very efficiently; it's very easy to sell a tonne of gold into the marketplace. If you've got 100,000 tonnes of iron ore, it's only got a certain grade, and it's only got a certain group of buyers who would be interested in buying that cargo."
Such commodity inventory financing products therefore require an intricate knowledge of commodity markets - effectively drawing a line between the European commodity trade financiers and
Business Times
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