What’s next for commodities?

19 July 2021

Commodities are bouncing back from their Covid-19 lows and some even talk of a supercycle. flow reports on longer term issues facing the industry, such as fraud, digitalisation and ESG transition discussed at the May 2021 TXF Virtual Commodity Finance Conference

Coming off the back of one of the worst decades for commodities – with an annualised 10-year return of -8.65% for the S&P GSCI – Covid-19 has hit the industry hard.1 The pandemic impacted both the demand and supply of commodities, a result of the direct effect of shutdowns and disruptions to supply chains, as well as the indirect effects of stagnating economic growth. What a difference a year makes: in the first quarter of 2021, commodity prices continued their strong recovery – with four-fifths of commodities now above their pre-pandemic levels.2

As the industry tries to reset and the world learns to live with Covid-19, senior leaders from traders, producers, banks, law firms, brokers and insurers came together TXF Global Commodity Finance 2021 to discuss what lies ahead for the industry.

A commodities supercycle?

The commodities market has been a frontrunner in the Covid-19 recovery, with the most prominent commodity index, the S&P GSCI, up by more than 86% since last March.3 The strong rally has led to talk of another supercycle, but as Deutsche Bank’s Natural Resources Finance experts Sandra Primiero and Willem Calame observed in February 2021, supercycles are by definition years and years of a high price environment and it would take the equivalent of China going into an industrial boom all over again to drive another one.4 Speakers at the TXF event three months later were in agreement. “We have not had a synchronised rally in commodity prices since 2008 – and prices have been flat-lining for the past decade” explained Kona Haque, Head of Research, ED&F Man. But, she added, supercycles also need to be driven by long-term trends. The most recent example of a supercycle was kick-started by China’s admittance to the World Trade Organisation (WTO) in 2001, which was seen by many as a statement of intent to modernise the Chinese economy.5

What we are seeing today, however, is not equivalent to China’s industrial boom in the noughties. The Covid-19 recovery may be a linking factor, but, as Jean-Francois Lambert, Founder and Managing Partner, Lambert Commodities, reflected, the growth in the commodities market can in fact be attributed to individual – and expected – trends, including the general dislocation of supply chains, poor harvests and the overall economic shock from the pandemic. What is being perceived as a supercycle could, therefore, be the consequence of the temporary alignment of supply and demand factors to create significant spikes in prices.6

John MacNamara“The post-Covid bounce has a lot of legs”
John MacNamara, CEO, Carshalton Commodities

John MacNamara, CEO, Carshalton Commodities remained cautious, saying that, “in all my years in the industry, I do not believe I have ever seen a commodity forecast that was actually correct”. But, he added, with an enormous reflation package coming out of the US, and similar recovery initiatives expected to follow from other leading economies, such as the EU, UK and Japan - as well as the continued, successful roll-out of vaccines across the world, - the post-Covid bounce “still has a lot of legs”. The fundamentals are strong, and commodities are at the front end of every cycle. “The cycle has been on its knees in terms of lockdown, so the only way is up.” Regarding the sustainability supply aspect of commodities, he thought that there could be a bit of separation around oil given the move towards electric engines, but pointed out that many commodities are very sustainable “as you can carry on growing the or recycle them”. With a full year of price rises behind us and potentially two to three ahead one could be staring a form of “supercycle”. And of course, at a certain price point there is substitution – if copper rises to US$10,000 a ton, people will look for “something else that is cheaper”.

Commodities and fraud

“Ten years ago traders were single-product clients for banks”, began Steven de Vries Reilingh, Head TCF Agri Europe, Rabobank. “Today, however, we are seeing a trend towards a diversification of liquidity, whether that’s through receivables financing, repo transactions, revolving credit facilities or even commodity swaps.”

In March 2020, commodities giant Agritrade International was accused of “massive, premeditated and systematic” fraud.7 Shortly thereafter, Singapore oil trader Hin Leong collapsed, amid reports of a reliance on fake trades, forged documents and dubious financing to help cover up huge losses.8 As a result of these and further scandals throughout the year, total commodity trade finance revenues for banks globally dropped to US$1.7bn in the first half of 2020, a 29% decline from 2019.9

This episode, explains Evgeny Poluektov, Executive Director, Head of Client Relations & Business Origination Department, Gazprombank (Switzerland) Ltd., has led to a deterioration of trust between banks and traders – and leading players in this space have either left entirely or significantly reduced their presence as a result. In August 2020, for example, Dutch bank ABN Amro announced a complete withdrawal from the trade and commodity finance market, while Société Générale and BNP Paribas are consolidating activities or suspending business with new clients.10 Those that plan to continue are, unsurprisingly, increasing their compliance efforts – and might well be more risk averse to smaller or localised traders going forward.11 But the world cannot function without commodity trade finance. Given this, “it is important that we find new mechanisms to make commodity trade finance more efficient, secure and comfortable for all parties involved”, as Poluektov concludes. One such mechanism is digitalisation.

Towards digitalisation

Covid-19 and the accompanying homeworking environment has acted as a catalyst for digitalisation, with banks and their clients making rapid adjustments to their existing processes. “From the very basic tasks to the most complex, all companies have begun to realise the importance of digitalisation in ensuring business continuity”, said Valeria Sica, Global Head of Trade Product Development, Treasury and Trade Solutions at Citi.

A common factor that necessitated many of these changes is that a lot of trade is still being recorded, stored and shared on paper. In fact, according to a recent report by the ICC Digitalisation Working Group, entitled Digital Rapid Response Taken by Banks under COVID-19, the largest trade finance process disruptions have been related to the physical transfer of paper documents.12 Paper-based processes, according to Dafydd Davies, Global Head – Marketing and Revenue at TradeCloud, cause two key problems: inefficiency and risk. “The operations or logistics function”, he explained, “is essential to the smooth running of a commodities company. It is the engine room of data creation, storage and sharing, yet operators are spending 35-40% of their day tracking paper processes and responding to emails”.

He added that all fraud cases – whether email fraud, documentary fraud or insurance fraud – have a common theme: the point of corruption stems from the manipulation of data by a fraudster in the supply chain around a digital document that is standing in for a paper document. “The issue”, Davies concluded, “is that these documents are still managed physically and not digitally – meaning that the stakeholder often cannot easily verify what is being sent to them.”

One way in which paper processes are being tackled is through digital trade finance platforms, which can be used to increase efficiencies and reduce costs, while also providing better client service. But, as Audrey Stauffer, Head Structured Commodity Trade Finance Gazprombank (Switzerland) Ltd., explained, they need adoption. Digitalising trade finance requires buy-in not just from banks, but from all clients and relevant stakeholders along the value chain. “Smaller traders, especially those in emerging markets, are less likely to be onboarded onto one of these platforms due to resourcing constraints”, she said, “and the fact that there are multiple providers that don’t necessarily interoperate is also holding back adoption”.

For Joshua Cohen, Managing Director, Financial Institutions Mitigram, the onus is not just on banks and their clients to onboard to multiple platforms, but for the platform providers themselves to collaborate. “We, as platform providers, need to work to remove these digital islands – or at the very least put bridges between them. Just as banks speak to multiple providers, we need to do the same to try and drive this interoperability.”

Sustainable mining

The metals and mining sector accounts for some of the most visible impacts on the environment, its inhabitants and the surrounding communities. As a result, the industry has a responsibility to minimise its impact where possible – something it has not always got right in the past. In June 2020, for example, The Guardian reported on how the expansion of an iron ore mine owned by Rio Tinto, the second largest metals and mining corporation in the world, led to the destruction of a 46,000 year-old Aboriginal heritage site in Australia.13

A 2021 mining industry survey, conducted by international law firm White & Case, found that more than 45% of key industry decision-makers expect ESG issues to represent the largest risk to the industry.14 Fortunately, according to Alexander Peters, Group CFO, ArrowResources AG, there is a growing focus on sustainability in the metal and mining industry, where participants are being pressed to adopt new ESG standards. This, he explains, “will not be a short lived trend – it is here to stay and is being driven by strong investor activism”.

A key goal of the Paris Agreement is to limit global warming to well below two degrees Celsius compared to pre-industrial levels. But there is very little room for manoeuvre: a recent report from the World Meteorological Organisation claims that there is a 40% chance of the annual average global temperature temporarily reaching 1.5 degrees Celsius above the pre-industrial level in the next five years.15 While much is being done to tackle the high levels of greenhouse gas emissions, particularly those stemming from ground transportation and power production, all roads from here lead to the metals and mining industry. The materials needed to produce batteries and wiring, including nickel, cobalt, aluminium and copper, are becoming very important – and it is these commodities that are going to be in high demand for the foreseeable future.

For Markus Nöthiger, Managing Partner, Enemco, ESG is very wide-reaching. “Employment practices, environmental topics, local emissions to air, land use, biodiversity issue, waste, how to close and re-habitat the mine, community issues, human right issues, indigenous people, resettlements, issues of governance, financial transparency and legacy issues of bribery and corruption – all of these issues falls under the broad banner of sustainability.”

Measuring these factors is becoming a hot topic. This is something that has, to an extent, been achieved for global emissions, with the GHG Protocol having set a comprehensive global standardised framework to measure and manage greenhouse gas (GHG) emissions from private- and public-sector operations, value chains and mitigation actions.16 The next step for the industry, according to Nöthiger, is to work towards a set of harmonised accountability standards that can be used to inform the entire chain of the precise footprint of the materials being traded.

Sandra Hack“We should focus on making sure we have the right strategies, monitoring systems and origination procedures in place”
Sandra Primiero, Global Head TF&L Natural Resource Finance, Deutsche Bank

The growing importance of ESG considerations comes hand in hand with a greater focus on reputational risk. Reputational risk, explained Sandra Primiero, Global Head TF&L Natural Resource Finance, Deutsche Bank, is when a company directly, or indirectly through one of its partners, does something that is not aligned with what is expected – and can range from perception to a breach of a law or regulation. For Primiero, while reputational risk from perception is an important consideration, it should not per se serve as a roadblock to business. “We should focus on making sure we have the right strategies, monitoring systems and origination procedures in place to ensure we can continue doing business in the right way.”

While it might seem logical to stop financing the oil and gas industry entirely, this would come with a number of knock-on effects including potential energy shortage as a consequence of insufficient financing and not yet sufficient alternative energy sources. “Looking at it from the financial perspective it could either mean that clients face a shortage of liquidity or that they begin to get their financing from partners who do not care about sustainability goals,” reflected Primiero.

As a result, Deutsche Bank has taken the decision to continue financing natural resources companies in order to support producers as they transition to cleaner energy production processes. For example, the flow article ‘Net zero in the north sea’, details the Bank’s role in supporting independent oil exploration and production (E&P) entities, Lundin Energy and Harbour Energy, as they restructure their operations to achieve net zero targets.

The TXF Global Commodity Finance conference was held virtually 26 to 27 May 2021


1 See https://bit.ly/2UNjZIg at spglobal.com
2 See https://bit.ly/3qKMQsH at worldbank.org
3 See https://bit.ly/3h5K8L4 at forbes.com
4 See Greening the supercycle at flow.db.com
5 See https://bit.ly/3w8ZTFm at institutionalinvestor.org
6 See https://bit.ly/2N9sSZa at spglobal.com
7 See https://reut.rs/3h9X3vA at reuters.com
8 See https://bit.ly/3yd8p7W at gtreview.com
9 See https://bit.ly/3jtTguz at spglobal.com
10 See https://bit.ly/2UdyZin at txfnews.com
11 See https://bit.ly/2UdyZin at txfnews.com
12 See https://bit.ly/3x9q0gP at iccwbo.org
13 See https://bit.ly/3hs88qC at theguardian.com
14 See https://bit.ly/3AajJ6m at whitecase.com
15 See https://bit.ly/2Uhysw1 at public.wmo.int
16 See https://bit.ly/3AjkgDe at ghgprotocol.org

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