Traders or Commodity Finance Banks Part VIII-The pivotal role of the commodity traders as financiers

The commodity finance market history shows a pattern of (often) hasty entries then departures by banks and alternative financiers.

The American banks were the first to specialize in operations on commodities, hedging trader’s positions, lending and sometimes trading the commodity itself…

J. Pierpont Morgan was a commodity trader.

A local sea captain was stucked with a ship of coffee and no buyers. An immediate action was required or the coffee would spoil.

Using the firm’s money, Pierpont purchased the coffee and sold it to New Orleans Merchants. He pulled it off, managing to turn a little tiny profit in the process.

No need to argue that the U.S investments banks have always been irresistibly attracted by commodities. 

Salomon Brothers, probably the most succesful franchise of Wall Street’s history, has owned 50% of the international physical commodities trading firm Phibro.

On the other side of the Atlantic, Credit Suisse has owned 50% of the capital of Cargill Switzerland, the world trade unit but it’s not before the 80s that Swiss banks became prominent institutions in the commodity trade finance.

Towards the end of the 70’s French banks had  their “commodities departments”.

When the Banque de France established untenable currency controls, Société Generale, Crédit Lyonnais and Crédit Agricole and their trading clients move this activity to Geneva. It shows that bankers are only good as their “relational assets”.

From that moment and onward the Swiss took over the place of their American counterparts but in 2014,  BNP Paribas (Suisse) agreed to plead guilty and to Pay $8.9 Billion for Illegally Processing Financial Transactions for Countries Subject to U.S. Economic Sanctions.

More money has been lost by BNP in the Iraqi food-for-oil trade scheme than what the franchise has ever made in Commodity Trade Finance.

More recently, regulatory changes and market dynamics have also prompted trading companies to re-evaluate their financing arrangements and -on more frequent occasion- acting in that capacity themselves.

Mercuria Energy Trading Inc banks with Societé Génerale New York Branch but occasionally re-lend to producers and give access to its capital (lend its credit) to selected counterparties in the energy derivatives.

But is it new  ? At its peak in the 80’s, Phibro made loans  through its Phibrobank A.G.

The Economist Intelligence Unit produced an illustrated view of the ever-evolving commodity finance landscape.

Jacques, S and Simondet, A. (2016)“Traders or Commodity Finance Banks”  has been to our knowledge the 1st paper exemplifying the pivotal role of the commodity traders as financiers.

tradersorcommoditytraders

In this paper we explained the regulatory changes and market dynamics.

“Around 2011, the world’s largest commodity traders saw a distinct anomaly, this time it was in finance. By depositing metal or another commodity as a collateral and getting money as low as Libor +95bps, they realized that they could also straddle loans for other traders/producers,neutralizing the price delta and purely engaging an arbitrage between interest rates like a bank thus creating a profit center between Trade Finance and Credit Finance”.

“In fact, at one large trading house, the finance spread became so attractive that the commodity loans origination arbitrage opportunities became the greatest profit center over the margins on the purchases and sales of physical commodities”.

“The finance incentive underpins the willingness of merchants to bid a premium for producers’ commodities”.

 

Navigating the commodities markets with Freight and Spreads  © 2017

Simon Jacques

Commodity Trading and Finance

1 226 348 5610

repo66

 

 

Advertisements

Leave your comment

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s