Last week ABN Amro announced its decision to exit the trade and commodity finance business. It joined a host of other banks like BNP Paribas, Société Générale, Natixis, ANZ to name a few, that have either exited or halted fresh financing in trade and commodities.
Many banks are shedding jobs, restructuring or reducing their commodities business to cut risk. Banks have suffered losses to the tune of $9 billion from the $18 trillion commerce finance enterprise.
The gap left by ABN Amro is likely to be the tune of $21 billion and the big banks that remain in the business may not be able to fill this, resulting in a potential liquidity freeze for commodity traders. Banks’ revenue from commodities trade finance slid 40% year-on-year to $700 million in the second quarter of 2020 according to consultancy firm Coalition.
Commodity traders have been feeling the heat in the recent past on account of volatility in commodity prices compounded by reduced trade due to Covid-19. The global agricultural merchant and trading giant Louis Drefyus saw net income fall 38% to $228 million in 2019. Its American-headquartered peer Bunge reported a loss of $1.28 billion for 2019 against a profit of $267 million in 2018. The British multinational Glencore posted an H1CY20 loss of $2.6 billion. Louis Dreyfus’ owner had to pledge her majority stake in the holding company LDHBV to raise a $1 billion loan from Credit Suisse.
Loss Of Trust
This decision by banks can be attributed to a certain set of micro and macro factors. “Key micro factors stems from the recent sizeable defaults by commodity traders in hubs such as Singapore, Dubai, and Switzerland, leading to a general collapse in confidence,” says Eric Chen, an ex-banker and Director at vCargo Cloud Pte Ltd, a digital services provider in the trade and logistics space.
Several frauds have been unearthed in the last few months – Hin Leong, Phoenix Commodities, GP Global, Agritrade, and ZenRock to name a few. Hin Leong, a marine fuel trader, has confessed to hiding about $800 million in losses. 23 banks have exposure aggregating up to $ 3.5 billion to Hin Leong.
Just weeks before Hin Leong’s failure, Agritrade, whose businesses consist of palm oil and coal mining, collapsed amid allegations of fraud. The case of Hin Leong shows that even a highly developed legal environment like Singapore is now considered difficult for banks to recover their dues.
How The Business Has Changed
Commodity trade finance was considered as among the safest businesses for banks at one point in time.
“Trades were mostly on a pre-sold basis, backed by letters of credit, thus with limited credit risk. These then increasingly moved to open account terms, exposing them and financing banks to price and credit risks,” says Srinivasan Govindan, a senior banker and formerly the chief representative of Natixis in India.
Many banks with no experience in the commodity finance business have entered the space lately and offered unsecured and cash-flow based medium- to long-term lending facilities. As many of these traders are global in size, they have been the darlings of not only big global banks but also local banks.
Govindan adds “Over the years, the usually tightly controlled and monitored, commodity trade financing lines were increasingly replaced with corporate lines in the form of syndicated loans, revolvers, etc., diluting the rigorous structures earlier employed. Low equity base, high leverage, and volatile price movements only compounded this situation.”
Double financing is a very big issue in trade and commodity finance. In fraudulent cases, it has been observed that borrowers have pledged the same collateral or inventory to multiple banks at the same time. The absence of a centralised database of collateral or securities registry nationally as well as globally adds to the problem of lenders.
60 letters of credit amounting to $1.5 billion were used by Hin Leong to finance cargo that both didn’t exist or was pledged to a number of patrons, as per the investigation by PwC, the court-appointed managers.
Eric Chen further says, “developments in the Basel framework stand to reduce the capital relief on commodity trade finance, making it less attractive on a risk-weighted profitability basis.”
Trading companies operate on very thin margins of 0-2% and some have a very opaque business model, which potentially makes it easy to conceal losses in derivative assets, inventory, receivables etc. One wrong call about price movements can erode their margins for the entire year according to the head of risk of an MNC bank in India, who spoke on condition of anonymity.
Regulatory changes mean that banks have to now charge more per transaction to clear their internal risk-adjusted return on capital employed thresholds. These changes have also tightened the high global recovery rates or low loss-given defaults being ascribed to many structured trade transactions like pre-payments, pre-export finance, thus making deals not lucrative at the current margins.
The changing environment amid the pandemic has led to a decline in global trade. Global trade is forecasted to decline between 13% and 32% in 2020, as per the U.S. Congressional Research Service depending on the depth and extent of economic downturn. This will impact the free movement of commodities around the globe.
Impact On India
India is more of an origination and destination market and less of a trading hub. Banks in India largely take a corporate type or balance sheet approach to financing whether it is a commodity trader or a producer and such defaults are few and far between.
However, many large traders have their subsidiaries in India, and banking limits to these are provided on the back of a corporate guarantee or letter of comfort from the parent. Many traders have global limits and sub-limits are carved out of these for their Indian operations. Such limits enjoyed by these subsidiaries from MNC banks in India could get impacted, more so in case of a global review of limits to these groups.
Over the years, some subsidiaries of large traders in India have, in turn, started to provide financing support to small producers here. The exit or reduction of big banks from the trade and commodity finance business could impact such small producers and result in temporary supply chain disruptions.
The subsidiaries of global traders operating out of India and tier-2-and-3 producers which import commodities into the country could see an increase in financing costs in the short to medium term.
To sum up, the trade and commodity finance business could see a major overhaul globally in the post-Covid scenario, with increased import and export financing costs, supply chain disruptions, higher risks, and consolidation of players.
Amitabh Tiwari is a former corporate banker, and currently a political strategist and consultant.
The views expressed here are those of the author and do not necessarily represent the views of BloombergQuint or its editorial team. BloombergQuint
This rebrand enables Dimension Data to consolidate its businesses, enhance efficiency and better deliver the changing technology needs of its clients in Nigeria
Integrated ICT services provider, Internet Solutions Limited is set to rebrand and operate as Dimension Data by the end of this year in all its operating companies.
This is part of Dimension Data's larger plan to consolidate its businesses, enhance efficiency, and better deliver the changing technology needs of its clients in Nigeria. Consequently, Olugbenga Olabiyi has been appointed as the Country Manager to head the company's business operations in this country.
Commenting on the new developments, Olabiyi assured clients that the company will continue to deliver services seamlessly and efficiently even as the firm works through the rebranding and integration process. He noted that they will be focusing on developing uniquely tailored IT solutions as well as providing value-driven services through customer engagement and outstanding technology infrastructure - that advance productivity and business growth.
"We are happy to have received the government’s approval allowing us to rebrand and operate as Dimension Data. Our vision is to be a partner of choice for businesses; delivering innovative, game-changing technology and solutions not only in Nigeria but in the Middle East and Africa," he said.
The Dimension Data Group of companies is also consolidating and rebranding all its subsidiaries in the Middle East and the rest of Africa where it has operations. The realignment saw Internet Solutions Managing Director Richard Hechle appointed to head the group's consolidated business in East and West Africa.
Dimension Data East and West Africa Managing Director Richard Hechle said consolidating the company's business will help the firm unlock opportunities for greater innovation, as well as giving clients the power to build their futures using game changing technology.
"Bringing all our people and operating companies together will allow us to effectively and efficiently execute our go-to market strategy and enable our clients’ success in a digital-first world. This digital-first world is characterised by technologies that are converging to deliver unified, hybrid and holistic solutions for real business impact," he said.
As the market around us continues to evolve, he said the company was conscious of the need to remain relevant by delivering products and services that enable clients to meet the increasing demand for personalisation and customisation. Leveraging technology is critical for businesses and our products and services play a vital role in empowering them to build their future.
The group is reorganising around five go-to-market areas to deliver Intelligent technology and services that are aligned to our clients’ journeys, including Intelligent Infrastructure, Intelligent Workplace & Customer Experience, Intelligent Business Applications, Intelligent Innovation, and Intelligent Cyber Security.
"Reorganising ourselves to deliver what the market demands is driven with growth in mind and we are very excited about the future and are committed to bringing these changes online quickly. The role of technology in business is changing, therefore, how it is consumed, and the decisions related to technology are also changing. We are adapting to align our organisation to that of our client choices,” Hechle said.
“The way we collaborate with our clients is where we create the most significant value and sustainable business outcomes for them. The logic is clear: the more we focus on seamless client experiences, the more focused we become on delivering solutions that work. We believe that when we understand our clients’ needs, we deliver better solutions.” he concluded.
Ethiopia has the potential to harvest more than 500,000 tons of honey annually, Expert said.
Because of its unique production environments and suitable climate, Ethiopia has comparative advantages to produce and supply high-quality honey and beeswax for the global market at competitive price.
International Centre of Insect Physiology and Ecology (icipe) More Young Entrepreneurs in Silk and Honey (MOYESH) Programme Coordinator Dr. Workneh Ayalew told The Ethiopian Herald that the country has a wide potential for honey production.
Currently, the country is producing honey below its potential. Despite, the potential to harvest 500,000 tons of honey, it is harvesting not more than 60,000 tons of honey annually.
Besides, there is a potential to harvest up to 50,000 tons of beeswax but the country is harvesting below 10,000 tons of beeswax annually.
The Climate Resilient Green Economy (CRGE) strategies and the ongoing comprehensive forest rehabilitation efforts could contribute a lot to generate more income from the beekeeping sub-sector.
The millions of hectares of protected and rehabilitating degraded habitats, forests, and bushlands can be used to establish commercial beekeeping, according to him.
Ethiopia is endowed with diverse agro-ecologies that are very suitable for raising honeybees where indigenous bee forages can support commercial beekeeping and promote honey sector investment, he said.
By making sufficient inputs available, conserving indigenous plant species, allocating suitable area of harvesting and infrastructure, designing proper policies, promoting market linkage, among others, are fundamental towards harnessing the honey sector potential, Dr. Workneh said.
Research surveys indicate that there are more than 7,000 indigenous plant species that help to harvest quality honey products countrywide.
Pesticide chemicals application on crops, lack of modern honey harvesting technologies, and the low attention given to the sector are challenging the sector's production and contribution for the national economy, he said adding, ensuring integrated pest management and reducing the application of chemicals on crops is important.
"Every chemical has its own short-term and long-term consequences on vegetation and insects like bees. Thus, utilizing organic-based and pro-environment agricultural inputs is important to maintain the safety of biodiversity," he stressed.
Beyond honey and beeswax production, bees play a significant role in facilitating pollination for the flower industry, coffee, crops, and fruit and vegetables.
Rehabilitating bees is essential not only for the honey production but ensuring sustainable ecological services.
Credit: The Ethiopian Herald
French Minister for Foreign Trade and Economic Attractiveness, Franck Riester says the planned Nigeria-French refinery is good for both countries.
The French Minister for Foreign Trade and Economic Attractiveness, Franck Riester says the new contract between French hydrocarbons company Axens and Nigerian industrial conglomerate BUA Group to build a large refinery will be beneficial for bilateral relations.
Riester disclosed this in his Twitter handle.
He said the idea was a step in the right direction, given that both countries’ economies were rocked by the coronavirus pandemic. Axens and BUA Group signed a deal on the new refinery project in Paris last Tuesday.
According to the agreement, Axens gets to license the key refinery technologies to the BUA Group. The refinery is expected to start operating by 2024 and will have the capacity to produce 200,000 barrels per day.“As both France & Nigeria face a tough challenge ahead because of #COVID-19, I believe that tightening our bonds will allow us to become more resilient.
“This deal is a very positive signal for the French-Nigerian partnership,” Riester wrote on Twitter. Abdul Samad Rabiu, the CEO of BUA Group, who attended the signing ceremony, said that the project was vital for Nigeria, which currently imports 90 per cent of petroleum products and expects to lower the imports of refined fuel.
Axens won the project over U.S. company Honeywell UOP.
Rabiu, who was appointed as the chairman of the Franco-Nigerian Investors’ Club, initiated by French President Emmanuel Macron, said in an interview to the France-based The Africa Report magazine that the French leader “has given special determination and support to this project.”
According to CEO of Axens Jean Sentenac, the contract is profitable for the French economy, which has been battered by the COVID-19 pandemic.The project site is to be located in Nigeria’s southeastern Akwa Ibom state.
According to the contract, its production will include export to other African countries but will prioritise the domestic market.
There was palpable joy on Saturday as the first international, non-essential passenger flight landed at the Murtala Muhammed International Airport (MMIA), Lagos, for the first time in over three months.
The News Agency of Nigeria (NAN) reports that this was coming after five months of closure of the Nigerian airspace due to the lockdown occasioned by the Coronavirus (COVID-19) pandemic.
The Middle East Airline (MEA), which took off from Beirut, Lebanon, made history as the first international flight to land anywhere in the country as it touched down at the MMIA at exactly 2.30p.m.
The aircraft was ceremonially welcomed with a water cannon demonstration by the officials of the Aerodrome and Rescue Fire Fighters, a Department in the Federal Airports Authority of Nigeria (FAAN).
NAN also reports that officials of FAAN, Nigeria Immigration Service (NIS), Port Health Services (PHS), Nigeria Customs Service (NCS) and other relevant agencies were on ground to attend to the passengers brought in by the airline.
On arrival at the terminal, passengers presented their documents, including COVID-19 PCR test results for screening by the Port Health Services officials, while their travelling papers, passports and visas were handled by the immigration officials at the airport.
At the arrival and departure halls of the airport, the arriving and departing passengers observed the social distancing protocols, just as it was being currently observed on the domestic routes.
Speaking on the procedures, Abdullahi Usman, Comptroller, NIS, MMIA, said the process was seamless and passengers were cooperative while travelling documents were requested from them by the officials.