In the world of commodities, there are now electronic marketplaces (e-marketplaces) and exchanges for almost every kind of commodity and semi-finished product. These range from softs such as coffee, fish, flowers and grain to the hard side with steel, base metals, as well as oil products and chemicals.
For many casual observers, commodities may seem simple on the surface, a sack of coffee, a pile of aluminium ingots – but in fact commodity trading is immensely complex, and what seriously contributes to this complexity is the supply chain. For financing to take place for cross-border trades, banks need to not only be geared up on the e-trade front, by having a suitably integrated e-trade capability, they also need to be happy with all elements of the supply chain. Only when all the logistical elements are lined up, and the Wnanciers are happy with the parties involved, can financing go ahead.
Many banks are working flat-out to come to terms with all this. Several have worked in conjunction with e-platforms, such as Bolero, Identrus and TradeCard. And the first deals are now being struck.
Caffeine boost
The Colombian coffee industry received a signiWcant boost, or perhaps e-boost, when it recently implemented a coffee export transaction through the bolero.net electronic trading platform. For all parties concerned this was a landmark in the evolution of e-trade and commodities. The deal was announced in October by Colombia’s national coffee growers’ association (FNC – Federación Nacional de Cafeteros de Colombia). Astonishingly, the deal was completed only five weeks after the organization joined bolero.net. The speed with which the transaction was structured and implemented will be pleasing both to Bolero, which needs to demonstrate practical advances in the realm of e-trade for commodities, and also to FNC, which is keen to move ahead in the highly competitive Weld of Latin American coffee exports.
Jorge Cárdenas, general manager at FNC, says: “This electronic transaction through bolero.net is a signiWcant achievement towards the integrated electronic business initiative that we are pursuing along with our trading partners in the coffee trade.” FNC represents Colombia’s 500,000 coffee growers and this deal will be a willip to them as they seek to take the advantages, in particular the speed, that e-trade can provide.
According to bolero.net commercial director Peter Scott: “The speed with which this transaction chain was pulled together was impressive. From work-flow analysis to implementation of local user software through parallel running to live operations all in the space of five weeks. This sends a big message to companies around the world that the benefits of bolero.net can be quickly realized. It was a great result for the FNC and firmly places Colombia among the leaders in international B2B e-commerce.”
| Latin American coffee growers can benefit form the speed if the net | ||||||
Cárdenas pays testimony to the marketplaces’ technology. “Bolero.net has proven to be a very reliable system,” he says, “not only for its high privacy standards, but specially for its legal infrastructure which allows the exchange of shipping documents and business information securely with our customers worldwide. In addition, our e-business initiative is not limited to speeding up clerical procedures, but to dramatically expanding and improving the services to our clients who, in the very near future, will be able to obtain logistic and commercial information instantaneously.”
The transaction involved a consignment of 17.5 tonnes of arabica coffee shipped on a P&O Nedlloyd vessel from the port of Contecar in Cartagena, Colombia, to Felixstowe in the UK. Other parties in the trade chain included UK-based coffee importer AJ Ridge & Breminer. P&O Nedlloyd general manager, marketing systems, Patrick Burrows says: “Technological innovation in support of our customers’ business is a key component in our approach to enhancing service and we are reviewing the implications of this transaction with considerable care and interest. While end-to-end automation of bolero.net transactions is some way away, the initial findings are encouraging and certainly rediect great credit on all those involved in setting it up so quickly”.
On the financing side, NatWest (now part of Royal Bank of Scotland) acted as the banker for the importer, and Chase Manhattan acted as banker for the FNC. Chase in fact has a well-established relationship with FNC, having arranged an $83 million financing for it last year based on securitized export receivables.
Walter Vollebregt, manager of the commodities e-business team at financial services company Fortis in Rotterdam, is intrigued by the potential follow-on applications of this coffee trade financing. “Yes it was a landmark,” he says. “It would be even more of a landmark, though, if it had some continuity allowing a template for further transactions to be done.”
In a move in which ABN Amro jumped over the physical financing hurdle, the Dutch bank struck an agreement with the eGreenCoffee B2B exchange to facilitate futures trading on the coffee exchange. Carolyn Reilly, senior vice-president of ABN Amro Futures in London, says: “With the concept of placing futures market orders online and integrating financial services, ABN Amro is helping businesses to manage risks associated with global trade on the internet. eGreenCoffee is one of the leading early players in what may become the preferred transaction medium.”
ABN also says it will use this development with eGreenCoffee as an opportunity to further its involvement in physical financing services, whereby online financing could be ultimately achieved. As a major commodity bank, and one where much time and effort has been spent on e-trade initiatives, it is only a matter of time before the bank becomes involved in the financing of physical trades as well.
Vollebregt at Fortis is keen to point out the distinct difference between commodity e-business and e-trade involving manufactured goods. “There is a lengthy logistics process in a commodity trade,” he says, “and a lot of risk and a lot of handling. The right ‘total fulfillment solution’ for commodity transactions is vital to drive liquidity. Besides logistics, issues such as credit and marine insurance, quality inspection and financing have to be addressed. So a successful integration of these ancillary services is key, and that is where we are coming from in approaching B2B commodity financing.”
As with any commodity trade, online or offline, one of the most basic elements is the creditworthiness of the parties involved in the transaction. In the case of Fortis, most of the large commodity traders are well-known to the bank, but the use of the worldwide web opens the door to many that are not so familiar, and a major part of any online deal will be the assessment of the trading players and producers involved.
“We have lately designed our selection criteria as to which marketplaces we might deal with,” says Vollebregt. “We have our own traditional rules in assessing the players, but also now new criteria. We have around 15 such criteria to assess the quality of players in the electronic marketplace. As one example we would need to assess just what kind of vertical know-how they have.”
As far as electronic providers or platforms are concerned, Vollebregt says: “Bolero has spent an awful lot of time and money, but it is not established that they are the winner in all this yet – there are others such as TradeCard and Identrus that are competing with similar solutions or parts of the solution. Bolero seems to be successful now and it is a good thing that we are now seeing practical applications, but it is hard to say just who will be the standard. Bolero provides the platform and would seem to be similar to Swift itself – and it is from the right background with its associations with Swift. But one thing is important – if they want to pitch for messaging related to LCs it will only work if all parties involved are connected. Otherwise transacting online will not provide the time-savings it is supposed to. As far as standards go, they still need to convince a lot of people before they will connect.”
Speaking on TradeCard, he adds: “TradeCard would, on the surface, appear to want to go a step further than Bolero and compete with the banks on executing [conditional] payments.”
Decline of the letter of credit
Peter Sargent, vice president of e-business at Citibank firmly believes that the e-enabling of commodity trade will hasten the decline of the letter of credit (LC) in many markets. He explains: “We can now begin to see a feasible alternative for LC-type transactions. LCs could be replaced by what amount to electronic deferred payment certiWcates. Interestingly, because of the potential difficulty in agreeing standard formats for other instruments, items such as bills of exchange might suffer the same fate on the web. What we may also expect to see is that deferred payment certiWcates might be lodged with a trusted third party such as Bolero or TradeCard, for example, and possibly even discounted.”
Sargent points out that the advantages of using electronic documentation will include quicker turn around times, greater efficiency and probably cost benefits. These advantages might come at the price of more and more standardization of offerings by financial service providers, and there will be much more standardization of documentation in the e-world, he says.
As far as the financing element is concerned, Sargent sees this increasingly being wrapped with risk management. “The traditional sales contact between many banks and corporates will disappear in favour of a more ‘bespoke’ service,” he says.
It would seem that Citibank has been in consultation with a number of the big commodity corporates in relation to their conversion to web based trade. “Some of our commodity corporates are saying to banks that in future they must to come in and bid on potential transactions through the web,” says Sargent. “The corporates will approve the banks which are allowed access to a site and allowed to bid. Documentation might be viewed online and checked without ever changing hands.”
But, he says: “You cannot standardize everything – you will need to continue to look at the more complex transactions with an increasingly corporate finance type focus, you might increasingly expect to see forex and commodity derivatives sold by banks to their clients in one package. It is those deals which will require the bespoke sales force previously mentioned.” Banks with more traditional product ranges and long-standing expertize in commodity and trade finance will have to look to their laurels as the delivery mechanisms continue to change.
Forging logistic alliances
TradeCard has also been forging alliances with logistics providers, having signed deals with several major commodities inspection companies such as SGS, Bureau Veritas, Inspectorate and ITS/Intertech – a highly impressive line-up. It also recently announced an agreement with Marsh, a leading risk management and insurance services firm, to provide TradeCard members with seamless access to competitive rates and services in cargo insurance. TradeCard already has French trade credit agency Coface as a partner.
Kurt Cavano, chairman of TradeCard, says: “TradeCard members can now obtain online cargo quotes and insure their shipments with the relevant underwriters through the Marsh-managed programme directly from the TradeCard system in a completely paperless way, from quote and purchase to claims processing.”
Tom Cooper, director of marketing at TradeCard in New York, says: “TradeCard certainly has many other logistics partners (Fritz, Capstan, etc), which provide the key logistics functions of both moving the goods as well as feeding electronic shipping information to our system which, if it matches with the original purchase contract when compared by our patented compliance engine, triggers payment from buyer to seller.”
But there have also been questions levelled that TradeCard might want to replace the role played by banks within e-trade. Cooper, however, says this is not the case at all. He states: “We want to partner with them [the banks], leverage their sales channels to reach their existing customers, and become an online trade payment alternative to traditional trade payment methods for them and their customers. They [the banks] first saw us as a threat, it is true, because our system cuts into their traditional LC business. But the LC business is really not a profitable one for the banks. Realizing this, and understanding that their customers want an e-commerce alternative to traditional trade payment mechanisms, has brought an increasing number of banks to partner with us.”
A fuller version of this article first appeared in the November issue of Trade Finance. The text is available at www.tradefinancemagazine.com
