Commodity trading firms face funding squeeze as rates rise
Spikes in shipping prices have hit mid- and lower-tier commodity trading companies at a time when banks are already increasingly cautious about who and what they finance.
European banks appear to be increasing lending to commodity trading firms that are facing unprecedented liquidity needs due to extreme commodity price volatility. However, as a research note published by Fitch Ratings in March notes, much of the lending is to top-tier firms that operate with large liquidity buffers and diverse funding pools.
John MacNamara, chief executive of Carshalton Commodities – a commodity trade finance veteran and chair of the London Trade Roundtable – notes that there is indeed a steady flow of new funds investing in trade finance.
“However, they don't add up to anywhere near the $13 billion ABN Amro alone took off the trade table when it pulled out of the sector in 2020,” he points out. “It appears that a lot of the heavy lifting in the commodity trade-finance market, which is where the very big numbers are, is being done by the very large commodity traders.”
Rising rates will only make matters worse as existing trade-finance facilities reach capacity more quickly and the cost of using them increases. That is the view of Michael Hogan, managing director UK at digital fraud prevention solutions developer MonetaGo, who says the real pain will be felt down the credit curve.