12-13 Nov, 2014 - Singapore, SINGAPORE
Novotel Singapore Clarke Quay
Novotel Singapore Clarke Quay
There is heightened competition in Singapore's commodity trade finance sector, given a continuous growth in commodity trade flows into Asia along with banking regulations. All of this is boosting the increased use of structured inventory financing in the region that is further driving the traditional commodity financiers to make a comeback even as newer Asian entrants make headway.
Commodity finance has been largely dominated by large European commercial banks in the past. However, post European sovereign debt crisis in 2011, which led many European banks to rein in their lending, new entrants such as DBS Group and more recently, China's ICBC, Bank of China and China Construction Bank have forayed into the commodity trade financing business.
Meanwhile European banks are also making a comeback and trying to capture the future growth in Asia. For instance, ABN Amro and Rabobank have already commenced their dedicated structured inventory financing desks in Singapore in the second half of 2013.
Stuart Smith, Deutsche Bank's head of commodities in Asia "estimates that the inventory market is growing at between 5-10 per cent a year, and that there is US$15-20 billion of such financing at any one time."
Commodity inventory financing includes traders who pledge a warehouse receipt for a secured loan as well as repurchasing transaction where the 'bank takes over the ownership of commodities for a short period of time'.
The latter - the 'ownership model' has become very popular because of the benefits it presents to both the client and the bank. This model increases bank's security as well as requires allocation of less capital under regulatory requirements and allows optimization of capital allocation while offering alternative financing. Further, ownership of goods also helps banks to stay clear of legal complications. The new ABN Amro desk adopts this ownership model by using a special purpose vehicle.
From a commodity trader's vantage point, the ownership model ensures just-in-time delivery, better management of balance sheet and access to more liquidity.
Further, it also helps to reduce the cost of the loan by between 10-50%. This is particularly true for smaller trading firms that have lower credit rating with banks. However, in recent years there have been a number of problems with frauds using warehouse receipts and inventory finance, and most recently the Qingdao scandal, indicates losses of hundreds of millions of dollars, affecting a number of large international banks and also a major international trading house.
More on the usefulness of the structures and the potential for fraud and how to mitigate risks, as well as wider commodity finance themes will be discussed at Warehouse, Cargo & Structured Commodity Finance conference opening on 12-13 November, 2014 in Singapore.
Contact Ms. Grace at grace@cmtsp.com.sg or call + 65 6346 9147 for more details.
