Commodity trade finance platforms are not something we actively write about, but it is such a key part of world trade that it’s important for readers to understand a bit about how this form of goods flow gets financed.
In a study done by the Bank for International Settlement (“BIS”) examining bank trade finance lending, commodity trade finance is a market dominated by the banks, and at that, very few global banks.
Commodity Trade Finance Characteristics
It is natural for commodity transactions to remain in the bank domain for several reasons.
- They are big – buying oil shipments or wheat is controlled by big private companies like Cargill, Trafigura, Vitol, etc. and transaction sizes are in the millions
- You can manage the collateral – commodities are real collateral that can be valued by market indices. Operation risk can be insured. For example, you can grab collateral if need be. With other goods, say spare parts, or apparel, how would you value?
- Prices can fluctuate wildly in a short period of time – this market risk can be controlled to some degree through hedging
- Commodities trade actively
If properly managed, the risk then really comes down to the credit risk of counter-parties, which is something banks generally do well.
Who Funds These Transactions?
The BIS report stated that historically, most of this trade has been dominated by European banks, particularly French and Swiss banks, which reportedly provided up to 80% of the financing for commodities trading worldwide at one point. Many of the largest commodity trading companies are located in Switzerland (egs. Tate and Lyle, Glencore, Cargill International, Vitol Group, Trafigura to name a few). Commodity trade finance alone in Switzerland is estimated to be around US$1,7 trillion size market.
But during the Great Recession of 2008, European banks like BNP Paribas and Crédit Agricole had to reduce their exposures in commodity financing as a result of a lack of access to US dollars. However, true to form, as global banks have balance sheet, U.S. and Asian banks as well as banks in the Middle East are now increasing their share of commodity finance. Blockchain based ledgers isn’t a household buzzword, like the cloud or the Internet of Things. It’s not an in-your-face innovation you can see and touch as easily as a smartphone or a package from Amazon. But when it comes to our digital lives—every digital transaction; exchange of value, goods and services; or private data —blockchain is the answer to a question we’ve been asking since the dawn of the internet age: How can we collectively trust what happens online?
Every year we run more of our lives—more core functions of our governments, economies, and societies—on the internet. We do our banking online. We shop online. We log into apps and services that make up our digital selves and send information back and forth. Think of blockchain as a historical fabric underneath recording everything that happens exactly as it occurs. Then the chain stitches that data into encrypted blocks that can never be modified and scatters the pieces across a worldwide network of distributed computers or “nodes.”