Small commodities traders scramble for new lenders

GENEVA Thu Jun 14, 2012 1:57pm EDT

A part of the logo of the BNP Paribas bank is seen on the rooftop of their Paris headquarters April 26, 2012. REUTERS/Mal Langsdon

A part of the logo of the BNP Paribas bank is seen on the rooftop of their Paris headquarters April 26, 2012.

Credit: Reuters/Mal Langsdon

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GENEVA (Reuters) - Small and mid-sized commodity traders are scrambling to find new lenders, including Asian and African banks, as dollar funding dries up from the big European banks that have been among their traditional creditors.

Former leaders in commodities finance including BNP Paribas (BNPP.PA) and Credit Agricole (CAGR.PA) are retrenching from the financing of transactions such as storing oil or arbitraging copper due to a lack of dollar financing and to capital requirements under stringent new rules known as Basel III.

The regulations - to be phased in from next year - require higher levels of capital and reserves at banks, which will make commodities lending more expensive.

"If you are big, that is what saves you. But for the mid-sized ones it is snip, snip on the credit lines. This is also choking off trade finance for new entrants," said Edward George, a soft commodities analyst at pan-African bank Ecobank.

Official data is hard to come by, but George estimated that European banks' share of the global commodities trade finance business has shrunk from around 75 percent to 50 percent over the past few years.

The gap is being partly filled by new players such as his own firm, which plans to boost its trade finance to around $4 billion this year from $2.8 billion in 2011, Asian banks such as China Construction Bank and Middle Eastern players including First Gulf Bank FGB.AD.

But these new players operate on a much smaller scale, often offering just $5 million at a time for multi-million dollar deals, according to Michael Rolfe, global head of commodity trade finance at UniCredit (CRDI.MI).

"What is changing is the number of banks participating in revolving credit facilities. The list is getting longer as participation mounts from new banks that are smaller than the usual core players," he told Reuters.

"Regional players want to break in. They are in producing regions, and these have good access to dollar financing," he added.

TRADERS BECOME BANKERS

Top Geneva-based trading houses such as Gunvor and Mercuria have recently signed multi-million dollar funding deals via revolving credit facilities, showing their ability to source funding even as smaller players struggle.

Banks have competed fiercely to provide these facilities, and one trade source said, which has cut lending rates to around 2-2.50 percentage points above Libor.

The fact that big traders have cheap access to dollars, the dominant currency for commodities trade, means that they can informally lend this money to smaller merchants, industry sources said.

"We are seeing larger trading houses financing smaller ones, using their own capital. Traders are acting as banks, and of course they aren't covered by Basel III, so they can do as they like," said Matthew Parish, a partner at Geneva-based law firm Holman Fenwick Willan, which advises commodity firms.

The world's third-largest commodities trader, Trafigura, runs a commodities trade finance fund as part of its Galena hedge fund.

The chief financial officer of Geneva-based agricultural commodities trader Quadra, Robert Petritsch, said he was often asked to provide credit to buyers of soft commodities.

"We are constantly being asked about this. We try to create packages where we give pre-financing to suppliers and offer credit to our buyers, for example on soybeans to Southeast Asia," he told Reuters.

Rene Awambeng, the head of regional corporate and commodity finance at Ecobank, said large traders were effectively binding clients closer by providing financing to them.

"It's a revenue opportunity as they (big traders) can recycle cheap dollars into a higher margins on the finance ... They are in a very strong position - their RCFs are generally oversubscribed," he added.

Some say further consolidation among traders is inevitable and that increased lending between traders will accelerate this process.

"The larger trader will ultimately take over the business if the smaller trader is unable to grow its own facilities. Essentially, the larger trader will see the entire smaller trader's business model and will be able to step in," said Rolfe from UniCredit.

(Reporting by Emma Farge; Editing by Veronica Brown and Jane Baird)

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