Commodity traders step up lending as banks retreat

Wed Nov 14, 2012 12:41pm EST

* Major traders raise profile in pre-export financing

* Basel III could lift capital requirements near 20 pct

* Glencore, Vitol already lend to producers

By Emma Farge

GENEVA, Nov 14 (Reuters) - Major commodity traders are replacing banks by offering trade finance directly to producers as new liquidity requirements hobble traditional lenders, bankers said on Wednesday.

Commodity exporters require letters of credit and other loans to arrange for the shipment and delivery of their goods on international spot markets.

But rising liquidity requirements under Basel III, a new set of global rules on capital adequacy, will force banks to make tough choices on lending to farmers, with long term pre-export deals seen as most vulnerable.

"The investments in agriculture that will feed the world are going to need long term investment and that's not coming from banks and that's to do with Basel III," Rick Torken, managing director at ABN Amro said at the Global Grains conference.

He added that bank liquidity requirements could go up by as much as 19 percent this decade.

Andy Howell, head of soft commodities at SMBC, said major commodity traders with deep pockets were increasingly filling the gap left by banks by offering financing in exchange for long-term supply contracts.

"Some of the banks are stepping back from financing the goods at origin which traditionally we've done quite well. The traders are much more able to go in to secure supply and they can do that by providing the finance," he said.

The trend towards pre-export financing among traders is seen as part of a broader shift in their business model from pure middlemen to major integrated players.

Swiss-based Glencore is already active in lending to metals producers while top oil trader Vitol offers pre-financing to a crude oil producer in Kazakhstan.

A senior source at a mid-sized grains trader said that ethanol producers and hog farmers are now seeking extended credit terms as financing from traditional partners dries up.

Damian Honey, partner at law firm Holman Fenwick Willan, said he had observed the growing role of commodity traders in lending to Thailand's biomass producers.

For now, the growing role of traders in lending has not yet attracted major scrutiny from regulators, he added.

"Regulators are a long way behind and are grappling with other issues on regulating commodities markets," he said.

An Oct 29 report by the World Trade Organization said trade finance growth had slowed along with growth in world trade and although there was no overall shortage of funding, there were tensions in Europe and parts of Latin America.

Dollar funding remained an issue outside the United States, although the growing use of the Chinese yuan had started to alleviate the situation.

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