Mihai Andreoiu gives his perspective on the recent TXF Geneva conference focused on Commodity Trade Finance and his takeaways related to the overall global trade context and ESG lender focus vis-à-vis the commodity traders.

Almost at the end of the Geneva Commodity week we had the TXF event. An excellent occasion to meet and exchange with clients, prospects, old colleagues and friends. But also, to watch very interesting sessions with excellent content. Packed into one day made the event more appealing and punchier in terms of content. As usually one is able to better focus in the morning and typically has diminished cognitive capacity in the afternoon, I’m probably biased and have paid more attention to the morning sessions despite some heavy weights closing the day.

Two topics caught my attention this year: the overall global trade and the ESG front for commodity traders as intertwined energy transition topics. Despite digitisation being spelled in several different ways, the topic was not the star but remained rather well contained as “only” the main enabler of certain specific activities.

Regarding the first topic, the global trade has been for a while in a changing paradigm. China has stopped globalizing already for a while and production is moving, in line with scaling possibilities, to the lowest small cost production countries (e.g. Vietnam with USD 3 per hour labour cost vs. USD 11 for China). A statistical certainty, as presented, is that overall global trade typically experiences the same growth path as global GDP growth (2.5-3% over extended periods of time).

We are now on a fragmentation and decoupling path which means global growth will not benefit as in the past from offshoring, as main driver, while, furthermore, emerging markets will move from 5% to 3% growth. The overall context will be challenged by an aging population, poverty trap and inability to grow productivity in certain regions. But the energy transition, despite depressed and volatile transition metal prices, will generate further growth based on what products, like the next generation of cars encompasses: more software (AI included) and specific metals but also the way people consume such products – an iphone on wheels as I call one specific EV brand. Neither a specific transition sense of urgency is there nor a proven economic success, as car manufacturers are sending very cautious signals about expanding their EV production capacity. Rates still being “higher for longer” are clearly making consumers slowing and the growth path of this industry is less obvious than before. The financial performance of both EV makers and companies involved in green energy (e.g. solar, wind) is raising some question marks recently. Furthermore, trade weaponization around certain products tends to hint towards a zero-sum game rather than overall global growth.

As energy transition is supposed to be a major growth driver but with green spending and subsidy agendas being the subject of serious political debate in the world’s largest economy, the “old world” fuels, their development and trading seems to still have a very significant role to play in the years to come. And despite their political challenges, the original BRIC countries still seem to provide plenty of opportunities to those with the right risk appetite. So, with global GDP growth being challenged so will global trade growth follow a more modest path. With that being said margin extraction from the same trade volumes can vary greatly and be substantially increased in times of global economy fragmentation.

Moving towards the ESG agenda of lenders, we seem to be facing the same questions: how you calculate the net zero, what is the framework to quantify emissions, what are the eligible KPIs and so on. The banks’ ESG approach remains fragmented with some leaders having a collection of exposure divided between green loans (i.e. green use of proceeds), ESG corporate ratings or ESG KPIs linked while other lenders seem to have increased their focus and concentrating on ESG KPIs only and making efforts towards a specific emission quantification framework. Banks may actually get more time as the finance industry will apparently get a break and be excluded from the initial roll-out of the Corporate Sustainability Due Diligence Directive.

While the “gentle push” from banks continues, the reality is that borrowers are and will remain in a much better position to measure their carbon footprint and various ESG KPIs impact as it’s simply about their business. Banks should be in no measure to dictate, and they must follow what makes sense from ESG and business perspective from client’s point of view while remaining compatible with the banks’ assumed role and mission in the overall society’s ESG process. So, it will be all about data and measurement and here there is a unique opportunity to be seized by potential “aggregators” of data, intelligence and best practices. Whether these are names dedicated to mapping carbon footprint or fintechs developing specific competencies around financing structures remains to be seen, but there is plenty of opportunity in this space.

Banks’ approach should be commodity specific. On one hand understand that the softs / agri traders will likely be the most advanced as structurally they have been “glued” to their supplier base / farmers for very long and hence their responsibility to their supply chain is even bigger. On the other hand, appreciate that the energy transition is not a big bang but a marathon whereby metal traders are in the spotlight as handling the materials needed for the transition while fossil fuel traders will have a role to play as long as we will still need such traditional fuels to complement the overall demand. Borrowers will need to remain incentivized for good performance while any “malus” charged by banks will have to go towards specific “green” destinations rather than banks own profit. Another interesting confirmation on the traders’ side is that the carbon trading business is alive and kicking, and those players with a deep enough upstream position will be able to offer an even broader offering to their off takers towards achieving carbon neutrality.

To conclude, while the overall global trade is very likely to decrease there is plenty of opportunity around for trading companies from the long energy transition journey to ever more focus on data, measurement, efficient capital allocation and specific geographic risk appetite.

And what I really liked a lot at this TXF edition is that we had a lot less fraud cases to talk about in the commodity trading industry. Hope we can maintain the trend!

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