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SPECIAL EDITION |MARCH 2021
SOCAR TRADING SOCAR Trading enjoys the unique advantage of being a state-owned entity with an independent global presence. By attracting the best talent in the industry and investing in sophisticated IT sys- tems, we are building a reputation as one of the most successful global energy trading compa- nies in the world.
SPECIAL EDITION |MARCH 2021 | |COMMODITIES |03
Editorial
A new cycle
2
020 has been a year of unusual shocks One. The world is entering a post - health
for the commodity traders, forcing crisis growth as the pandemic is more
them to embark on a frightening or less under control. Vaccines will also
roller-coaster. At first, the Covid-19 boost the global economy and help it re-
pandemic hit them hard. Health restrictions cover. That will benefit the commodity
around the globe triggered a sharp recession industry because it is at the core of the
in most countries, advanced or developed production activity.
ones. Highly correlated to global activity,
commodities like oil and metals saw their Two. Many countries take the pandemic
prices fall accordingly. At the same time, the as an opportunity to make their eco-
pandemic created production shortfalls on nomy greener. Commodity traders will
some soft commodity markets, edible oils for play a key role when it comes to building
Frédéric Lelièvre instance, pushing some food prices up. infrastructure and electric vehicles, or
CEO and Editor-in-Chief, achieve the targets set by the Paris agree-
Agefi ment on climate change. Let’s not forget
External shocks were not there is also the need to feed the world in a
more sustainable way.
the only ones to affect the
commodity traders. This is a secular trend pushing
However, unlike previous global recessions commodity prices up beyond
which had long lasting effects, most com-
modity markets swiftly recovered from
the recent rebound.
the price shock. The combination of supply
cuts by OPEC+ and a faster-than-expected Combined, those two reasons may well lead
rebound of the Chinese economy have sent to a new “super cycle”, which is a secular
most commodity prices up again, many of trend pushing commodity prices up beyond
Jan Schwalbe them reaching their pre-pandemic level. the recent rebound. This would happen be-
Editor-in-Chief, cause the increase in demand is only slowly
Finanz und Wirtschaft External shocks were not the only ones to met by a lagging supply. Four such super
affect the commodity traders. Last year was cycles have happened since 1900. The first
also the year of fraud cases. They mainly took two occurred after World War One and
place in Southeast Asia and the Middle East, Two, with the reconstructions. The third
but Switzerland was not isolated. Swiss banks one took place during the oil price shock
specialised in trade finance suffered at least of the seventies. The last one came with the
half a billion Swiss francs of losses. As a result, rapid industrialisation of China in the ear-
some players left the business. Nevertheless, ly 2000s. In that potential new super cycle,
2020 should also be remembered for some oil prices may well reach USD 100 a barrel,
positive developments. In particular, Swiss experts say, before plateauing as the world
people voted against the Responsible Business will switch to alternative, less CO2 -intensive
Initiative and instead favoured a so-called energy sources. All this means that there
“counter-proposal” designed by the govern- are plenty of opportunities ahead for the
ment who took account of the international Swiss commodity hub.
competitiveness of the Swiss commodity hub.
These future legal provisions will help the One last transformation would still be needed
commodity industry move forward and beco- though. Gender inequality remains an issue,
me more sustainable. The vote was a sign of but there might be light at the end of the tun-
trust, not only in the industry, but also beyond nel. Some companies start to appoint women
and emphasised the important role that multi- to top positions. They could in turn become
nationals play in the local economy. role models and inspire other women to
consider a career in the commodity world.
What’s to expect in 2021? The industry is
back to fundamentals as this special issue GERMAN VERSION
reports. And it is not just about providing
the global economy with the key ingredients
it needs. The industry is also starting a new FRENCH VERSION
cycle for at least two reasons. 
04 |COMMODITIES | | MARCH 2021 |SPECIAL EDITION
Contents - March 2021
22/ INTERVIEW Carbon capture is critical to achieve
Back to Fundamentals the net zero goal, but it is very expensive.
05/ Back to fundamentals. Anna Krutikov, Glencore.
Ramon Esteve, STSA.
23/ Achieving net zero: the role of carbon markets.
07/ ONE ON ONE WITH Florence Schurch. Gérard Delsad, Vitol.
STSA.
24/ Climate: in Africa, problems can turn into opportunities.
08/ A success to be maintained in Switzerland. Isabelle Chevalley.
Fabio Regazzi, Regazzi Holding.
25/ How coffee growing is coping with climate change.
09/ 2021: Back to fundamentals. Nicolas Tamari, Sucafina.
Emmanuel Lemoigne, BIC-BRED (Suisse).
26/ Driving sustainability in cotton farming.
10/ What role market insurance plays. Alan Mclay, Better Cotton Initiative (BCI).
Philippine de Villèle, BPL Global, Geneva branch.
27/ What do chicken nuggets and cotton have in common?
10/ After the storm, a promising renaissance. Jürg Reinhart, Paul Reinhart.
Pierre Galtié, Banque de Commerce et de Placements, Switzerland.
28/ The role of Swiss-based commodity traders
11/ Crises: a catalyst for change in trade finance. in shipping decarbonisation.
Jean-François Lambert, Lambert Commodities. Sebastien Landerretche, Louis Dreyfus Company.
12/ Reinforcing common practice in commodity finance in Switzerland. 30/ Regulations in shipping’s energy transition.
Alastair Houlding, ING, Patrick Cotasson, UniCredit et Michael Jackisch, BIC-BRED. Chris Hughes, Lloyd's Register.
30/ Shipping: new technologies in practice.
Digitalisation Nils Joyeux, Zéphyr et Borée.
14/ A riskier landscape demands a trusted system.
Souleïma Baddi, Komgo.
Legal & Regulatory
15/ The new blueprint for commodity finance. 32/ The future of trade finance in Switzerland and Singapore.
Guido Bühler, SEBA Bank. Marc Gilliéron, Chabrier Avocats and Baldev Bhinder, BlackStone & Gold.
16/ Tokenization shaping the future of commodity markets. 33/ The impact of the counterproposal
Marco Grossi, Tokentrust. to the Responsible Business Initiative.
Mark Veser and Claude-Aline Dubi, Ernst & Young.
Sustainability and Gender Equality 34/ Commodity trade finance – Money laundering,
17/ The commodity trading industry and the UN fraud and financial crime risks in 2021 and beyond.
Guiding Principles on Business and Human Rights. Olivier Bazin, Holman Fenwick Willan LLP.
Raphael Jenny, STSA.
35/ Looking into the future of regulation through
18/ Towards more equality: the Swiss “Comply or Explain” approach. a green tinted magnifying glass.
Daniel Rüfenacht, SGS. Lisa Weihser, STSA.
18/ WISTA Switzerland and promoting equality.
Maryana Stober, Women’s International Shipping and Trading Association. HR & Education
36/ Working from home – from pleasure to frustration?
19/ ONE ON ONE WITH Muriel Schwab. Adrian Tüscher and Christophe Bellino, KPMG.
Gunvor.
37/ Trader's unique role in business and Human Rights.
19/ ONE ON ONE WITH Céline Coimbra. Dorothée Baumann-Pauly and Serra Cremer Iyi, University of Geneva.
LafargeHolcim Trading.
37/ Master in commodity trading online during Covid-19.
20/ ONE ON ONE WITH Deia Markova. Eliane Palivoda Herren and Jean-Paul Vulliéty, University of Geneva.
Société Générale.
38/ Education during COVID times:
21/ ONE ON ONE WITH Mariam Almaszade. Waltzing among constraints, creativity and agility.
SOCAR Trading. Silviane Chatelain, STSA.
Commodities is a supplement to l’AGEFI, daily publication of la Nouvelle Agence économique et financière SA | Chairman of the board Raymond Loretan | CEO and Editor-in-chief Frédéric Lelièvre | Commercial director Olivier Bloch
Editorial contribution STSA team, Elsa Floret, Agefi | Graphic design Damien Planchon | Subscriptions (021) 331 41 01 – abo@agefi.com | Advertising STSA Tél. (022) 715 29 90 – info@stsa.swiss | Printers Imprimerie Hertig + Co. AG | Copyright © Any reproduction
of articles and illustrations is prohibited without written permission | Head Office Route de la Chocolatière 21, Case postale 61, CH-1026 Echandens-Denges, T. (021) 331 41 41, www.agefi.com | Front page image credit: Ryan Stone – Unsplash.
Commodities is also a supplement to Tamedia Finanz und Wirtschaft AG, Werdstrasse 21, Postfach 8021 Zürich, Verleger: Pietro Supino, Chefredaktor: Jan Schwalbe, redaktion@fuw.ch | www.fuw.ch | Tel. 044 248 58 00,
Verlagsleitung: Marcel Tappeiner, Anzeigen: Goldbach Publishing: Philipp Mankowski (Chief Sales Officer), Adriano Valeri, Urs Wolperth, anzeigen@fuw.ch, Tel. 044 248 40 11
SPECIAL EDITION |MARCH 2021 | |COMMODITIES |05
Back to fundamentals
L
ast year, our theme was disruption. purpose definition and mission statements of
I don't think anyone anticipated what most trading companies, not to mention the
the world has gone through in the last credit analysis of most banks. Trading compa-
15 months. So far, it seems that we have nies are doing their share to protect the planet
adapted, particularly in the commodity indus- but the campaign for the Responsible Business
try where our trade channels have continued Initiative reminded us that our actions are not
to operate with few problems in terms of sup- yet recognized, our industry has to multiply
ply or logistics. It is surprising that despite the efforts in communication.
various lockdowns, there is a resilience of de-
mand in some sectors of our economies. Among the adaptations brought about by CO-
VID-19 is working from home. This was made
There were maybe two major disruptions to possible by today's technology, which, even ten
Ramon Esteve our industry and these were only remotely years ago, might have been proven difficult.
President of STSA COVID-related. I would mention the new trade The situation has also greatly pushed forward
barriers certain countries have put in place to the dream of the “paperless office”. The pande-
protect their weakened economies with most mic will have a long-lasting impact on the way
often a detrimental effect on their consumers.
Then there are the major losses incurred by the
financial sector in Asia. Large trading houses We are privileged
seem to be weathering this storm but it has not
always been smooth sailing for the smaller mar- to be a micro-cosmos
ket participants. It is ironic that even though
regulators fear institutions that “are too big to with well-established
fail”, their actions often lead to further conso-
lidation creating precisely that risk. I doubt
trading houses.
losses of such magnitude could happen in the
Swiss trading hub. We are privileged to be in we work. There are many technology-related
a micro-cosmos with well-established trading initiatives in which our industry participates
houses and shipping companies, experienced that are aimed at streamlining trade flows, such
auditors, seasoned bankers and underwri- as Blockchain and cryptocurrencies. We hope
ters, knowledgeable sector consultants and of to shed some light on these developments in this
course, controlling companies; information cir- edition. I also take this opportunity to congra-
culates freely and problems are usually rapidly tulate our teaching staff and our students for
anticipated and mitigated. completing our courses on-line. I have always
wanted an on-line offering so companies abroad
Climate change and environmental concerns can benefit from the Swiss excellence in educa-
are clearly on our agendas. The world needs to tion; COVID has forced it upon us. I hope that
decarbonize and today's consumer seems to be we can continue with an on-line selection after
putting increasing pressure on financial insti- things get back to normal.
tutions and what they finance. These are very
valid concerns that will accelerate change. GERMAN VERSION
Several brands have made bold environmen-
tal commitments and traders, as part of their
supply chains, will make them a reality. Sus- FRENCH VERSION
tainability has gradually made its way into the
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SPECIAL EDITION |MARCH 2021 | |COMMODITIES |07
One on One with Florence Schurch
Florence Schurch, Secretary General of the Swiss Trading and Shipping Association.
S
tarting her career working against orga- ness. It is mostly our fault for not communica-
nised crime, Florence Schurch was the ting enough. My goal – as Ramon Esteve, STSA
first Swiss female special agent posted President said – is “to make Switzerland as
overseas with the federal police. Six mon- proud of its traders as it is of its cheesemakers.”
ths after 9/11, she was posted in the Swiss embas-
sy in the US and later in Germany to work with The role of transport is also key to our economy.
the BKA. As a diplomat, Florence supported the Do you have some examples in shipping in this
ambassador on homeland security policies and whole value chain?
diplomatic duties. In 2009, the Conseil d'Etat Without maritime transportation moving 95%
nominated her as the federal attaché to defend of goods, distribution wouldn’t be as efficient.
Geneva’s interests at the national level. One year This is thanks to the sailors and crew members
after her nomination as the head of STSA, Flo- continuing to deliver goods and commodities
rence has set up her team, successfully digested around the world, sometimes without retur- responsibility through various projects. Some
the campaign against the Responsible Business ning home for months. are now financed by the World Bank or de-
Initiative and sees the focus of the year 2021 on veloping banks that see traders as having an
the fundamentals - for STSA’s 200 members but
also for the industry as a whole.
It is time now to learn important role to play in local community de-
velopment. There are many existing labels and
After the Great Reset announced by the World
from the mistakes made, standards which remain ignored by the public.
Economic Forum, the return to fundamentals, get rid of the past and work Does the expression “Back to Fundamentals”
proposed by the STSA. Can you explain this choice? mean that you want to place the trader in the middle,
In 2020, significant frauds have shocked the on the future of the trading via information-sharing among others?
trading industry and left banks and SMEs in This is exactly our aim. As you can see below,
difficulties. The impact on the industry’s image hub in Switzerland. traders play a fundamental role in everyone’s
is huge. Our role is to support the traders to res- life. Mistakes were made, but trading compa-
tore their image. We believe this can be achieved 2020 has been a successful year for the big trading houses. nies’ governance models changed to increase
by going “Back to the Fundamentals”: it is time to Can it explain why the trading sector is demonised? transparency and accountability.
learn from the past and work on the future. Traders are working in complex countries,
where the law and governance are not always Elsa Floret, Journalist at L’Agefi
Ok, let’s talk about the future, comparable to Switzerland. Switzerland
what are your priorities for 2021? doesn’t cultivate cocoa, coffee, rice or cotton. GERMAN VERSION
Communication, communication, communica- Thanks to traders, commodities from re-
tion… and transparency – our keywords to go source-rich countries, often marked by insta-
forward. The industry’s reputation has suffe- bility, are moved to resource-scarce countries. FRENCH VERSION
red for too long due to a lack of public aware- Trading companies are actively promoting
Illustration par Florence Schlegel insta@floschandfam
08 |COMMODITIES | | MARCH 2021 |SPECIAL EDITION
A success to be maintained in Switzerland
by relatively low regulatory costs in com- to Switzerland often have regulatory costs
Fabio Regazzi parison with other countries, especially for between 10 and 15% of GDP. Switzerland is the-
President of the Swiss Union of Arts and commodity trading. In fact, every regulation refore doing well for the time being.
Crafts, National Councillor, Chairman of leads to costs for SMEs. Generally, the more
the Board of Directors, Regazzi Holding regulations there are in number and detail, The USAM notes, however, that since its first
the fewer opportunities companies have study developed with KPMG in 2010, regu-
I
to develop their potential. Of course, some latory costs have increased by more than
f there is a great paradox in Switzerland, regulations are necessary, such as for road CHF 10 billion in just 9 years. Fortunately,
it is the trade in raw materials. Indeed, traffic. It is therefore important to be able the situation is not yet at our disadvantage
Switzerland is a small country very poor compared to other European countries. This
in commodities. Switzerland doesn't even
have a maritime outlet that would allow it to en-
Switzerland's economic is why the USAM is fighting to introduce a
constitutional regulatory brake, similar to
ter the international maritime trade. However, policy (…) is characterized the well-known debt brake. With this instru-
Switzerland is one of the most important com- ment, a vote would have to be taken each time
modities trading centres in the world. It's an eco- by low regulatory costs. to introduce a new regulation. This is the
nomic fact that high-growth countries are often only way to keep the costs of regulation low
the poorest in raw materials, but it's another to to differentiate between regulations that and to maintain a high level of competitive-
be able to climb to the top of the world's com- are necessary and those that stifle entrepre- ness for the success of SMEs in Switzerland.
modity trading rankings. Especially since it is neurship. The basic rule is to apply an objec-
mainly SMEs in the Lake Geneva and Ticino re- tive cost-benefit ratio. The USAM represents and defends the interests
gions that have succeeded in establishing a solid of more than 500'000 SMEs in our country. The
reputation and developing cutting-edge know- Ultimately, unnecessary regulatory costs members of the USAM are the cantonal unions
how in the transactions that are indispensable weaken the competitiveness of SMEs in the of arts and crafts, the Swiss professional and
for trading. How is it possible to achieve this market. Where does Switzerland stand in re- industry associations as well as other organi-
without the necessary resources and maritime lation to these regulatory costs? According sations and institutions for the promotion of
access? Critics will write that Switzerland's to a study by the USAM published in 2019, the SMEs, which include 230 associations.
aggressive tax system is the reason, or that the regulatory costs would amount to more than
financing provided by the big banks has made it CHF 60 billion or about 10% of Switzerland's GERMAN VERSION
possible to set up this dynamic trading hub. GDP. The study estimated this cost on the basis
of 4,000 legislative texts, from all the different
The reality is more straightforward. Swit- areas of regulation and the federal, cantonal FRENCH VERSION
zerland's economic policy is characterised and municipal levels. Countries comparable
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SPECIAL EDITION |MARCH 2021 | |COMMODITIES |09
2021: Back to fundamentals
has often mechanically improved financial The correct answer must therefore be
profitability but obviously increased the level based on what the financing teams specia-
Emmanuel Lemoigne of risk. Only, we always find less expensive lising in Commodity Trade Finance know
General Manager than less expensive and by forgetting to pay at by heart by going back to initial practices
BIC-BRED (Suisse) the right price, its own risk premium, we end and applying them scrupulously. The
up leading to the scalding of bankers who can- working groups set up by STSA, made up
not afford to leave on the table and all at once, of specialists from Swiss banks, are, in
With change increasing both in speed and the equivalent of several years of profit. This this regard, illustrative of the know-how
complexity, the commodity trading leaders inconsistency has resulted in a significant hu- to which reference should be made (see
of the 2020s will be the organisations able to man cost and has fuelled a legitimate concern pages 12 and 13).
among traders about the abandonment of
take informed decision faster than their peers. these activities by banking establishments. Reasons to be optimistic about the
W
Commodity trading ecosystem in Switzerland.
hile 2020 will be remembe- A return to the fundamentals of the business The ecosystem that exists in Switzerland
red, obviously marked by is therefore essential: structured and tran- around the commodities sector is a real
the health crisis, it will also sactional financing. opportunity for all players. Recognised
leave the world of commodity The basis of transactional financing is re- worldwide for its competence, Switzerland
trading with a bitter taste. Indeed, the cases course to the financed assets and the self-li- must capitalise on this environment condu-
of fraud revealed have very concrete conse- quidating nature of the credit. The bank cive to business in conditions of security
quences that could have a lasting impact on the finances the acquisition of an asset, which and transparency where everyone can find
future of this essential link in world trade. So, the company pledges to it and is reimbursed their account:
it seems that a return to reason is called for.
• Traders, based in Switzerland but also
According to various sources, the trader This abandonment those who operate from abroad and find
defaults cost in the order of USD 9 billion expertise in structured finance in Swit-
to USD 10 billion globally. Mainly linked to of good practices only zerland. No financial centre has developed
players in Southeast Asia and the Middle this skill so assertively.
East, the claims ended up affecting banks amplified the movement
based in Switzerland, specialising in trade
finance. Thus, according to several esti-
of suspicion on the • Trade finance banks and their teams who
have accumulated years of experience
mates, the gross losses resulting from these
failures could reach nearly a billion dollars
transparency of the sector and have, despite the setbacks, adapted to
the new situation of globalisation.
for Swiss banks. These losses accelerated and ended up constituting
the disengagement of some players and • Regulators through their continuous mo-
precipitated others in a drastic review of a societal concern nitoring of establishments.
their portfolio, extended if necessary, by
decisions to reduce the allocation of capital
opportunely relayed • Lawyers and advisers whose support to
dedicated to this business. by various NGOs and stakeholders is essential.
If the fall is sudden, it is only the consequence politicians from all sides. • FinTech’s whose innovations will accele-
of practices that have slowly drifted over the rate the digitalisation of the sector by
course of many good years. If we summarise bringing reliability and fluidity.
them, they are generally characterised by a by the proceeds from the resale of this same
reduction in the requirements in the tran- raw material after several stages that have • Finally, NGOs and politicians whose
sactional financing of operations approach, marked the operating cycle (prepayment to approach cannot be limited to a general
leaving room for rather classic scams. In ad- the producer, storage, transport, resale) and criticism of the activity but to a pragmatic
dition, this abandonment of good practices which requires this structuring of financing. and constructive approach to the changes
only amplified the movement of suspicion on We come back, more broadly, to the basics of to be made to respond to societal concerns,
the transparency of the sector and ended up the banking profession which is, above all, the legitimacy of which is indisputable.
constituting a societal concern opportunely knowing what you finance, to whom you lend
relayed by various NGOs and politicians and how you will be reimbursed. Faced with competing financial centres
from all sides. The latter, not always well-in- which have just paid a high price for the
tentioned and, to say the least, often guided by By developing RCF-type financing methods, denaturing of the business, but which will
ideological postures, saw it as a dream oppor- normally reserved for large corporates remain vivid competitors in the future,
tunity to want to put a stop to the development with significantly less leveraged financial Switzerland has all the assets in hand and
of the sector. But this is only the catalyst for structures, banks have participated in the benefits from a historic window of oppor-
the crisis, and in the end, by dint of wanting to disguise of the profession. Indeed, the ba- tunity to strengthen its predominance on
disintermediate everything, all the players in lance sheets of large traders are marked by these trades.
the sector have helped to gain flexibility and a greater level of encumbered current assets
speed while pressurising financial costs. The than a more traditional company. De facto, Let everyone take the full measure of this
reasons for these choices can be explained creditors who have subscribed to this type to bring the world of commodities into
by the weakness and decline in the economic of RCF financing find themselves in a form a new era which, far from being a step
profitability of these businesses. In other of subordination which leaves them with backwards, will herald new practices as-
words, when your business model no longer very limited recourse in the event of default. sociated with an increasing use of new in-
generates a sufficient level of margin, there This type of financing should not find a taker formation technologies.
is a strong temptation to compensate for this under these conditions since its repayment
relative weakness by increasing the volumes should normally be ensured by the profitabi- GERMAN VERSION
handled. This headlong rush is necessarily lity of the company and not by new debt. This
accompanied by a more intense recourse to shift towards the facility explains the level
debt, accepted by the largesse of the banks. of losses, reinforced by the pricing of these FRENCH VERSION
The resulting increase in financial leverage credits at abnormally low margins. 
10 |COMMODITIES | | MARCH 2021 |SPECIAL EDITION
What role market insurance plays
Lloyd’s of London. The support and protec- The CPRI market has a long history with trade
tion the CPRI market provides trade, export and commodities activity with a deep level of
Philippine de Villèle and commodity finance activity is often wel- understanding of its clients’ business. Whilst
Director, BPL Global, Geneva branch come by buyers or sellers when the value the market’s coverage offering has broadened
of contracts is large or when the number of significantly in the past five to ten years, trade
contracts is significant. It is a useful miti- and commodity related business remains a
W
gation tool for corporate risk managers but core part of its activity. In 2020, enquiries
hen one company buys or trades also for banks who finance the underlying related to risks in extractive industries (Oil,
goods or commodities, there are trade who see such insurance protection as mining and metals) represented a healthy
resulting risks that arise and a security, thereby enhancing the credit pro- percentage of all transactions submitted to
need to be considered: file of their borrower. CPRI insurers. 2020 has seen a fair number of
challenges for the market from the impact of
• The performance risk of the seller which
is borne by the buyer: e.g. if the seller does
These risks can be the COVID-19 pandemic to the well-publicised
frauds involving businesses in both Singapore
not deliver on time or the agreed quality /
quantity described within the sales
mitigated by insuring with and Dubai. The latter resulted in significant
claims volume for the insurers involved which
contract is not as it should be; the Credit and Political could in turn lead to insurers’ offering in the
• The credit risk on the buyer which is borne space becoming more selective in terms of the
by the seller: e.g. if the buyer defaults on its Risk Insurance market. risks they are willing to insure, however ove-
contractual payment obligation(s); rall, the CPRI market should still be viewed
• The political risk which can arise in the Today, with an estimated total of around USD as an informed, strong and reliable option for
country where the goods / commodities 350 billion in live exposure, CPRI insurers risk managers and banks to consider when
can be in transit or stored. play a central role in facilitating trade and seeking to manage and mitigate their country
economic development across all five conti- and credit risk around the world.
These risks can be mitigated by insuring nents and in practically every country in
them with the specialist Credit and Poli- the world. Currently, banks represent 55% of GERMAN VERSION
tical Risk Insurance (“CPRI”) market. The the CPRI market client mix, while corporates
CPRI market is mainly based in London (e.g. exporters and commodity traders) re-
and consists of circa 60 individual insurers present 30% and other financial institutions FRENCH VERSION
consisting of both insurance companies and making up the remaining 15%.
After the storm, a promising renaissance
based sector de-risking, lenders have fur- have, for instance, increased their use of digital
Pierre Galtié ther reinforced their risk assessments and platforms to help managing operational risks.
Head of Commodity Trade Finance securities over borrowers, and are putting Another cornerstone of this ‘new era’ is simply
Banque de Commerce increasing emphasis on the transition towar- to prioritise experience. If bankers need to be
et de Placements, Switzerland ds greater sustainability. generalists in terms of their wider technical
knowhow, they also need to be specialists in
This means, first and foremost, a more rigo- their knowledge of the industry. Continuous
After the turmoil that shook the commodity rous approach to the transactional self-liqui- training and connectivity to the market are es-
trade finance universe in 2020, a period dating financing principles that have always sential. A trade finance banker is financing the
of introspection has gradually given way constituted the foundations of modern trade real economy with complex risk elements and
finance, including: strict Know Your Customer needs to be “there on the ground”.
to the fundamentals which are laying and Know Your Deal due diligence, enhanced
the foundations for a new era with collateral monitoring practices, the detection The description of this new framework which
greater robustness. has emerged from the ashes of the recent crisis
I
would not be complete without highlighting
n addition to the disrupted trade dyna- A trade finance banker is the evolution that most trade finance banks
mics due to COVID, the crisis revealed and commodities players are conducting
instances of fraud and embedded bad financing the real economy. towards more sustainability. This transition
practices deviating from the basics started well ahead of the crisis, but has been
of trade financing. If the crisis revealed of potentially duplicate trades, stronger gua- further amplified since. Integrating more en-
weaknesses, in its wake has also come the de- rantees, and privileging borrowers with fully vironmental, social, and governance criteria
sire to refocus on what lies at the very heart transparent accounts, regulation and corpo- in the credit analysis process is becoming an
of the commodity trade finance industry. rate governance. At the same time, the two important part of financing decisions.
main commodity trade finance hubs, Geneva
Hence, while some lenders are still healing and Singapore, have worked on codes of best Looking ahead, the crisis was a necessary
their wounds, banks are taking a proactive conduct aimed at enhancing transparency as wake-up call for an industry which will
approach overall to adapt the pre-existing well as promoting sustainable credit flows. continue to adapt and stand by its customers.
model. What is at stake is accommodating These standards are not new, but restating While the dead wood has been trimmed, the
the USD 12 trillion market in commodities them was needed to align market players with roots of the tree remain strong.
exchanged and consumed annually around the principles that must guide the industry
the world. Between the necessity to cut risk and world trade as a whole. This has come with GERMAN VERSION
exposure and the need to continue to finance a higher level of standardisation in a sector
commodity trading, trade finance banks characterised by the atomisation of its supply
have taken a whole series of steps, in a “back chain. It explains the recent acceleration in FRENCH VERSION
to basics” stance. Rather than a mere broad- blockchain investments made by banks, which SPECIAL EDITION |MARCH 2021 | |COMMODITIES |11
Crises: a catalyst for change in trade finance
dity prices leading to additional financing ficulties, insofar banks, as part of their own
requirements. Finally, the economic outlook strategic imperative shift, are refocussing
Jean-François Lambert is rather positive as if the world had learned their scarcer resources on fewer markets.
Founding Partner, to live in a lingering COVID-19 uncertainty.
Lambert Commodities They will therefore be less prone to support
Are we back to normal, then? Not quite. There overstretched supply chains unless this is
R
is no longer such thing as normal. History deemed strategic (such as in Japan or China).
elationships between traders and shows that major crises are always a catalyst Commodity traders will find it increasingly
bankers were severely challenged for major changes, for better or worse. This difficult to attract banks in pre-financing
during 2020. Amid the economic one will certainly not differ. Amongst the new their suppliers if located in geographies per-
crisis triggered by the COVID-19 priorities of a post-COVID-19 world, as urban ceived as high risk. They will have to either
pandemic, supply chains have been disrup- populations have rediscovered a much less commit more of their own resources to pro-
ted, whether on the demand or the supply polluted environment whilst economies were vide this essential support or partner with
side, or by affecting the logistics supporting under lockdown, the energy transition will alternative financiers such as credit funds
the trades. Compounded with the violent most certainly prevail and be significantly ac- attracted by higher yields.
volatility of prices sparked by the pande- celerated. This will affect all businesses, and
mic-induced disruptions, the world drifted in
a perfect storm. Most traders survived, for-
notably trading, of commodities but also other
goods. Traders and supply chain managers
Are we back to normal?
tunately but some did not, and a few high-pro- will not only have to show a more thorough Not quite. There is no longer
file bankruptcies caused painful losses for the management of their own resources and car-
banking industry. It was no surprise there- bon footprints, but they will soon be under the such thing as normal.
fore that many banks reassessed their lending cosh to demonstrate the same conduct across
strategies. Many choose to shrink their risk the whole supply chains they manage. Banks, So are we really back to fundamentals? Should
appetite, but some took sterner actions and under an ever-stronger reputational pressure not the question rather be “what are the new
shut down commodity lending businesses, from society at large, will be asked to put their fundamentals in the making?” We are living
some regionally, a handful even totally. customers’ Environment, Sustainability and through extraordinary times and should heed
Governance (ESG) policies on top of their agen- the changes that are taking place. With an ove-
Where does this leave the industry at the da and of their own credit decision process. The rarching challenge. Market places have beco-
dawn of 2021? It is not in a bad place at the (very few) traders – both small and big, still in me increasingly transparent. Secrets do not
outset of the year. Demand has improved denial are strongly advised to start drawing last long in a social media environment and
in various markets and whilst supply chain their ESG plans and revisit their strategies to recent events show that collective uproar can
address the structural changes underway. put strategies or even companies down, with
little ability to rebuild a shattered reputation.
History shows As the world polarizes and redefines globa- A whole sector can be very quickly harmed by
that major crises are always lisation, supply chains will get shorter and
increasingly prioritise local content as do
individual behaviour. The only valid response
is to strive towards the best standards and to
a catalyst for major changes, consumers. Food and strategic supply mana- communicate with the key stakeholders and
gement will certainly fare also high on top primarily banks in the most open and transpa-
for better or worse. of the governments’ agenda. Relying on – po- rent manner. Never have we lived through such
tentially easily disrupted – long and complex a powerful looking glass. In an industry so long
disruptions are still occurring, trading is supply chains is now increasingly seen as a shrouded in secrecy, this is probably the most
proving quite profitable, whether in agri, weakness that needs to be corrected. This will difficult challenge, but there is no alternative.
metals or energy, in some cases, extremely create both opportunities and difficulties.
profitable thanks to auspicious market Opportunities for traders able to take advan- GERMAN VERSION
structures. Traders, notwithstanding iso- tage of such new strategic imperative, either
lated situations, did not face a major liquidity as suppliers or hoarders, able to answer
squeeze after the banks’ strategic reviews, growing supply security concerns, shorte- FRENCH VERSION
and this despite generally elevated commo- ning or diversifying their supply chains. Dif-
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www.TradeDataMonitor.com | Geneva@TradeDataMonitor.com12 |COMMODITIES | | MARCH 2021 |SPECIAL EDITION
Reinforcing common practice
in commodity finance in Switzerland
Alastair Houlding Patrick Cotasson Michael Jackisch
Global Project Lead, Head Commodity Trade Finance,
Head of Soft Desk, BIC-BRED
Trade and Commodity Finance, ING Switzerland, UniCredit
N
ewton’s Third Law of Motion dic- ding sector, particularly in the field of hydro- Angst
tates that every action shall have carbons, which experienced historic price Coming at a time of several other pressures
an equal and opposite reaction. volatility and demand fluctuation as the (the continued push on universal bank mar-
As mentioned in other articles world stayed home due to the COVID-19 pan- gins through low interest rates – amplified
here, while the number of traders involved demic. If the epicentre of these events was by monetary responses to COVID-19, rising
in recent events was not that numerous, the in other regions, the impact did not avoid compliancy costs, reputational risks coming
scale of the potential losses was very signifi- Switzerland – international banks incurred from trader activity in developing markets
cant and impacted nearly all the active trade losses in their Singapore branches, impac- and the beginnings of a tectonic shift away
finance banks. ting appetite for commodity finance glo- from hydrocarbons), banks have thought
bally, while many Swiss offices maintained long and hard about their participation in
A large number of trade finance banks and responsibility for the coverage of UAE-in- and exposure to commodity finance.
their clients have their trade finance teams, corporated clients, some of them being invol-
or at least a presence, in Geneva. Under the ved in fraud as well. Failings
auspices of the Swiss Trading & Shipping As in most disasters, the failings leading to
Association (STSA), leading industry banks Commonalities any major financial loss are typically many
have been meeting to discuss financing prac- Whatever the specific background to these and sequential. Appropriate client selection
tices in an initiative that attempts to enhance cases they each had a commonality in as is a fundamental criteria and the need to pick
the control mechanisms against fraud and much as banks financing these entities be- clients with good integrity and standards of
adopt a “back to basics” approach that unifies lieved themselves to be well-protected from governance is a key lesson. Sensitivity to po-
standards of transactional administration. financing loss through their transactional tential red flags and adequate due diligence
If not a “USD 10 billion reaction”, it reflects (or borrowing base) financing of liquid com- prior to on-boarding is important given that a
a pressing need to restore confidence and modity inventory and receivables from end very human phenomenon, confirmation bias,
avoid repetition. consumers. Typically, when clients get into may suppress sensitivity to (and socialisation
financial difficulty, banks financing on this of) potential red flags once on-boarded.
basis find themselves well-protected against
An initiative that attempts loss. However when fraud is involved (the A loss of bank participation
assets are not there or not of the expected
to enhance the control quality, or pledged twice over), very signifi- in this real-world métier
mechanisms against fraud cant losses can and do arise – far in excess
of banks’ modelled expectations, thereby can impede the efficient
and adopt a “back to basics” leading to valid questions as to whether
flow of international trade
these models and practice are fit for purpo-
approach that unifies se. Given that commodity finance is meant
with attendant cost to the
to be a relatively low margin industry (the
standards of transactional movement (trade) of essential commodities world economy.
administration. from producer to end buyers is an inherent-
ly high volume low margin business and the Questions should also be asked about poten-
low margins of the trading community can tial shortcomings by third parties, be it collu-
The size of the ‘Bezzle’ only support a certain financing cost), but sion by staff at long standing warehouse kee-
Trust is an important feature in all econo- relatively costly to participate in (following pers or the inadvertent failings of auditors
mies and an essential lubricant to create low transactions from inception to repayment is in not picking up on balance sheet inflation,
transaction costs. Fraud is the hidden cost of work intensive and involves material com- hidden risks and losses. Both in and outside
trust (sometimes not so hidden: the fact that pliance costs), low loss expectation and expe- the commodity sector, we have seen that an
the EU has a significant trade surplus with rience is fundamental to bank participation. audit assurance may measure aggregate as-
itself can only be a proxy indicator for the A loss of bank participation in this real-wor- sets according to established conventions but
scale of VAT fraud). In his seminal work on ld métier can impede the efficient flow of in- not assure as to their real value; it is more a
the 1929 market crash, JK Galbraith coined ternational trade with attendant cost to the quantitative than qualitative discipline.
the term “Bezzle”, being the inventory of world economy.
undiscovered fraud in an economic system. A number of weaknesses in the overall as-
Frauds typically grow to the point at which It is worth outlining that the vast majority of sessment were more psychological in nature.
they are uncovered and in general they are the commodity traders have behaved impec- Herd behaviour, for example – the notion that
brought to light by significant periods of cably in 2020 and despite extreme market a course of action must be permissible because
volatility and retractions of liquidity (of- turbulences, are showing positive (for some everyone else has been doing it for decades.
ten with a domino impact as confidence re- record) financial results. They have demons- Other factors include being too complacent
verses with events); frauds typically require trated that their business model and price with historical, well-established trading
growing liquidity to avoid discovery. protection (hedging) have been as robust as houses and, last but not least, an increasingly
one should have expected. A minority of bad competitive banking landscape, especially in
With the benefit of hindsight, 2020 brought apples have triggered unprecedented tur- Singapore (e.g. if an extra step is requested, the
just these conditions to the commodity tra- moil in the industry in 2020. fear that someone else may take the business).SPECIAL EDITION |MARCH 2021 | |COMMODITIES |13
Finally, the industry participants may have The aim has been to bring relatively detailed sta- to create more uniform ways of working that
been describing financing as “transactional” tements of best-practice, covering each element lead the way to greater systemisation, digiti-
(commonly meaning loans being secured by of transactional and borrowing base secured sation and the use of nascent technology in
the goods used as collateral, including the commodity finance, with the intent that com- trade confirmation, contractual confirma-
proceeds of the financed goods to repay the mon adoption by banks will both make the in- tions, inventory tracking and assurance, to
loan in a self-liquidating manner), while not dustry safer but also lead ultimately to savings ultimately drive down the prospect for loss
always administering the financing to these on costs of administration. The premise is that and the important costs of running a tran-
exacting standards. Under these circums- standard practice will lead to less negotiation sactional trade finance business.
tances, we may have been to some extent with individual clients and their counterparts
confusing the good behaviour of the vast and ultimately facilitate systemisation due to Old-fashioned maxims remain valid – crea-
majority of our clients with the impact of our commonality of process requirements. At the ting third party proof points in a transac-
transactional administration. time of writing, after numerous interactive ses- tion’s lifecycle. The exciting element is the
sions, the three work streams have been com- degree to which technologies are rapidly
Reactions pleted and the Banks involved are in process of evolving to facilitate this and it is the inten-
Except for two important European commo- finalising a consolidated communication. tion of the Swiss commodity finance indus-
dity finance banks, the vast majority have try to be at the vanguard of their adoption.
confirmed the continuation of their com- The recommendations are numerous but some
modity activity. Nevertheless, most banks key conclusions are obvious: for a contract to
undertook a deep dive portfolio and modus be transactionally-financed, it should be freely
operandi review with some retrenching on assignable to a financing bank and end pay-
client type. ment shall be clearly established without set-off
Who does what
or counterclaim. In consequence, if underlying Commodity traders play an essential
Simultaneously to Singapore’s Code of Prac- commercial contracts are appropriately struc-
role in the value chain (transportation,
tice, banks involved in commodity finance tured, financing can follow smoothly. Others
involve greater interaction with end-buyers, finance, hedging, transformation)
Banks involved in commodity noting that some of the industry events were
predicated on double-financing of open account
to deliver goods to the consumer.
finance in Switzerland met receivables. Here the industry has moved to Within this context, trade finance
notification of assignment to end buyers and
under the auspices of the increasingly looks for assurance from those
banks are essential in financing
the real economy and providing the
buyers that proceeds will be remitted in line
STSA to share lessons learned with the assignment. This can be burdensome liquidity for world trade flow.
and discuss best practice to administer, but again, once an agreed way of
working is established with clients and major After last year’s negative news flow,
moving forward. counterparts (involving separate negotiation joint efforts are required to restore
with these buyers), administration becomes
banks’ confidence in the sustainability
in Switzerland met under the auspices of the smoother and can potentially be systemised.
STSA to share lessons learned and discuss The working groups recognised that the com- of commodity trade finance.
best practice moving forward. The objective mon characteristics in last year’s fraud cases
was to produce a set of specific recommen- were a combination of weak corporate gover-
dations to ensure common standards for all nance, speculative (but hidden) behaviour and
industry participants. poor business ethics. Each of those factors will
incline banks to enhance their due diligence by
Recognising that convention and practice spending more time and resources conducting The Swiss hub
can be different between the sub-sectors of extensive operational audits. There is also the
oil, metals and soft commodity finance, three possibility of traders requiring banks to act to- The Swiss financial centre has
separate working groups were established gether in order to optimise the resources spent developed a niche expertise to
for each sub-sector. These groups (chaired by on such exercise. become the main commodity hub
the authors) are populated by leading banks
in Europe by far for trade finance.
in the commodity finance sector in Switzer- Back to Basics, Back to the Future
land; Arab Bank, BCGE, BCP, BCV, BIC-BRED, In the short run, higher standards of manual
CAI, Credit Suisse, ING, Sberbank, Societe administration are being imposed to keep Not only traders and banks, but
Generale, UniCredit and UBS. the industry safe. The long run objective is other service providers linked to it
(surveyors, lawyers, consultants)
often have their main offices in
switzerland to be nearer their clients.
Overtime, academic qualifications
(Masters in commodity trading at the
University of Geneva, for instance)
have lent credibility to Switzerland’s
claim as the place to be for the
commodity business.
GERMAN VERSION
FRENCH VERSION
14 |COMMODITIES | | MARCH 2021 |SPECIAL EDITION
There are two types of companies: Those who know they’ve been hacked,
and those who don’t. Firms are scrambling to mitigate risk.
A riskier landscape demands a trusted system
the activity they have performed with it (fi-
nanced for a bank, for example). This creates
Souleïma Baddi a digital audit trail against a document that
Chief Executive Officer, Komgo will strongly mitigate the risk of it being
reused for fraudulent purposes.
K
Digitalisation is the first step toward efficient
omgo SA is a software develop- fraud management as it strengthens organi-
ment and IT services company in- sational processes, decreases dependency
corporated in Geneva since 2018. on emails where information is siloed, and
Founded by leading Swiss and limits manual checks by enabling automa-
international companies in the trade and tion. It frees time for a company's teams to fo-
commodity finance industry to drive digi- cus on what matters. Komgo has seen a surge
talisation of the sector, Geneva was a natu- in demand in the past months, especially
ral choice in its capacity as a world-leading for Trakk, as it can be deployed quickly, re-
commodity hub, its access to highly skilled quires very little change management, and
human resources, and its respected role in brings new visibility to the status of trade
driving best practices for the industry. documents. Leading corporates are now
registering all of their invoices on Trakk,
Three years later, there is no doubt that Kom- which has brought significant comfort to
go will transform the trade finance industry their lenders and trading partners.
over the next decade. Indeed, the environ- COVID-19 has also compelled many teams
ment post-COVID-19 is mainly about mitiga- to shift to remote work, and most managers
ting fraud risk, as fraud is more prevalent in acknowledge that we might never return
times of financial stress. Regulators are pres- to business as usual, which has increased
suring banks to add fraud mitigation tools to demand for cloud-based software applica-
tions and remote login infrastructure, a key
added-value provided by Komgo.
Digitalisation is no longer
The pandemic is also disrupting supply
a discussion topic; chains. Reliance on the movement and pro-
it is an absolute “must have”, cessing of physical paper has proven too
slow, and has delayed the time between order
which will play a major and cash collection. Companies have to hold
more inventory, as delays in shipments of one
role in the future of the component can derail the entire manufactu-
ring process; the industry has moved from
trade finance industry. “just-in-time” to “just-in-case”. This is more
expensive and requires more financing, and
all their products. This is even more true in emphasises the need to go digital to execute
the commodity space, where transactions safer, more efficient transactions. Komgo’s
are generally not yet conducted via digital network is underpinned by permissioned,
channels and trusted counterparties; both authenticated messaging removing the need
banks and trading houses need an easy and for signature verification and call-backs,
simple way to enhance their trade execution. while structured data from Komgo messages
Komgo powers a secure network of veri- can be easily mapped and integrated with any
fied actors generating instantaneous trust internal system, generating huge efficiency
between parties, and offers a smart solution, gains and reducing manual errors.
Trakk, to increase the security of trade do-
cuments exchanged between multiple par- Digitalisation is no longer a discussion to-
ties via email (invoices, contracts, BLs, etc.). pic; it is an absolute “must have”, which will
©. Markus Spiske – Unsplash
Trakk allows users to register the proof of play a major role in the future of the trade
any document to create an immutable, digi- finance industry. No organisation can af-
tal version, whose genuineness and authen- ford to be left behind, and those that move GERMAN VERSION
ticity can be easily verified by anyone, thus too slowly will lose a competitive edge to
guarding against fraud and falsification. others who are already working together
Banks, traders and inspection companies to build a trusted and more secure finan- FRENCH VERSION
can track the usage of the documents and add cing environment. You can also read
