Some pretty robust performances by Asian economies were undermined by rising oil prices during 2004. With an energy intensity double that of OECD countries, the positive effects of strong export growth and increased private consumption were neutralised.

So here is part one of my review of the structured-commodity-finance market in Asia. I will finish off next month.

When considering Asian structured-commodity-finance trends, the large liquidity pool in the Asian market brought about by strong economic growth has to be considered. If the market has plenty of liquidity, the need to borrow naturally declines. This has been a major trend in the development of structured commodity finance in Asia over the past two years.

However, there are other factors affecting the volume of transactions in the Asian market. Structured trade requires detailed explanations of deal structures and documentation. The days of name lending (‘family lending’) created a culture that is difficult to shake off, and apart from during a short period after the Asian crisis, old habits have re-emerged.

A lot of structured trade finance is relating to international commodity flows, pre-export finance requirements, tolling, inventory and distribution finance. Many large commodity groups and trading entities that operate within Asia actually have their own finance centres in the US or Europe. There has also been an increasing trend of end-user product inventory (meaning Asian manufactured goods) being held nearby global end users. In fact, a lot of American-based finance houses are financing inventories of variable goods, anything from cocoa to frozen fish. What you also see is these American finance houses (which are non-banking institutions) setting up shop in Asia in order to trace the finance of the goods flow back to the producer.

Other commodity-trading groups just pay cash with limited structuring, especially for mid-cap sized deals. In 1999/2000, when I was CFO of a big trading group, I discussed structured trade deals for Indonesian and Russian coal. But I didn’t get strong support from my colleagues and my board was aloof to off-balance-sheet structures, which I think is often the case in Asia. In 2001, when the company arranged its first syndicated-loan and later on a convertible bond, it became just a question of using cash.

One other interesting memory from just two years ago was that the company I was working for had increasing needs for finance outside of Asia, in Latin America or Russia for example.

Actually, a lot of producers in Asia prefer the developing-capital markets – the Chinese aluminium industry is one such example. A lot of banks are focusing their structured-trade divisions on looking at receivables programmes or factoring programmes as ABS structures become more popular (with all the Basel II benefits). Publications that focus on structured-trade-finance business often talk in their Asian pages about ‘supply chain’ or ‘trade services’ or ‘ebanking’. Currently, there even seems to be a lack of deals to get the press excited. This is in stark contrast to the trade-services market, which is booming due to the high trade volumes particularly relevant to China.

We will take a closer look at China’s structured-trade market in a later issue. In the meantime, what about other countries in the region?

In Thailand there is a preference for the developing-capital markets – the power sector, for example, prefers this to the ECA route. In the Philippines, the domestic syndicated-loan market is strong, with local lending rates less than the sovereign rate. Vietnam still has a lot of government control of commodity industries.

There have been some pre-export finance deals for coal in the market. A lot of ‘paper trade’ or ‘structured dummy deals’ for foreign-exchange arbitrage have been seen in the Indian market. Although there have been some pre-export finance deals for copper and aluminium, these dummy deals have been numerous and, for a lot of financiers, have been their main play in India.

There are vagaries about ownership of goods in India, for example how can a financing bank get legal ownership over goods in a warehouse it happens to be financing?

This has been a continuing grey area and has perhaps hampered structured-trade-finance developments. In Malaysia, there are some niche pre-export deals for timber and a number of shorter-term structures for soft commodities. Indonesia has been one of the stars of the structured-commodity-finance market, with a number of large coal deals. And, of course, Pertamina is a favourite with the structured-trade banks. We’re also seeing some multilateral agency activity from Asian Development Bank and International Finance Corporation, especially in relation to recent deals in China.

David Sullivan is CEO of Trade Finance Corporation in Hong Kong