SUB-SAHARAN AFRICA: TRADE & COMMODITY FINANCE OVERVIEW

Feature

posted 15 Mar 2002 in Volume 5 Issue 6

SUB-SAHARAN AFRICA: TRADE & COMMODITY FINANCE OVERVIEW

Opportunity in the face of risk

Ian Henderson, Senior Product Manager, Structured Commodity Finance, at WestLB gives a synopsis of the current state of trade and commodity finance in sub-Saharan Africa. Markets such as Zambia, Ghana and Nigeria keep the deals flowing and even countries such as the DRC, Equatorial Guinea and Sudan are looking brighter prospects for financiers and traders. As ever, the risks remain however.

“In the middle of difficulty lies opportunity,” Albert Einstein

Sub-Saharan Africa remains a primary commodity exporter and a net importer of refined, processed and manufactured goods. This is an ideal environment for institutions providing financial solutions for trade flows.

The sub-Sahara region is more often than not considered as a single target market. This may be true when comparing real and relative numbers on a global basis. The region is however made up of contrasting cultures, infrastructure, legal systems, climates, export and import demands. In order to maximise returns and generate a sustainable return to meet the investment required in pursuing buisness in Africa, financial institutions tend to market products ranging from retail banking to corporate finance and advisory services. In tandem with this approach these same institutions tend to be present in several countries to take advantage of various seasonal differences and benefit from an element of risk diversification.

The main players in the sub-Sahara African markets continue to be Afreximbank, ABSA, Barclays, BNP Paribas, Citibank, Fortis/Belgolaise, KBC, SocGen, Stanbic and Standard Chartered.

In recent months there has been a fair amount of press on the encouraging level of deals concluded in the region. However, when one takes a closer look, an element of concentration is present. Namely, oil and west African country risk. The large headline structured trade and commodity deals closed in the last 12 months have included Sonangol (Angola), SNPC (Congo Brazzaville), Ghana Cocoa Board and SIR (Cote d’Ivoire).

The main reasons for this relate to the high level of risk mitigants such as offshore performance risk, self-liquidating export finance with OECD payment risk and sovereign/donor support due to the strategic nature of the deal/commodity. These deals also provide an attractive deal size or credit turnover volume to generate returns at an acceptable risk/reward rate.

Pricing for African export and performance risk-related transactions is usually not the prime attraction. Sub-Saharan Africa is overbanked, with major international banking groups present across the region who are competing with one another and with the larger domestic financial institutions for a limited number of broadly bankable transactions. As other emerging markets such as Russia and Brazil mature, international banks who have traditionally not booked African assets are also starting to consider Africa in an attempt to shore up reductions in revenue streams due to finer margins in other regions. The high level of competition keeps the pricing keen despite the maximum exposure constraints some players operate within.

A large degree of commodity and pre-shipment finance is provided on a bilateral and club basis with limited or shared recourse to offtakers. More often than not these transactions are relationship-driven by the offtakers looking to take country and performance risk off balance sheet. In southern Africa this has certainly been the case for tolling and pre-payment agreements for copper and cobalt, where the performance risk has become widely accepted following established track records. Unfortunately, the unstable political environments in DRC and Zimbabwe coupled with lower commodity prices are having a negative impact on the level of investment in the region (Zambia included), which in turn is reducing the number of future financing opportunities.

A large number of refined petroleum product imports in sub-Saharan Africa are brought to the market for risk cover on a limited-recourse basis. In this instance the pricing is usually very attractive, however country limit allocation is required and overall capacity is limited. This has been an area where the insurance market has played an active role in providing capacity, either on a direct insurer to trader/supplier basis or banks providing risk cover to the traders/suppliers and in turn insuring a portion of the counterparty risk. The demand for this type of cover usually brings NNPC/PPMC to mind where the payment risk cover is not so much to cover payment default but to cover payment delays, and in need cashflow support for the funding of the purchase pending payment for the delivery.

Trade in oil and refined petroleum products represents the single largest generator and/or user of foreign currency in the region. This is evidenced by the large ticket size of the Sonangol transactions; the volume and value of Nigerian crude liftings; the US$ import bill for the semi and refined product imports into Kenya, Nigeria, Zambia, Zimbabwe, and so on. For this reason this sector is actively pursued by international, regional and domestic banks.

Mining and metals-related commodity financing opportunities are not as prevalent despite the mineral wealth of the region. This may be ascribed to the project finance nature of the financing required or the involvement of large multinational mining companies who finance the project from internal resources or via corporate credit lines. A number of club deals have been arranged for producers in Zambia post the privatisation process, which have proved successful. The South African mining market remains the domain of the corporate and structured finance products. The Democratic Republic of Congo (DRC) stands out as a potential market in the future but high political risk and infrastructure constraints keep the prospects on the drawing board. Tanzania is emerging as a leading African gold producer with production starting to flow from the Geita region and a number of smaller projects (eg, Buhemba), due to come online in the coming months. Unfortunately this market has not been the domain of structured commodity finance as mining contractors have raised funding through parent company support. As the operations mature it is hoped that more trade finance opportunities arise.

Sub-Saharan Africa produces a diverse range of soft commodities however the majority of production goes to domestic consumption. The commodities which are the exception tend to be those produced on a broad level and are classified as traditional exports in the country of origin. These include tobacco in Zimbabwe and Malawi; cocoa in Cote d’Ivoire, Ghana and Nigeria; groundnuts in Senegal; cashew nuts in Tanzania and Mocambique; and tea and coffee in Kenya and Uganda. Sugar is exported from sub-Saharan Africa in limited quantities under EU quotas however the whole region remains a net importer of sugar.

Warehouse fraud

Privatisation and the demise of central co-operatives or control boards has led to the reluctance on the part of many banks to provide origin and farm gate finance. Crop and harvest financing is largely provided by domestic banks or via the local presence of an international bank. Unfortunately in a number of countries the domestic banking market is unable to fully support the newly privatised entities. The matter has been exacerbated by the absence of acceptable warehouses and the prevalence of fraud in warehouses. In structures involving warehouses it has become common practice for lenders to insist on a collateral manager such as SGS, Intertek or ACE to control the custody process or alternatively the goods must be stored in a third party warehouse owned by an acceptable international company. Pre-export financing is also made more difficult in Africa because a lot of the soft commodities do not meet terminal market specifications or no terminal markets exist, which may be further complicated if firm offtake contracts are not conlcuded until the goods are ready to be shipped (eg, cashew nuts exported from Tanzania to India).

In the last few years Africa has seen investment from countries outside of Europe, Japan and the US. Certain privatised assets and companies are now wholly or part owned by companies based in Singapore, Dubai, Egypt, Libya, Mauritius and India. This is having an impact on the trade flows and commodity bankers required to structure around an OECD risk component are having to enhance structures to meet laid down credit criteria. Examples of this can be seen in the level of Mauritian-based investment in the sugar industry in Tanzania and Mozambique, and the supply of inputs from Egypt to agricultural producers in Malawi, Zimbabwe and Zambia in return for commodities.

There is a lot of interest in the oil industry in Equatorial Guinea which is in the early stages of development but should lead to some interesting pre-production type transactions in the near future. The Nigerian oil sector is undergoing change with a push from the government to have a greater level of participation by indigenous operators and producers. The involvement of the top-tier Nigerian banks and Afreximbank in this sector is creating opportunities for international banks to get a slice of the action. On an optimistic note, as the political situation in Sudan improves the financing of oil remains attractive. The metals and mining sector will largely be driven by the level of commodity prices and world-wide stocks. However, political stability in the DRC should lead to the development of low cost copper and cobalt producing operations which are on the cards of a number of mining companies operating in this region.

Looking forward, the oil sector remains important and in the longer term the drive to non-traditional exports in many countries will lead to soft commodity financing opportunities. This approach is being taken by a number of countries including Kenya, Nigeria, Uganda, Zambia and Zimbabwe.

Sub-Saharan Africa remains a competitive and difficult region in which to provide commodity-based financing solutions. There remains a high demand for tailor-made solutions but these opportunities need to be weighed up taking all risk factors into account in relation to credit volume and risk/returns. Knowing your counterparty and having eyes on the ground remain vital components to having a successful track record.