Editor’s foreword

Trade finance is, of course, all about hedging risk. So commodity-finance bankers are quite accustomed to spreading their risk around the world and avoiding being too heavily exposed to any one market lest it all go wrong. Not that they never get caught out: many Western institutions got carried away in Russia in the 1990s and found themselves in the unfortunate position of having balance sheets awash with Russian risk when crisis struck in August 1998.

Few seem poised to repeat this mistake in China despite its rapid growth and insatiable demand for commodities. A crash in China is unlikely to be as catastrophic for the trade-finance community as the Russian crisis, and talk of a slowdown in Chinese consumption makes very little difference to most commodity financiers. While on the surface one might think this is because some lessons were learnt the hard way in Russia, it has more to do with the fact that China’s commodity-finance opportunities have been much less tantalising than Russia’s were – and still are – and that traders and producers have been making much more money out of China than trade financiers. China has not been much of a market for structured deals anyway, with most flows still financed with standard trade instruments like letters of credit.

Though many have heeded the siren song of Russia once again (and could yet be burnt once again), the prevailing strategy is more a juggling act of several markets: a bit of Russia, a bit of China, but also Ukraine, Kazakhstan, Uzbekistan, Brazil, Venezuela, Vietnam, Indonesia and India. And so on.

While banks juggle these various commodity markets, the markets themselves jostle for prominence and regularly change positions. In commodity sourcing, there is a shift going on – countries in Asia and Latin America that used to not be able to compete are learning to produce quality output in a cost-effective manner (Brazil being an excellent case in point).

Trade-finance banks also want to avoid relying on too narrow a product set as well as too few markets. Many are branching out into, for example, derivatives – not just with commodities but other elements that may affect commodities such as weather derivatives. Currently, weather derivatives are a $10bn industry – still a miniscule portion of the overarching $100tn derivatives market. However, industry forecasts predict that the size of the weather-derivatives market will grow to $75bn over the next three years as more investors become familiar with this financial product. Commodity financiers will no doubt help drive some of this boom, as the more successful ones know that in addition to striking the right balance among the various markets, they must also have an innovative approach to product development.

Courtney Fingar is editor of TFR.

Features

Trading places Free
Chinese consumption is still going strong despite some signs of a possible slowdown, Russia is back in the structured commodity finance fold after nearly being written off last year, and sourcing is shifting to newly efficient markets such as Brazil, India and Vietnam. Erika Morphy reports on these and other developments affecting the ever-changing global trade in commodities.

Exchanges: AIM’s success story Free
While not a contender with the London Stock Exchange, or even the Toronto or Sidney exchanges, the London-based Alternative Investment Market (AIM) has become an interesting player in commodity finance.

Taking a multilateral approach Free
In Latin America, multilateral institutions and development banks have long played a crucial role in developing capital markets, supporting structured trade finance transactions and taking on risks that are unacceptable to most private investors. Multilateral support – which at times has been the only option available – n combination with lending by local and foreign banks, is now resulting in innovative deals that tap new asset classes and new sectors. Erika Morphy reports.

Remaking Russia Free
Robust growth in the Russian economy is in part due to a successful macroeconomic strategy. But one key determinant of its ultimate success is the ability to channel capital and finance into the real economy via a restructured banking and financial sector. This is to include development of the mortgage market and, correspondingly, mortgage-backed securities, as Svetlana Aslanova, senior corporate analyst at Moscow Narodny Bank, writes.

Kazakhstan: A good market gets better Free
With margins going down and tenors up in Russia and deals there are not as profitable as they used to be – notwithstanding recent developments that suggest this might not last – trade financiers are glancing around for other opportunities in the neighbourhood. They’ll find most of them in Kazakhstan.

Security concerns Free
Though implementation of Basel II is still some way off, many of the points contained in it represent best practice. Now then is a sensible moment to review some of the most basic considerations lenders should have in mind when taking security over commodities – be they at origin or at destination. Richard Swinburn, head of international trade and commodities at law firm Richards Butler in London, explains the pitfalls in taking security over commodity stocks.

Regulars

Market view: Nicholas Grandage Free
Preliminary hearings in the recent Mahonia case raised a number of potential issues relating to letters of credit and the “autonomy principle” (ie, that LCs remain independent of underlying transactions) as well as raising issues on potential re-characterisation of transactions. The judgment in the full trial has now been given and is helpful on a number of issues for those involved in LC transactions as well as structured finance transactions (including SPV structures).

Letter from Hong Kong: David Sullivan Free
This month it was not so difficult for me to start writing since something keeps happening that I am totally fed up with. I am like the last of the Mohicans down here, the surviving old commodity banker, old China hand, overweight, too expensive and basically unemployable. I am like Marlon Brando stuck away on my little island surrounded by the locals as I build my empire. (I am also a little bit smaller than Marlon Brando.)

Company profile: Building a 24-hour emerging-markets book Free
Earlier this year, Standard Bank London embarked on a major restructuring of its distribution activities, appointing three new regional heads. Kathleen Williams speaks to Peter Kennedy, general manager and head of global distribution and specialised finance, as well as the regional heads, about the rationale behind the restructure and where the bank is headed.

Personal profile: The building blocks of a successful trade business Free
Bruce Proctor joined JPMorgan three years ago at a time when the bank was building up its trade business and reasserting itself as a top trade-finance player. Having succeeding in this, the American institution is now in the midst of a merger with Bank One that should create an even bigger network with broader capabilities, as the head of global trade services tells Courtney Fingar.

Emerging-market debt pricing Free
Omni Whittington Commentary, September 2004

Country-risk appetite Free
The analysis from Standard Bank London: