Rising rates are reshaping once-lucrative commodity trades

Companies that buy, sell and transport the world’s natural resources are especially sensitive to rising rates, as they rely on banking lines to finance their trades – from shipping cargoes of wheat or oil to aluminum. Till keeping the list.

As rates rise, the additional costs of week-long travel or extended storage in a warehouse or tanker are making some trades less attractive. Financing costs can decide whether deals are made or not, and some firms are seeking to cover the costs to their clients or exit some trades altogether.

“It is completely reshaping the supply chain, we have customers coming to us saying they have to rethink their business model because of interest rates,” said Commodity Trade Finance at Banque de Commerce et de Placement. Head Pierre Galty said in an interview “Players used to be able to buy a large cargo and keep it on storage for a month or more with tolerable costs. Now it’s a bit different, the cost of carrying is much higher.” is and is not an option,” he said.

The pressure on commodities traders is an example of how the end of the era of cheap money is changing the world of business. But unlike sectors like technology and crypto, the business cycle for commodities traders has turned in the opposite direction, making record profits despite rising interest rates.

According to consultancy Oliver Wyman, the industry is set to generate an estimated $115 billion in 2022, even accounting for costs such as freight and finance, an increase of about two-thirds from a year earlier.

Interest rates are only one element of the cost that goes into a typical commodity deal – even moving products from one port to another means chartering ships and carrying insurance for the voyage. Then there is the cost of hedging derivatives to lock in the price of the cargo, and the collateral in the form of margin to enable those positions.

However, the industry is particularly exposed to rising rates as business houses depend on the huge amounts of bank credit needed to buy, transport and store large quantities of goods.

The interest amount accrued adds up quickly: for example, at current prices a typical LR1 tanker shipment of fuel oil can cost around $46 million, and a medium-sized oil trader may have the potential to have several transits at any one time. There is a possibility. With a network of nearly 140 banks worldwide, trading giant Trafigura Group had total credit lines of $73 billion at the end of its last fiscal year.

One area where interest rates are a central factor is when traders buy and hold commodities. For example, storing the metal in warehouses for an opportune moment to sell has been a feature of the aluminum market since interest rates were set at near-zero levels following the 2008 financial crisis.

As rates have risen, futures prices have traded at an increasing premium – or “contango” – to reflect the higher cost of carrying cash rates. But Duncan said even the biggest contango since 2008 was only enough to offset more expensive financing. Hobbs head of research at metals trader Concord Resources Ltd.

“Proliferation will have to go out to compensate, and if it doesn’t you can imagine some people will move away from that place,” he said.

In other cases, the increased cost of finance for merchants is reflected in higher prices for the end customer. “The cost of small-volume oil contracts has gone up a lot this year for buyers based in the Caribbean,” says Michael Winstone, director of crude and fuel oil at trading house Novum Energy Trading Corp.

“It depends on the exact logistics but I think with finance costs in addition to higher shipping rates, some of our diesel and fuel oil sales contracts have gone up between six and ten dollars a barrel,” he said.

BCP’s Galtié said the ability to keep profits stable by raising prices and maintaining margins can sometimes be a question of scale, and medium-sized players are under more pressure.

Still, even the biggest players are having to weigh the additional costs.

“Liquidity is limited right now and capital is expensive. So what it means is that if you want to do in the market, you need higher margin to cover your operating base,” said Vitol, the world’s largest independent oil trader. said Christopher Beck, a member of the group’s executive committee. said on a panel during International Energy Week. “It gets more difficult.”