Finance, margin crunch prompts clutch of closures in Asia metals trade
Commodity traders have long forecast that there would be consolidation in their own industry, and in some of the world’s biggest centers for metals business that has already started to happen.
Independent metals trading companies operating out of Shanghai and Singapore - many of which launched during the early 2000s, surfing the commodities “supercycle” to bountiful profits - have seen risks to business rise during the Covid-19 pandemic while margins remain ultra-thin.
Several closures in recent months of small to mid-sized merchants point to a consolidation in the Asia commodities industry, market participants have said, with a rush toward Chinese state ownership or links to companies that will facilitate banking lines.
The closures of independent traders comes amid a global tightening in commodity financing, with banks licking their wounds from losses accrued after several high-profile industry blowouts.
ABN Amro, a staple provider of finance to commodities businesses, racked up $1.31 billion in impairment losses during the first quarter of 2020, paving the way for its exit from the industry.
Meanwhile, Standard Chartered booked $1.576 billion in credit impairments during the first half of the year, in part due to defaults by commodity trading houses, while HSBC’s Asia commercial banking division also racked up losses.
Roland Rechtsteiner, partner and oil & gas lead, energy at consultancy Oliver Wyman, said the pandemic’s dislocation of supply, demand and finance has benefited large commodity traders, but has also driven “a bit of a shakeout” among smaller market participants.
“The financing situation is changing, specifically through some events in Asia. Quite a few banks pulled out of trade financing and it’s getting harder to access funds, which again is driving consolidation,” he said. “Those larger firms continue to access finance but, for the smaller ones, it’s much more difficult.”
An Oliver Wyman study showed that larger traders with more than $500 million in gross margins per commodity class experienced 30% less gross-margin volatility on average than smaller traders.
Traders close up shop
Market participants involved in the winding-down of operations, mainly focused in Asia, have been nameplate trading companies.
Alfar Resources, which operated entities in Shanghai, Hong Kong and Singapore, began to sell off remaining inventories and contracts in July, with traders leaving the company by the end of September.
Meanwhile, Shanghai trader Bayin Resources, which started in 2004 through a management buyout of Pechiney Far East Ltd in 2004, and which counted Barclays Bank as a cornerstone investor, will also stop trading at the end of the year, informed sources told Fastmarkets.
Like Alfar, and in line with business structures in many Asia-focused commodities trading houses, Bayin had incorporated companies operating out of Shanghai but also Hong Kong and Singapore.
This follows the breakup of Chinese public-private joint venture Xindeco-Maike, which saw an exodus of traders throughout 2020, without formally announcing a closure.
Fastmarkets understands that all remaining business has ended or been referred to either Xiamin Xindeco or Maike, which is China’s premier copper trader.
All companies named in this article declined to comment when approached by Fastmarkets.
“These are specific traders, but the whole market in Asia - be that Singapore, Hong Kong or Shanghai - we’re all facing the effects of the banking exit,” a senior Singapore-based trading source who declined to be named said.
Annual contracts stall
There could well be consequences for next year’s metals markets, with trading houses less likely to commit financing lines to long-term contract supply.
After producers including Chile’s Codelco rolled-over copper 2020 premium offers to the port of Shanghai for 2021 at $88 per tonne over LME, buyers in China were stalling on signing contracts, unwilling to take positions at that level.
Shanghai trading weakness matters, in part because of China’s outsize role in the world of metals. Last year, the country accounted for 42% of all internationally traded refined copper, and 28% of nickel.
“Before, it was financial demand that dominated this market, and now it’s real demand. But for the past three years this has not been good,” Eric Liu, head of copper trading at growing Chinese trade house ASK Resources, said.
“This year’s long-term contract will be very interesting. I estimate the premium will be much lower than in previous years. Some people will be reducing their purchasing volumes,” Liu added.
Margins thin, risks rise
Several companies told Fastmarkets that a lack of consistent arbitrage-related business had trimmed margins over the past year.
Rising financing costs, and stricter financing rules laid down by banks, have meant that, although most businesses can continue to trade incoming seaborne cargoes, some have been instructed that they are not allowed to hold metals in the Shanghai bonded zone, several sources told Fastmarkets.
“For a lot of these Chinese [market participants] with limited access to cost-effective working capital, a lot of business involving bonded material is also tied to a variety of arbitrage, FX and interest rates as well as price,” Eric Chen, head of business development at digital trade platform Guud Finance, said. “But you need to be able to hold this material to start with.”
In terms of supply and demand dislocations, metal markets have been hit harder than other commodities, with production for zinc, copper and lead centered in Latin American countries hit hard by the pandemic.
These gaps favor larger trading groups, which can source material from other regions and arbitrage the price difference, according to Oliver Wyman’s Rechtsteiner.
“If you have strong outlets and a strong producer base - [such as] the trading arm of a major mining, oil, or very large trading organization - then you were able to play that system very well on a physical basis,” he said. “It is obvious that the smaller firms might be forced to take riskier positions, or are active only in one part of the market - and either that does well or it does not.”