The commodity trader as financier

As regulatory requirements continue to drive banks back from funding the commodities industry, the relationship between financial institutions and commodity traders is changing. Banks are prioritising other asset classes that offer more lucrative returns, and so larger trading houses are stepping in to fill the void in the commodity finance market.

Traders are subject to many of the same governance regulations that the banks must comply with, but they are not constrained by the same capital, leverage and liquidation requirements. Traders are therefore well positioned to capture opportunities in the market, and a number of them are now making money not only out of buying the product, but also out of providing the financing for the deals.

The reduced lending appetite from the banks is having an adverse effect, especially amongst the smaller players in the value chain who present more credit risk and regulatory concerns. Having access to regular funding is critical and therefore the smaller players are finding themselves in a position where they have to accept financing from traders under less favourable terms.

With the increasing level of commodity financing activity amongst the traders, their demand for commercially-astute, well-connected structured finance professionals continues to grow. They are particularly keen on individuals that can demonstrate the ability to forge strong relationships with key industry players and as we see a strong focus on emerging markets, financing experts experienced in those regions are highly sought after.

A significant proportion of this talent comes from the banking community and this is evident when we see the team structures within the likes of Trafigura, Mercuria and Vitol. Though much of the talent still sits within the banks, not all bankers have the ability to seamlessly transition into the trading firms, which demand very different skillsets. Banks are much more structured institutions, and some find the more entrepreneurial culture of the trading firms difficult to adapt to.

Finding the right individuals to move is not always easy, but what’s clear is that the demands are shifting, and as traders increasingly assume the role of financiers, they are hungry for talent with more specialist knowledge, and the ability think outside the box.