Navigating through the commodity value chain

July 10, 2017

Commodity players are not only limited to producers, traders and their affiliate business partners.

Widespread commodity players

Many corporates – which are using commodities in their industrial process – are connected to the commodity value chain. They are buying, consuming, transforming and delivering semi-finished or finished products to the market.

For instance, imagine a large, multi-national corporation in the food industry, manufacturing and marketing large volumes of food products under its own brand. This corporation might consider itself as a pure food retailer. However, it is also a large commodity player buying on regular basis large amounts of wheat to manufacture biscuits, cookies and crackers. This example shows that commodity players are more widespread than commonly believed.

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Similar needs regardless the position in the value chain

Even if their position along the commodities value chain may vary (upstream vs. downstream), their needs and areas of concern are quite often similar:

  • Securing and financing their sourcing,
  • Managing and anticipating their cost,
  • All the while optimizing their working capital metrics

Corporates using commodities face specific risks (price volatility, economic and political risks in emerging countries, traceability requirements, counterparty risks) and show some common features (lower operating margins, significant financing needs, business cycles).

Long story short, commodity players are challenged at every level of the supply chain. However, dedicated solutions exist to address their needs.

Example from all around the world

Italian pasta manufacturer looking for financing tailor-made solutions

An Italian pasta manufacturer buys high quality wheat directly from Canadian producers. It has it ground into flour by a local miller, before manufacturing spaghettis for export.

It is looking for a tailor-made solution to finance these business flows at a competitive cost.

With a bilateral trade financing solution, this pasta manufacturer can finance the whole purchase and processing cycle: from wheat purchases in Canada, transit and storage in Europe, to milling into flour, with a repayment in cash or an assignment of export proceeds. Bilateral trade financing solutions are generally secured by the commodities financed so the cost is lower than for an unsecured loan. Actually, it is the solution for commodity players with important working capital needs but who are unable to finance themselves on a pure corporate basis given their creditworthiness and/or their unsecured borrowing capacity.

Related services associated to this product (risk management, market intelligence, structuring advisory and technical assistance) will bring additional value to the manufacturer.

Scandinavian aluminum corporate looking to enhance its working capital metrics

A Scandinavian corporate holds large commodity inventories.

As he is manufacturing semi-finished rolled and extruded aluminum products that are sold to automotive and household industries, it is looking to monetize its large commodity inventories to enhance its working capital metrics.

In this case, a purchase and sale agreement can be the solution. Through this transaction, a specialized inventory manager buys aluminum ingots from the company at the market price, holds them for a period of time while maintaining a related hedge and sells them back to the company on demand. It is a simple way for this corporate to monetize inventories while enhancing working capital metrics and integrating a hedging solution against the asset’s price variation. Given the secured nature of the solution, the pricing terms are usually competitive. In addition, the true sale nature of the transaction (providing there is validation from external auditors) may allow accounting deconsolidation.

This solution can be offered for various ranges of commodity players whatever their positioning along the value chain.

French oil importer looking for additional funds

A French corporate imports oil products and distributes them to its own Gas Station network.

It is looking for an additional source of funding while monetizing its moveable assets. In this case, its banking partner can provide the company with a borrowing base facility, based on a declarative weekly report of inventories and receivables.

The available facility amount is based on the amount of declared assets on which a reasonable discount is applied. This solution allows the company to monetize rapidly moving assets while providing an additional source of funding to increase leverage. A borrowing base facility offers many advantages: greater flexibility, increased amount borrowed (syndicated financing), simplicity of use (one agent bank on behalf of the syndicate vs 4 to 5 banks to work with on a bilateral basis).

Note that this solution is however more suitable for larger companies with predictable volumes, sophisticated IT tools, adequate equity cushions, and evidence of sufficient liquidity.

Swiss chocolate manufacturer looking to mitigate its counterparty risk

This large Swiss chocolate manufacturer already prepays a new cocoa supplier based in West Africa.

As it doesn’t have a track record with this new counterparty, the Swiss buyer is looking to mitigate the risk of non-delivery associated with the supplier.

In order not to jeopardize the new commercial relationship, the Swiss chocolate manufacturer is looking for an undisclosed solution, i.e. a solution where the supplier is not aware of the buyer’s concerns. In that case, a non-performance guarantee can be the appropriate solution. A bank issues a short-term guarantee in favor of the Swiss buyer to cover the risk of non-delivery of goods by the West African supplier under a commercial contract. The guarantee is undisclosed, so the supplier is not aware of the buyer initiative. Once the supplier has performed the delivery of goods, the guarantee is cancelled. If the supplier can’t perform, the Swiss chocolate manufacturer can claim under the guarantee and recover a significant part of the prepayment.

All in all, a non-performance guarantee allows buyers to manage their exposure to the counterparty risk in line with their risk management policy.

Common concerns require the right partner

These four business cases illustrate how commodity players – wherever their positioning in the commodity value chain – can adequately address their business concerns, such as: financing a specific transaction (including logistics and storage), monetizing assets, hedging forex positions, enhancing working capital metrics, providing additional sources of funding, and mitigating counterparty risks, etc.

These solutions, however, require a strong knowledge of the commodity market. Today, only a few banks can offer this level of expertise across the related sectors (Energy / Agribusiness / Metals & Mining), and as a result, choosing the right banking partner is critical.

Know more about BNP Paribas STS

BNP Paribas Specialized Trade Solutions (STS) business line is dedicated to working capital and trade financing solutions within the commodity supply chain, bringing expertise on three main sectors: Metals & Mining, Agribusiness, and Energy.