Financing The Full Commodity Lifecycle
Commodity Finance Overview
Commodity Finance is a specialized area of trade finance used for funding the production, transportation and sale of commodities. Commodity Finance provides primarily short-term financing facilities to a range of principals in the commodities business, including producers, commodity traders and major international trading operations, commodity importers and commodity exporters.
Commodity finance facilities may be secured or unsecured depending upon our assessment of the strength of the borrower and the structure and profitability of the underlying deal. Commodity finance is too broad a statement because there are really four different financings in the commodities lifecycle as illustrated in the table above.
Types of Commodities
Commodities are typically divided into four subcategories based on the nature of the product.
- Mining and Metals
- Oil and Gas
- Soft Commodities
Types of Commodity Financing
Commodity financing is typically grouped into four specialized categories of financing based on when in the deal cycle the financing is applied.
- Pre-export Finance
- Countertrade Finance
- Inventory Finance
Risk in Commodity Finance
Commodities have long been considered a high risk proposition that’s often difficult to finance, frequently with good reason. More than 100 years ago early commodity trading exchanges were created so that farmers could mitigate the risk of commodities pricing extremes. Commodities have certain characteristics that make them inherently risky. Consider these factors, which are by no means a comprehensive list.
- Because commodities are traded openly on public exchanges, there is transparency in pricing, which has a tendency to limit margins.
- Commodity prices have always been susceptible to extreme price fluctuations that can substantially affect the value of the collateral, or even reduce a profitable deal into a money loser in a short time.
- Unlike manufactured goods or even raw materials for manufacturing, there is always the risk that external factors will severely impact the viability of the commodity collateral, which makes commodity finance difficult.
- Agricultural products can spoil, livestock can die, mines can flood and oil and gas can burn.
- Commodity finance is often exposed, along with the collateral, to numerous cross-border jurisdictions, many of which are in emerging markets. Language barriers, cultural division, and political risk can all impact the venture.
For these reasons – and more – firms that finance commodities tend to become specialists who actually focus on a very narrow niche within commodities. In so doing they becoming experts in particular commodity asset classes. Many financiers who offer commodity financing are very limited across the asset classes they will finance.
Structured Commodity Finance
We also offer Structured Commodity Finance, known as SCF, a sophisticated commodity-based trade finance method used for the import, export or foreign trade of commodities. More specifically it provides financing for commodity producers and commodity trading companies who do business in developing markets. SCF extends financing for metals and mining, energy commodities, and agricultural crops. If you would like to learn more, we have in-depth information about Structured Commodity Financing.
Commodity Financing We Offer
Global Trade Funding offers worldwide trade finance and commodity finance services, providing comprehensive commodity finance solutions to the international commodities trade market. We apply decades of trade and commodity finance experience in every transaction in which we are involved, and we are exceptional at what we do. We offer clients a full range of commodity finance solutions, incorporating pre-export finance, shipping finance, and export credit agency-backed finance. Quite simply we are able to deliver comprehensive, solution-based financing to our clients by deploying:
- Issuance of Letters of Credit
- Standby Letters of Credit
- Guarantees and similar trade finance instruments
- Letter of Credit confirmation services
- Warehouse and receivables financing
Mining and Metals
We finance the full range of metals including ferrous, base, minor, precious metals and alloys. Our clients and counterparties range across the metal production spectrum including miners, smelters, refiners and traders all the way through to end-users. Our commodities financing capabilities enable us to provide a full financial service tailored to our clients’ requirements.
Energy, which is really just oil and natural gas, is a small part of our commodity financing business. Although we do an exceptional job, it cannot match the unparalleled expertise we offer in other commodity finance sectors.
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