This article was written by Anthony Lipmann. All views and opinions are strictly his own.
If there is one thing I learnt after 41 years of trading it is that it takes a very special kind of person to be a banker. I should mean that kindly, but I am afraid I don't. I had reason to develop my jaundiced point of view when I struggled to set up 27 years ago. No bank worth its salt wanted to see the commodity acorn that I was or recognise the fine little oak tree I hoped to become. That is, no one from Moscow Narodny, ING, BNP, Bank of Ireland, Allied Irish, ANZ or any other of the famous commodity lenders. 'Do come back when your net worth's $10 mln', the nice lady from ING said, adding helpfully, 'You see, we have big overheads so only take accounts that can earn us $250,000 in fees'.
As I left the sweet-smelling confines of each bank and departed into the rain to drag my bones around other lenders, I couldn't help noting these institutions didn't appear quite so mean on themselves. The boardrooms, if I got to them, were often kitted out in the finest leather, and the tiles and marble at reception reminded me of modern art museums, sometimes hung with Damien Hirst's or Tracy Emin's finest. I wondered about the psychology. What was it about the safe and secure world of lending, that could induce the urge to be so expansive in appearance? Is it that the banks live so close to money and wealth they can't quite accept it is not always theirs?
And so, we come to the world of commodities lending. While in my early days lending to commodities companies was circumscribed, it appears to have rankled the banks to compare their paltry margins with those they lent to. In my early career any jealousy of one profession over another was well concealed. The City of London delighted in its mosaic of separate professions that made up the whole - wool, coal, oil, grain, softs and metals merchants were often linked while lawyers, accountants, insurance brokers, discount houses and bankers honed their segregated skills towards sectors whose business they served.
All that changed in the late 1990s at the beginning of the commodity super-cycle and pushed on after the financial crisis when commodities were regarded as safe collateral. When Glencore floated on the London Stock Exchange in 2011 valuing the company at £38 bln, and making billionaires of several of its shareholders, it could truly be said that traders had in some cases eclipsed the lenders. It seemed that in a world hurtling towards high-speed Armageddon via globalism and hyper-production, commodities would always be short. Bankers not wanting to be left out spawned proprietary trading divisions and backed themselves with customers' money that should ordinarily have been lent to safe and secure businesses - or little acorns.
While bad for lenders, the financial crisis of 2008 paradoxically benefited commodities people and especially those who blended the two activities - for example JP Morgan who became the conduit for quantitatively eased dollars with no obvious home. A large slice of this money was channelled into the London Metal Exchange, and thence into stocks held in proprietary-owned warehouses. This in turn led in 2012 to false queues in which a title-holder of metal stored in LME registered warehouses was sometimes required to wait up to a year to obtain delivery, paying high rents on top of lending fees.
So why have the lenders lost interest now in 2020?
In August this year it was reported in the FT and Bloomberg that Soc Gen, BNP and ABN Amro were looking for the exit. Perhaps large frauds, and the possible end of globalism may have assisted the move. Specifically, it is said that the hidden losses of Singapore's Hin Leong Trading has cost 23 banks up to $3.5 bln. But the sums alone cannot be the only cause of an exit that I personally will not mourn. It seems that when looking at the numbers, the costs of administration and systems, simply do not match the profits needed. The speed of deals and physical shipments, volatility in market values, opaque structures of trading companies operating via low tax areas, has meant that when dealing with large traders, the banks have just been flying blind. In Hin Leong's case, one of the many accusations is that its owner sanctioned the forgery of an Inter-tank transfer certificate (ITT) for 1.05 mln barrels of oil evidencing a false sale to China Aviation Oil, and by doing so secured US$56 mln of trade finance. And this fraud was triggered by US$800 mln of losses on the futures markets - dealings often opaque and difficult for the banks to monitor.
It all comes back to control and probity and I now cite a new example that has come to my attention via the insurance market. In the last few months, it has become plain that this lack of control now extends to transactional loans to traders for valuable shipments being discharged without a bill of lading but against Letters of Indemnity issued by the shipper. In one case, at the end of last year, a shipment of rice from Vietnam to Cameroon was discharged against an LOI leaving the lender with a worthless B/L as collateral. The lawful holder of the B/L is now seeking $1.15 mln and has no recourse but to arrest vessels owned by the carrier. Such cargoes may well have been paid for while the trader either went bankrupt or absconded. In a second instance, a trader called GP Global, financed by Natixis, loaded a cargo of fuel at Yanbu Saudi Arabia but switched destination from Rotterdam to Fujairah, UAE, where the oil was discharged against an LOI. In this case the lender has a worthless B/L and is suing GP Global for $11.1 mln damages.
All these wheezes are becoming more frequent, spawned on the one hand because lenders are not close enough to their customers to fully understand their business, and secondly because the customers have used banks' apparent hunger to be involved with commodities against them.
As for me, I will not be despondent to see the banks retreat to their marble-walled bunkers and leave the commodity world to finance itself. It is a fascinating possibility which as I write this piece was confirmed by an announcement made in the summer by AMC Group, the company founded in 1929, and known to all metals merchants with its long history on the LME and in physical metals trading. With their strong balance sheet behind them, they say, they want to expand their commodity trade finance and specifically lend to SMEs, including those in the minor metals trade.
In the early days of our company, this is exactly what we did - borrowed from fellow traders and those connected to, but not in competition with us. The trading risks had not altered, but what made it work was the huge amount of mutual trust.
We remained on-shore too, believing that off-shore structures in low tax areas merely mask inefficiency, and make it a lot harder for lenders to understand your business. The real test of a commodity trader is to pay your taxes, remain on shore, not over-trade - and still make money.
It's possible, you know, you just have to want to do it.
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