Commodity finance being done by Trading Houses

A story recently in Reuters talked about how the biggest trading houses are filling the traditional banks (and mostly European banks role) of funding traders. This got particular attention, especially in light of the Obama administrations sanctions on Rosneft and other big Russian commodity producers.

If you look at the big trading houses, do they really want to take over the role of banks (who have access to historically cheap deposits?). Or is it really a question of providing these large trading houses with huge credit lines to further provide upstream finance to their smaller counterparties?   The authors Dmitry Zhdanniko and Ron Bousso, oil markets reporter for Reuters, commented:

Banks such as BNP Paribas and Societe Generale have cut funding of small and mid-sized companies with low credit ratings because of growing regulatory and political pressure, risk aversion and weaker profits.

But banks still feel comfortable in providing large trading houses with billions of dollars in credit lines and then often watch this money being re-lent at higher rates to those they chose not to deal with directly.

But truthfully, how many trading houses have the capital of banks? Apart from publicly listed Glencore, trading houses have relatively small capital compared to banks. Trafigura's shareholder equity is in the area of $5 billion and Mercuria's of $2.7 billion.

So the money has to come from banks. And banks fund these companies through trade lines, just like they fund so many hedge funds, factors, and others now interested in trade receivables. See – Shadow Banking Market grows and grows and Commodity Trade Finance – Still the Banks’ Domain

The Reuters story documented some of the bank lines - Trafigura's has 130 banks across the world, with some $42.5 billion worth of credit lines opened to it . Geneva-based Mercuria has a $2.65 billion revolving credit facility that involves 52 banks .

So as we see, for the most part, the money is still coming from banks.

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