Commodity trade finance consists of financing the physical flows of raw materials from their place of production to their place of consumption. In essence, it is required to reduce deficits of raw materials existing in some places with excess raw materials produced elsewhere.
Commodity trade finance has been historically developed globally by banks, having dominated this business over the last decades. It is the lubricant that greases the wheels of global trade of raw materials. It is a business with a turnover of around $2 trillion a year.
The commodity trading business has grown enormously over the last 15 years. The top 5 trading houses dominating the oil market globally have a combined turnover close to the $ 1.5 trillion marks. Only 10 years ago, their combined business was around a tenth of such size and some of the top 5 players were still in their infancy stage.
As this business is increasing globally, traditional players are not able to finance such growth alone, and increasingly new players, like financial institutions from emerging markets, are entering the game. Such entry is facilitated by the attractiveness of the business. Its risk profile is moderate if the business is well structured and collateralized by the underlying flows of commodity financed.
It is also essentially a short-term business following the economic cycle of the commodity, from 30-90 days in oil to 360 days in agricultural commodities. As such, it can be financed with cheaper, short-term liquidities. For risk management purposes, it requires, however, an in-house infrastructure of mid- and back-office to structure, monitor and manages the performance of each individual trade transaction.
Commodity trading has been traditionally carried out by either floor traders that trade on their own behalf on the trading floor of commodity exchanges, or by firms of commodity brokers that carry out trades on behalf of others. These firms often maintain a large staff of brokers and are able to carry out trading on most if not all of the world’s major multi-commodity exchanges.
The advantage of trading via a commodity brokerage is that such firms often offer advice and a vast range of information as part of their service: for an investor starting to learn how to trade commodities this support could be very important.
Online commodity trading has become a growth area in recent years, with many commodity brokers competing to offer the best deal to new investors. Some can have welcome bonuses and benefits, so if you are an investor looking to start trading commodities it’s worth shopping around for the best deal.
If you are incorporated in Singapore as a commodity trading company, you may be interested to work on expanding the trade through financing from financial institutions and banks. This allows your business to grow much faster than it would ordinarily be able to.
Commodity financing Singapore works closely with banks to decide commodities financing for businesses and is able to assist you in getting the financing that you need to spread your wings in the commodities trading market.