The Financial Times concluded that once upon a time Morgan Stanley, one of the original “wall street refiners” was one of the largest shippers of fuel oil to New York Harbour. Deutsche Bank held enough aluminum to build 30,000 jumbo jets, BoA-ML leased around 16 billion cubic feet of natural gas storage in the United States while JPMorgan helped ship Brazilian sugar to buyers around the world. The world of physical commodities was one that the big banks adored and the race for dominance was underway. JP Morgan and Morgan Stanley led the charge with reactionary investments from Goldman and many others. Enter the global financial crisis. The banking commodity honeymoon came to a screeching end but subsequently opened an entirely new opportunity for the versatile commodity trader. The “Credit Tree” was formed and privately-owned commodity firms with healthy balance sheets were ripe for success. Fast forward to 2018 and the top 5 trading giants have morphed into quasi banks with clear dominance across the commodity food chain.


Driven by policy and regulatory concerns such as Dodd-Frank and The Basel Accords, restrictions on proprietary trading has forced most banks to curb their exposure to the physical commodity business and downscale their commodity related trade finance divisions as well. Coupled with working capital constraints, weak commodity prices, a shaky global economy and compliance risks only validated corporate boards decisions to de-risk themselves from this perceived minefield. In a nutshell, it just wasn’t worth it anymore as revenues paled in comparison to other revenue streams. At its peak in 2008, it is estimated that the top 10 banks in commodities earned revenues of circa $14bn while last year figures place estimates at below $4.5bn.

However not all institutions necessarily eliminated their exposure to physical commodities. Certain institutions
chose to rather place themselves in a comfortable low risk and calculated lazy-boy seat. That calculated risk was
defined as financing the giants of the trading world that had trade volume, a well-defined compliance processes
and cash.

While most of the banks retreated, Macquarie and Goldman Sachs snatched up market share over the years by acquiring divisions of Koch, Cargill and others while remaining until now active institutional players in nichephysical commodities.

To run a physical commodity desk, the banks needed an arsenal of compliance and risk departments which became a
serious burden. This created the ultimate vacuum for traders to become cash rich and sit atop the credit tree.


Traders started thinking like bankers and focused on activities such as governance, compliance and risk. To gain the trust of banks, heavy investments were made in AML/KYC processes, corporate policies and hired the associated arsenal of staff to manage these requirements. Traders simplified the on-boarding process compared to the traditional, red tape heavy banking approach.

Centralizing the lending practice to the large traders became a clear strategy for the banks and gave them far
more comfort with regards to their exposure. Not to say this is became the rule of thumb for all but banks would
scrutinize secondary market participants by forcing collateral, back to back counterparty terms, insurability
and an extremely healthy balance sheet.

Over time the same traders accrued cash-rich positions which provided the luxury of internal financing schemes.
External financing no longer became the top trader’s life line but rather provided optionality. With that treasure chest of cash, they essential became banks and the trickle effect ensued. Top traders finance producers, government and smaller sized trading houses who in turn finance wholesalers or niche trading firms who in turn finance and take on the exposure to the higher risk counterparties such as shipping and retail owners. Insert the requirement for credit coverage by insurance firms along that lending chain and it no longer comes down to the next short but rather a shadow banking network built around insured credit portfolios (or un-insured as you move down the chain.)


In the late 1800’s The National Bank of Cleveland financed Standard Oil which enabled them to build an empire which controlled 90 percent of the global oil refineries. Within a few years they controlled 90 percent of the marketing of oil, and one-third of all oil wells by structuring commodity-for-loan type deals with states, international governments and competitors. Historically banks have always financed various producers who would on-sell their product directly to clients, traders or used the credit to grow their business.

However, a serious uptick for commodity-for-loan deals by traders has been seen in the industry over the past 6 years. Commodity trading juggernauts have fostered this as a core strategy to their business model. From government entities to private industries such arrangements keep making headlines across Nigeria, Algeria, Russia and Venezuela. Financing refineries in exchange for refined products, financing NOC’s for crude allocations or financing farmers for crop yields has provided a serious competitive advantage to those capable in structuring such deals.


It’ll be difficult to predict what the future holds for the commodity industry and how or if the Credit Tree will evolve further. With the global financial crisis being something of the past will banks capitalize on regulators short term memory and have another go at physical commodities? Unlikely. Or will the ultimate killer be if regulators extend their rules and policies to include commodity traders and hamper their current modus operandi. Maybe.

However, what’s certain is more and more traders are trying to climb the ranks of the credit tree by applying out of box methods to facilitate supplier and client financing. The industry only stands to witness further financial creativity which will most likely move up the supply chain and into the upstream side of things. As the risk barometer increases, trader must remain vigilant as they are not too big to fail….

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