Turbulence in commodity markets — how Swiss business reacts
Switzerland's commodity hub controls 50% of the global trade in cocoa, 50% of its coffee, 60% of the grains, 60% of the metals, 35% of its oil, and 50% of its sugar*.
So how do Swiss brokers and commodity financiers feel about today's global political and economic turbulence — and Switzerland's future in the commodity scene?
GTR (Global Trade Review) brought its world commodities dialogue to Geneva on 19 September 2019 to find out. A Global Geneva Special Report for our free newsletter subscribers (3200 words).
Two sides to the Swiss situation
Volatility in global commodity markets, of prices and supplies, might seem to make Geneva and Switzerland a weak player on the world scene.
Powerful companies operate from here. But Switzerland is a deliberately minor figure in political Europe. Its costs for business are comparatively high. And its constitutionally enforced neutrality limits its participation in UN activities.
Each of these elements, however, has an opposite side, as became clear at GTR (Global Trade Review) Commodities 2019, bringing together over 300 of the most influential specialists (corporate and banking officials) at the Hotel President Wilson on 19 September 2019.
There was no escaping the troubling world situation in commodities and commodity trade financing. Turmoil, turbulence, uncertainty — these were the terms used to describe the global commodity picture. Stéphane Graber, Secretary-General of the Swiss Trading and Shipping Association (SSTA), talks of a "new world order".
Robert Parson of the international law firm Clyde & Co observed many indications that "trade is indeed being weaponized."
Not just the wrangle between the U.S. and China. He points to the images of burning sabotaged Saudi oil wells, still in the news as participants gathered at the Hotel President Wilson, as an example of what happens when dialogue over conflicts fails.
"Is this the new normal?" he asked. Are the people who fund the commodity business "staring over the precipice or the sunny uplands of the commodities market"?
As Shona Tatchell, CEO and Founder of the British-funded Halotrade system for commodity trading, reminded the specialists: "We have a climate emergency" and arable land is being destroyed 10 times faster than it is being created.
GTR, a major event organizer and training provider as well as magazine publisher, moved its commodities dialogue to Geneva to partner with STSA after five years of holding the get-togethers in Lugano. In one day it offered full plenaries, streamed sessions on specific issues, networking breaks, showcasing for new technologies, roundtable breakout sessions with project promoters, and wi-fi voting and questions on topics that came up. It describes the event as "the premier gathering for the global commodity financing sector".
When the participants — major players in the business — were asked via the electronic registering system to describe the current state of global commodity finance, the answers that flashed up on the giant screen in the debating hall included "evolving", "uncertainty", "shaky" and "complicated".
The risk-averse choice
"We are in Switzerland, so it is natural to be a little bit risk-averse," commented Sebastian di Paola, chair of the meeting, a partner and leader of corporate treasury solutions in PwC Switzerland.
The most popular choice was "challenging".
You might easily have made the mistake of thinking that as a result, the commodities world is in deep depression about its future. When GTR put together a debate between an optimist and a pessimist on the future of trade turbulence, it was certainly hard to tell which was which.
And perhaps it was no surprise that first GTR Commodities 2019 to take place in Geneva included this question from a participant: "Is Switzerland at risk of losing its edge to others, such as Singapore?"
Graber reassured the traders and financiers: "We don't see Singapore as a competitor: it is an entrance to the Chinese market. They are very complementary places."
"It is clear that Switzerland in such a turbulent period offers stability," he pointed it. Switzerland is in an ideal time zone (like the rest of Europe) between Asia and the US. Its competition is European. In this, Geneva "fares very very well," di Paola agreed.
The price of expertise and the Swiss advantage
To succeed in the current turbulence, cost is a key factor, but Switzerland can offer cutting-edge qualified specialists to justify its expense. Companies recognize, said Graber, "if we want to have access to this expertise, we have to be here."
Di Paola added the "great, untapped potential" of Geneva in the sector to connect with the UN and other international bodies, as shown by STSA's work on business and human rights. di Paola also cited as one of Switzerland's advantages: its responsible politicians, relatively responsible voters driven by direct democracy, and a business-friendly environment.
Swiss commodity trade and finance, STSA's world premiere
According to figures from STSA, Switzerland's trading hub controls one-thirds of world trade in crude oil and oil products, and is the number 1 trader in grains and oil seeds, in sugar for Europe and ties for top place with London for cotton. Its companies pay 22% of Geneva's budget through taxes. Switzerland has other commodity business centres in Zug and Lugano.
STSA can boast of playing a critical role in the implementation of the U.N.'s Guiding Principles on Business and Human Rights (UNGPs) within commodity trading.
STSA took part in elaborating, along with several socially critical non-governmental organizations (NGOs), the Swiss government's "world premier" Guidance on implementing UNGPs in commodity trading, published in November 2018. It also offers a training programme for companies to apply the standards across their supply chains. The course has earned it a Swiss quality award for its standard.
Bright future for adapters
So the unpredictable world situation, a high-cost economy in a small country, and detachment from the mainstream of the international community can be perfectly manageable with agile and expert professionals and a willingness to innovate in drawing up and applying sustainability and ethical standards across their business.
Nice for Geneva's financiers, brokers and traders to hear. But no-one was offering them grounds for complacency.
True, "the future remains bright for those who can adapt," in the words of the STSA boss. "The next economic boom could be just around the corner."
But Graber also underlined that "old recipes are not working in the new configuration."
The new challenges include finding solutions for demanding markets, promoting transparency and sustainability, navigating through new global conflicts, and grappling with new regulations, including rules such as "Basel III" tightening up the requirements on financial reserves.
Black swans vs old school mindsets
Speaking as the optimist in a debate on global turbulence, Jean-Christian Heintz, head of LNG (liquid natural gas) broking at SCB Brokers, pointed out that several "black swans" — unpredictable events that seem disasters at the time — had turned into opportunities for commodity traders and nations.
But losers in this business, he suggested, would be those with short-sighted strategies, misplaced ambitions and "old school mindsets". The winners would be portfolio players familiar with optimization tools, vertically integrated companies, and hedgers. "Agility is the word. It is important not to cross the road at the wrong moment," he advised. "If you do, you die."
Turbulence management requires caution
Niels Stradzins, head of global trade policy and Europe director in the Global Trade Professionals Alliance (GPTA), cast as a pessimist, was challenged by a participant: "Isn't turbulence management the core of commodity trading?"
"Yes," he replied, "but I wonder whether we have ever seen turbulence of this kind before." Stradzins argued: "Disruption is all around us. Businesses cannot make financial or investment decisions in an environment that changes day by day or tweet by tweet."
Not surprisingly, perhaps, 62% in the audience voted in favour of the arguments for caution.
Sustainability — 'perhaps the dominant issue'
Though turbulence was certainly on most participants' minds, sustainability was given equal prominence. GTR described it as "perhaps the dominant topic in the current commodity climate".
This can cover everything from sourcing gold to decarbonizing shipping. Olivier Bujol of the major food producer ADM pointed to his company's detailed reporting on and activities related to sustainability but noted this was not unique to businesses that have been operating for a long period and have anticipated the issues raised. "We have not been waiting for buzz created by the social media, we have not been waiting for the governments [to force action]. It's definitely not driven by pressure from the outside."
Borrowers, investors and staff
Jasper van Schaik, global head of trade and commodity finance at Rabobank, said lenders are now giving preference to borrowers who have a strong sustainability story or with social impact. His bank launched a social impact syndicate in 2018 and was surprised by the amount of oversubscription. These days, too, you narrow your range of investors if you do not have a sustainability element in your investment funds, he told bankers, particularly looking 10 years into the future.
Moderator Travis Randolph of PwC Switzerland reminded the financiers that polls showed 90% of millennials would change brands on the basis of sustainability, which demands traceability along the value-chain of products.
Van Schaik added of his bank that "the people we attract are not just interested in the economic benefits" and respond to the mission of doing some good for the world.
Responsible gold sourcing
"The gold industry has been at the forefront of responsible sourcing for many years," observed Olivier Demierre of the Geneva- and Ticino-based MKS PAMP precious metals group, in an article distributed by STSA in advance of the meeting.
He recalled that the Swiss Better Gold Assocation (SBGA) was founded in 2013 in a public-private partnership with the Swiss State Secretariat for Economic Affairs (SECO), with the aim of helping artisanal and small-scale miners (ASM). SBGA's members include jewellers, watch makers, refiners and the financial sector. "To date, it has channelled to Switzerland 2.4 tonnes of ASM gold for a value close to $100 million," he reported.
Checking on a cellphone
PAMP (Produits Artistiques Métaux Précieux) has a patented process called VERISCAN© for registering and then scanning the micro structure on the surface of precious metals products as an anti-counterfeit measure.
This process is now integrated with PAMP's blockchain-based Provenance information solution.
Using a gold bar and an iPhone, Demierre demonstrated PAMP's app that can give holders of its products easy and on-the-spot confirmation of the authenticity of the gold and details of its provenance in the form of a trace from the mine to the end product.
The London Bullion Market Association (LBMA) in 2013 awarded PAMP its Responsible Gold Certificate, the first refinery to pass the auditing process covering avoidance of contributing to conflict, human rights abuses, terrorist financing and money-laundering. In 2019 PAMP joined the Responsible Metals Initiative.
PAMP also produces a sustainability report covering social, environmental and economic responsibility. Its activities are supervised by FINMA (the Swiss Financial Market Supervisory Authority) for compliance with Swiss money-laundering controls.
Traceability and blockchains
This new imperative of traceability led inevitably to talk about blockchain (immutable digital) recording of the events in commodity production and trading, with particular reference to the U.K.'s Cambridge University in developing the new technology. The system provides benefits beyond recording, enabling transfers directly to the target communities and much more cheaply, it was pointed out.
Souleïma Baddi, CEO of komgo, a digital distributed network to finance commodity business, which was showcased at GTR Commodities 2019, observed: "2019 can be billed as the year of the start of the enterprise blockchain."
There's a reason (that might not be immediately obvious) for Swiss commodity traders to be interested. This landlocked country has the 11th largest commercially operated shipping fleet in the world, with 812 ships registered in 2018 to 65 shipping companies. It stands fifth on the European scale.
Saving 30% on costs
Baddi notes that no major innovation on transaction recording in the commodity shipping business has taken place since the 1970s. But pilot trades through komgo have cut the documentation time from 20-5 days to under five, and companies estimate the operational costs could drop by 30%. "The groundwork is set for a major breakthrough," she says.
Shona Tatchell reported that her Trado consortium came together to contribute to SDG 12: responsible consumption and production, with the encouragement of Prince Charles and with matching funding from DFID, the British overseas development agency. The idea is to harness fintech for sustainable business by rewarding sustainability practices "in the first mile of production".
Rewards for social and ecological data
The pilot project received a full writeup from the Cambridge Institute for Sustainability Leadership two days before Commodities 2019. As participants learned, some 225 smallholder tea farmers in Malawi were offered a financial rewards for feeding social or ecological data into the Trado blockchain.
In exchange for the data, the buyer allowed a (lower) rate to be applied to the suppliers' working capital financing. "Suppliers often borrow money to cover their working capital needs at a higher cost than that of 2the buyer," Trado observes, while its blockchain system creates minimal disturbance to the bank involved.
In return, the funders gained reliable data about the sustainability properties in their supply chain. Jessi Baker, Founder and CEO of the Provenance enterprise, another start-up, enthuses: “The Trado model can help businesses pay farmers more without impacting consumer prices."
Savings returned to smallholders
Tatchell comments: "Through Halotrade’s system we were able to generate financial savings in real terms. These were returned to smallholder farmers to improve their livelihoods and help them to be more sustainable, with no extra cost to the end consumer.
"The fact that the origin producers received the benefit was incredibly well received by consumers. The project shows how to realise new and more responsible forms of finance from which the entire supply chain can benefit."
Halotrade, she noted, works with both traditional and new technology solutions to link the supply chain to track shipments from means of production to destination and uses this information to offer attractive financing to suppliers in return for sustainable and ethical business practices.
The importance of land rights
Meridia, a Dutch company that maps land rights, provided the collection services for Trado in Malawi. "Land rights are a fundamental requirement for building sustainability in farming," Tatchell declared. "If you don't own the land, you are not going to look after it."
The cost savings from Trado could be given back to farmers to incentivize them to adopt sustainable systems, she explained. Tea was chosen as a product very vulnerable to climate change.
The aim was to gather information the most capable farmers as well as their product. Because of the blockchain's security, Unilever, as the middle merchant, was able to issue a bank guarantee to the tea factory immediately instead of taking 5-8 weeks using paper documentation.
Both Unilever and the factory agreed not to pocket the saving (estimated at up to 2.8%), and it went back to the local cooperative, confirmed via the blockchain and invested in training the farmers to manage their soils and resources better. In addition, Provenance have an app that provides full information on a product via a QR code.
Customers don't pay extra
Apart from the sustainability aspect, consumers appreciated that they were not paying any more for their tea and that 78% of the farmers were women.
Tatchell argued that the Trado system enables business to distribute profits much more fairly along the supply chain.
The Cambridge study remarks: "Existing trade finance pricing models are inefficient in attributing risks due to a lack of information about product flow and supply chain party participation."
One major debating point was how to persuade/order banks to take sustainable development goals (SDGs) into their lending policies. Tatchell suggested that rather than waiting for Bank of International Settlement (BIS) action, ratings agencies could have a major impact by making SDGs a more explicit part of their assessments of companies.
Old ships don't have environmentally friendlier technologies
Shipping expert Murali Subramanian, Chief Executive Officer of FIMBank, said he could "emphatically agree with that excellent point". He had previously warned that banks had to take their bottom line into account, and until countries put a time-limit on the life of ships, old vessels with inadequate protective measures against pollution and outdated technology would still be profitable to finance. Subramanian noted that shipbuilding "was at its height 15 years ago", when today's environmentally friendlier technologies were not available.
In an article prepared before the meeting, Christos Chryssakis of DNV GL - Maritime suggested shippers can meet the International Maritime Organization (IMO)'s 2030 target of a 40% emission cut on 2008 simply through current technologies for energy efficiency, alternative fuels and even speed reductions.
Showcasing four enterprises
The afternoon gave four enterprises a showcase for their high-tech systems, followed by an opportunity for the financiers and brokers to sit round the table with the senior executives and discuss their projects in detail.
The presenters included the mammoth global agribusiness consortium known as ABBCD from the initials of the companies involved (where the C is Cargill, the largest privately owned company in the U.S. by revenue).
The first showcaser was komgo, while ABBCD reported on how technology can simplify processes in countries such as China and Brazil.
Cross-referencing for invoices
Raj Uttamchandani, Executive Director of Trade Finance Market in Singapore, profiled the World Blockchain Trade Consortium(WBTC), set up to build a decentralized registry for financiers "to cross-reference invoices before committing to financing while keeping data private and secure".
He said this project stemmed from problems with his platform, operational since 2015, which is aimed particularly at small and medium enterprises (SMEs) through "trade finance solutions beyond the bank" including crowdfunding to link up businesses with investors for an average fee of 1%, commonly for 120-day loans.
Through its InvoiceCheck blockchain application, tradefinancemarket provides lenders with a guarantee against invoice financing fraud, and WBTC now has a CollatoralCheck system as well.
'Good luck, guys'
"I've seen how hard it is to actually get people to pay for anything," commented one panellist. "So good luck with your [projects] guys."
The fourth presenter was Arviem, a multi-prizewinning cargo-tracking project headquartered in Baar, Switzerland, founded in 2008. It installs automated location and sensing technology on containers to monitor goods in transit for their condition as well as location.
GTR noted that Arviem recently expanded its business to help financiers optimize lending, enabling them also to bring more financing to SMEs.
Reducing safety stocks and smaller inventories
"End-to-end transparency paves the way for significant working capital optimization. First, safety stocks can be reduced and work-in-process inventories allocated efficiently among the supply chain. Second, innovative supply chain finance services for goods-in-transit can be accessed," says Arviem.
The session concluded with an expert panel discussion of the projects and their breakout sessions.
Blockchain promises, incentives for producers, new technologies
From the discussions, it seemed clear that the brokers and financiers are tempted by the promises of blockchain systems to reduce paperwork and costs — keeping their companies profitable even in leaner times. They also see the benefits of providing incentives further down the value-chain to producers, particularly if this does not cost consumers more. As for the challenges of proving their environmental and sustainability credentials, they see answers in new technologies as well as through their traditional foresight, with the added factor of "greener" ethics among their new recruits.
Avenir Suisse on Geneva's commodity trading: 'Two thirds of Switzerland's commodity companies are based in the cantons of Geneva and Vaud', 1 October 2019. (LINK)
GTR Commodities 2019 (LINK)
UNCTAD Review of Maritime Transport 2019: Sustainable Shipping. "Trade tension: A major risk to maritime trade causing disruption to supply chains. [...] A new normal in the sector appears to be taking hold, reflecting moderated growth in the global economy and trade. It is characterized by the following trends: a supply chain restructuring in favour of more regionalized trade flows, a continued rebalancing in the economy of China, a larger role played by technology and services in value chains and logistics, intensified and more frequent natural disasters and climaterelated disruptions, and an accelerated environmental sustainability agenda with an increased awareness of the impact of global warming." 1 November 2019. (LINK)
ETH Zurich charts course for emission-free shipping. swissinfo.ch. 2 November 2019. (LINK)