As a rule of thumb, financing commodities is not for the risk averse. The finance market for commodities is characterized by price volatility, high primary investment, bulk shipments, big ticket transactions and complexities in terms of cross border transport and involvement of multiple jurisdictions.
Risks also arise from non-financial factors – ESG directives, corporate and social responsibilities and local opposition. Keeping in mind the type of commodity (Agri, Metals/Minerals and Energy), the commodity in essence can be perishable or spoilt.
Despite these risks, commodity trading is still one of the hottest markets around. For one, they are prerequisites to any economy and are raw materials for co-dependent manufacturing industries.
Commodity trade finance (Supply chain finance) deals with the financing of the movement of these goods from supplier to buyer and is linked to the asset conversion cycle.
The financing itself can be based on
- Shipment/transactional value
- Working capital assets (I.e., receivables, WC liquidity, inventory of the borrower)
- Purely on the credit worthiness and history of the borrower
- Structured trade finance (prepayments, tolling, structured inventory/repo)
All of these methods would have varying levels of risk and applied control measures.
Commodity supply chain finance is on its way becoming increasingly more digital. Interventions and credit worthiness are being increasingly judged by a cohesive data pool as opposed to fragmented/siloed data. A single unifying standard for all parties along the supply chain is becoming more common, with tech solutions in the market bringing more transparency and automation to the process.
With Supply Chain Financial Solutions, a commodity business would be much more streamlined and less prone to irregularities and delays.
For more, visit us at www.tasconnect.com.
