Historic Commodity Rally Sends Trading Houses Hunting for Credit

Historic Commodity Rally Sends Trading Houses Hunting for Credit

(Bloomberg) — Commodities trading houses are being forced to seek additional financing as Russia’s invasion of Ukraine sends prices soaring, stretching credit limits at the companies that buy and sell the world’s resources.

News that US President Joe Biden was considering whether to issue an outright ban on Russian oil imports helped trigger a historic surge on Monday in commodities where Russia is a major producer — oil, gas, nickel, aluminum, palladium and wheat all hit multi- year or record highs.

Trading houses typically use short positions in derivatives to hedge against potential losses on long-term contracts or physical inventories of commodities. With prices soaring, brokers and exchanges require additional cash — or “margin” — to cover part of the value of those positions. At the same time, the cost of shipping oil, metals and crops around the world is surging, further straining the traders’ finances.

Banks across Europe and the US are being asked to pitch credit packages to trading houses seeking new lines or to increase existing borrowing facilities, according to people familiar with the matter. Banks are for the most part able to offer additional credit to traders but some are asking for higher interest rates, said the people, who asked not to be identified discussing private information.

The difficulties faced by traders is evident in the mammoth margin calls being asked of those in the nickel trade. The London Metal Exchange nickel trading on Tuesday after the price tripled in the space of two days, driven by market participants with short positions being forced to close them because they couldn’t meet margin calls.

“We are swamped with requests across the whole commodity spectrum from companies requiring liquidity,” said Kristofer Tremaine, founder of London commodity finance lender Kimura Capital. “Naturally, huge margin calls are being seen at brokers on hedges.”

Trafigura Group, one of the world’s top independent traders, is raising a $1.2 billion syndicated revolving credit facility designed to help it navigate “unprecedented market conditions and extreme volatility,” Chief Financial Officer Christophe Salmon said in a notice on Tuesday. The company expects to increase the facility to over $2 billion “within a short period of time,” Salmon said.

Mercuria Energy Group Ltd. was also looking for funds, people familiar with the matter said on Monday.

But they are far from the only ones: almost all the major traders are in discussions about expanded credit facilities, according to people familiar with the matter.

Some commodity traders with publicly-traded debt have seen it sell off sharply in the past week. The yield on Trafigura’s bonds due in 2026 jumped from less than 4.5% before the Russian invasion of Ukraine to a high above 10% last week, before coming back to around 7.7%.

Commodity traders like Mercuria and Trafigura have global revolving lines which they renew every year with relationship banks. Last quarter saw the sector raising record loans as soaring prices add pressure to their liquidity needs. Worldwide borrowings from the loan market doubled to record $31 billion in fourth quarter last year from the previous three-month period, according to data compiled by Bloomberg.

The need for additional funds comes at a time when some of the biggest lenders to the commodities industry historically have pared their exposure in recent years or exited entirely.

However, lenders are piling into the facilities even as deal sizes grew bigger. Trafigura increased its recent European deal to $5.3 billion from the original-marketed $4.5 billion after attracting 55 banks to the deal.

©2022 Bloomberg LP

Leave a Reply

%d bloggers like this: