Second half of 2022 promises further volatility for commodities

The second half of 2022 promises as much turmoil as the first for commodity prices and supply, according to a downbeat assessment by the mining.com website citing Bloomberg News.

It concludes that the world faces an escalating energy crisis, as copper plunges on growing fears of a US recession, and Russian President Vladimir Putin delivers a shock for Shell. Russia’s move to reshuffle ownership of the Sakhalin-2 gas plant spells trouble for the group’s plan to offload its stake. An analyst in Japan warned it “could even trigger a panic” in liquified natural gas (LNG) markets — although Moscow said Putin’s decree doesn’t threaten supplies and is not nationalisation

Energy crises and central bank moves to crush inflation present powerful headwinds across markets, underscored by a collapse in the price of copper, which has fallen below US$8,000 a ton for the first time since early 2021. Demand for the metal, used in electrical wiring, is regarded as a barometer of the world economy. Fears of a global recession is weighing on all metals, and China’s tentative economy recovery has so far prompted a collective shrug from investors.

With Europe’s fears over Russian gas supplies already at fever pitch, Putin delivered a bombshell for foreign investors in Sakhalin-2, including Shell as well as Japan’s Mitsubishi Corp. and Mitsui & Co. Rights to the project will be vested in a new Russian company, with zero compensation for those who opt-out.

The move threatens to complicate Shell’s efforts to sell its 27.5% stake and casts a cloud over the future of gas supplies to Japan, which depends on Russia for about 9% of its imported LNG. Japan’s task of replacing Russian supplies is made tougher by Europe doing the same.

European gas and power markets, already in turmoil, face a further major risk should the Nord Stream pipeline — Europe’s key channel for gas from Russia — not be restarted after 10 days of maintenance that begin 11 July. Regardless of the outcome there, Europe’s politicians are under intense pressure to act immediately to avoid even deeper troubles when winter arrives. 

The focus remains on heavy consumer Germany, which already raised its gas risk level to the second-highest “alarm” phase, tightening monitoring of the market and rebooting some coal-fired power plants. The next step could be more stringent steps to discourage demand. Allowing utilities to pass on higher costs to customers would speed rationing of supplies but is an option that German vice chancellor Robert Habeck has so far resisted.

Meanwhile oil last month experienced its first monthly drop since November on fears of a global downturn, although the supply situation remains tight. The two big questions hanging over the market are whether OPEC+ can ramp up production any further after completing the return of supplies halted during the pandemic and whether a downward shift in demand will kick in.

Saudi Aramco is expected to release its official selling prices for August shortly, which will provide an indication on its outlook. Bloomberg reports that refiners and traders it surveyed expect a further increase. In the US, gasoline demand on a four-week rolling average is at the lowest since 2014, except for 2020 when the effect of the Covid-19 pandemic impacted.

Agricultural commodities are similarly volatile. “We in grains have never traded a war market before, so this is all new,” said one trader as wheat harvests begin in the Northern Hemisphere. This month will test how much wheat can get to market with Ukraine’s supplies still severely constrained. Wheat and corn futures have returned to levels last seen before Russia’s invasion.

Even with the downturn, prices remain at elevated levels, straining budgets of importers and lower-income nations. The United Nations publishes its annual food-security report this week, detailing the latest assessments of global hunger. The situation was already worsening before the war, and tens of millions more could lack enough to eat this year, the World Food Programme has warned.

Ireland “vulnerable” on corporate tax

Ireland's reliance on only 10 multinational firms to pay over half of the country's soaring corporate tax receipts represents an "incredible level of vulnerability" for the economy, the finance ministry's chief economist John McCarthy has warned.

Corporate receipts, mostly generated from major multinationals attracted to Ireland by its low corporate tax rate, have surged in recent years and made up almost a quarter of all tax revenues in the first half of 2022 after a 53% year-on-year jump.

The finance ministry said this meant that one euro in eight collected by the state comes from "an exceptionally small number of firms" and that any shock which impacted on the multinational sector would have severe fiscal implications for Ireland.

“That's an incredible level of vulnerability,” said McCarthy, adding that the level of concentration in such a small number of firms is something he has not seen in any other economy. “This is something we're very concerned about.”

The concentration level is even larger including the income tax paid by multinationals such as Facebook, Google and Pfizer, which employ around one in nine Irish workers in often highly paid jobs, McCarthy noted.

He admitted being more worried about overreliance on these types of firms than the impact a global overhaul of corporate tax regimes could have on Ireland's position as a hub for multinational investment.

McCarthy also revealed that the treasury expected to take in €18-19 billion in corporate tax this year, up from €16.9 billion forecast just three months ago and a near fivefold increase in the past decade.

Corporate fundraising slips 25% as caution rules

Corporate fundraisings slipped in the first half of 2022 as financial markets turmoil saw bankers and CFOs become more cautious towards issuing new equity and debt. Companies raised US$4.9 trillion in new bonds, credit and equity in H1 2022, representing a contraction of 25% from the US$6.6 trillion raised in the first half of 2021 according to financial market data provider Refinitiv.

Investors have becoming increasingly reluctant to wade in while bankers report that corporate treasurers have largely halted all but absolutely necessary fundraisings. The junk bond market, where enterprises with low debt ratings borrow from risk-tolerant investors, recorded its biggest quarter-on-quarter loss since the pandemic-induced volatility of Q1 2020.

The slide in debt capital markets (DCM) and equity capital markets (ECM) was concentrated among lower-rated companies globally, while high quality investment-grade issuance remained in line with historical trends. Financial market uncertainty so far this year has negatively impacted equity sales the most, with many corporates delaying planned initial public offerings (IPOs) including several that cut their valuations privately.

“We had begun to anticipate the storm in the first quarter. Now we are really in it” stated JPMorgan Head of Global Corporate Debt Issuance, Kevin Foley.

“There are just too many question marks at this time for deals to get done. The slowdown is unlikely to abate until inflation begins to cool. Nobody knows where the bottom is” commented private equity firm KKR ECM’s Managing Director, Lauren Hahn.

Fallout continues from Three Arrows Capital

Singapore-based cryptocurrency hedge fund Three Arrows Capital (3AC), which was ordered to go into liquidation on 27 June and has subsequently filed for bankruptcy in the US, is reported to own non-fungible tokens (NFTs) worth around US$7.36 million in total.

According to other reports partners from the consulting and advisory firm Teneo have been lined up to handle the insolvency of 3AC, which was set up in 2012 by Su Zhu and Kyle Davies. The reports also suggest that creditors and liquidators seeking to seize 3AC’s assets might face several obstacles as the hedge fund’s paper trail has revealed a complex web of ownership that could delay their efforts.

Late on 30 June, the Monetary Authority of Singapore (MAS) issued a public reprimand of the firm for providing “misleading information to the regulator and exceeding the threshold set for assets under management.”

In early 2021, 3AC is said to have reported a S$1.2 billion position in the Grayscale Bitcoin Trust (GBTC), evenly split between its entities in Singapore and the British Virgin Islands. However, in Singapore Three Arrows Capital was only registered to manage assets under S$250 million (US$179.9 million) – well under what its position in GBTC is worth.

3AC was deeply invested in several troubled cryptocurrency projects, including Terra, as well as Axie Infinity, a “play to earn” game that lost almost US$700 million to a hack from North Korea last year, and BlockFi, a centralised cryptocurrency exchange that recently laid off hundreds of staff.

It also had sizeable leveraged investments in bitcoin, Ethereum and other cryptocurrency assets, all of which have seen falls of up to 60% in the first half of 2022.

Third successive rate hike in Australia

The Reserve Bank of Australia (RBA) has wrapped up its July policy meeting by lifting its cash rate by 50 basis points to 1.35%, marking 125 basis points of hikes since May and the RBA’s fastest series of moves since 1994.

“The Board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead,” said RBA Governor Philip Lowe in a statement. The latest increase was widely expected, while futures narrowed the odds on a further half-point rate rise in August.

Lowe expressed confidence that Australia’s economy could withstand the jolt with unemployment at five-decade lows of 3.9% and job vacancies at all-time highs. Household demand has also held up well, thanks in part to A$260 billion (US$178.6 billion) in extra savings accumulated during the pandemic lockdowns.

However, the recent floods across Australia’s east coast in recent days will add to consumers’ pain by pushing up prices for vegetables and fruit. Official data on consumer price inflation for Q2 2022 due later this month and is expected to show the rate rising to 6% or more, levels not seen since a national sales tax was introduced in 2000.

Zimbabwe to introduce gold coins

Zimbabwe’s central bank will begin selling gold coins later this month as a store of value to tame resurgent inflation, which has considerably weakened the local currency. Annual inflation, which last month reached 191%, has hampered President Emmerson Mnangagwa’s attempts to revitalise the economy.

John Mangudya, governor of the Reserve Bank of Zimbabwe said that the new coins would be available from 25 July in local currency, US dollars and other foreign currencies at a price based on the prevailing international price of gold and the cost of production.

The Mosi-oa-Tunya coin, named after Victoria Falls, can be converted into cash and be traded locally and internationally, the central bank said. The gold coin will contain one troy ounce of gold and will be sold by Fidelity Gold Refinery, Aurex and local banks, it added.

Last week, Zimbabwe more than doubled its policy rate to 200% from 80% and outlined plans to make the US dollar legal tender for the next five years to restore confidence. The country previously abandoned its inflation-ravaged dollar in 2009, opting instead to use foreign currencies, mostly the US dollar. The government reintroduced the local currency in 2019 but it has further declined in value.

Banks step up trade finance as global commodities boom

Major banks are ratcheting up funds for the global commodities trade as Russia’s war in Ukraine drives up prices for a range of staples from crude oil to corn, reports Bloomberg.

It says that lending to the sector is growing again as the war reinvigorates raw materials markets, with ING Groep and Japan’s Mitsubishi UFJ Financial Group (MUFG) among those heeding traders’ calls for cash, providing lines of credit to pay for the goods they truck and ship to customers. The resurgence contrast with 2020, when a series of scandals and heavy losses prompted ING and others to scale back their exposure to the industry.

MUFG announced earlier this month that it is expanding its commodity trade finance business with a new desk in Amsterdam. The bank has hired Natalia Kasyanova to lead the effort, overseeing clients in Europe, MUFG said in a statement to Bloomberg on Friday. She was previously with digital trade finance firm Komgo and will report to Atakan Akkaya, the bank’s head of commodity finance in Europe, Middle East and Africa.

However, going against the general trend is France’s BNP Paribas, which as was recently reported is exiting its commodities finance business in the US following earlier retreats in other parts of the world.

United Arab Bank goes live with Arab Monetary Fund’s Buna platform

Dubai-based United Arab Bank (UAB) has announced the launch of cross-border multi-currency settlement service through the Buna payment platform.

Buna was launched in February 2020 by the Arab Monetary Fund (AMF) as a regional payment platform that enables regional financial institutions to send and receive cross-border payments across the Arab region and beyond in Arab currencies, as well as key international currencies. Incorporated in the United Arab Emirates (UAE), it is operated by the Arab Regional Payments, Clearing and Settlement Organisation, a subsidiary of the AMF.

A press release issued by the UAB added; “Buna offers its participant members modern payments solutions that comply with international requirements against financial crime and adhere to the highest standards of information security and data protection.

“The Buna platform is the first Arab regional payment system that allows the use of Arab currencies as settlement currencies alongside other international currencies, and the platform provides UAB with modern payment solutions that comply with international standards and principles and international compliance requirements.”

Shirish Bhide, Chief Executive Officer at UAB, added: “This strategic collaboration is in line with UAB’s mission to play a pivotal role in supporting the growth of trade and investments in the Arab region as it opens up opportunities for our clients to cooperate more dynamically with their partners at the regional and international level, by providing real-time payment solutions. Furthermore, it facilitates the process of cross-border transactions and develops trade and financial exchanges in the Arab region.”