Global commodity trading “on cusp of next normal”– Industry roundup: 31 January
by Graham Buck
McKinsey: Global commodity trade “may need US$500 billion extra finance”
A “new normal” of commodity trading will call for new types of traders, a just-published McKinsey report suggests.
Among its predictions are that a combination of increased shipping times, a tripling of energy costs, much higher interest rate payments and greater volatility could mean an additional US$300 billion to US$500 billion will be required to finance global commodity trading,
In The Future of commodity trading, McKinsey analysts Roland Rechtsteiner, Joscha Schabram and Arun Thomas forecast that the transition from oil and gas to electricity and renewables could further exacerbate the “regionalisation” of commodity trade flows.
The commodity trading sector moves raw materials such as oil, gas, sugar and gold around the world, powering the global economy. Noting that the industry has enjoyed an upward trend over the past five years, the report concludes that while all industries go through multiyear cycles of peaks and troughs, the industry’s prospects for the years ahead look excellent.
“Indeed, commodity trading is on the cusp of the next normal. The energy transition now under way is an economic and physical transformation that cuts across and integrates the various global food, energy, and materials systems,” the trio writes.
“From a commodity trading standpoint, this transformation will increase structural volatility, disrupt trade flows to open new arbitrages, redefine what it means to be a commodity, and fundamentally alter commercial relationships. All these developments will create unique opportunities and challenges for new and incumbent players alike.”
Commodity trading value pools have already grown substantially, almost doubling from US$27 billion in 2018 to an estimated $52 billion of earnings before interest and taxes (EBIT) in 2021. Most of this growth was fuelled by EBIT from oil trading, which were estimated to have increased by more than 90% to US$18 billion over the period.
Power and gas trading was just behind, rising from US$7 billion to US$13 billion. “These value pools maintained their upward trajectory in 2022,” the report states. “The market will likely attract new entrants that enhance competition, and our analysis suggests that its overall value will continue to grow.”
On top of this, Russia’s invasion of Ukraine has trigged a profound shift in global trade flows — often resulting in longer, less efficient shipping routes.
BP reduces long-term forecast for oil and gas demand
BP has revised its outlook for global oil and gas demand in its latest annual energy projection and forecasts that the upheaval unleashed by Russia’s invasion of Ukraine will push countries to develop greater energy security over the next decade by investing in renewables.
This could see global carbon emissions peak earlier in the 2020s than BP previously suggested, although the analysis also shows that even with increased political support for the shift away from fossil fuel, governments and industry are lagging in the race to achieve net zero emissions by 2050.
One of the sector’s most closely read studies, the outlook describes three scenarios for the evolution of the energy sector through to 2050. Under its “New Momentum” scenario, which aims to “reflect the current broad trajectory” of the world’s energy system, oil demand would be about 93 million barrels per day in 2035, 5% less than BP forecast last year, and natural gas demand would be 6% weaker.
The lower forecasts reflect an increased role for domestic renewable energy as countries reduce dependence on imported hydrocarbons, but also expectations of weaker economic growth in the next decade that reflect a lasting impact from the energy crisis.
Despite the declines, in the New Momentum scenario global emissions would only fall 30% from 2019 levels by 2050, the report predicts, adding that a 95% drop from 2019 levels is required for the world to achieve net zero emissions.
In this scenario, oil demand would remain around current levels, close to 100 million barrels per day (b/d), through “much of this decade” before declining gradually to about 75 million b/d by 2050. By contrast under the “Net Zero” scenario, the study’s most ambitious outlook for a reduction in emissions, demand would drop to 70 million b/d in 2035, and down to 20 million b/d by 2050.
However, BP argues that natural declines in existing oilfields mean investment in oil and gas production will still be required for the next 30 years, even under the “Net Zero” outlook.
“The events [of the past year] also show how relatively small disruptions to energy supplies can lead to severe economic and social costs, highlighting the importance that the transition away from hydrocarbons is orderly,” said BP’s chief economist, Spencer Dale. “Demand for hydrocarbons must therefore fall “in line with available supplies.”
Nigeria launches AfriGo payment card under cashless initiative
The Central Bank of Nigeria (CBN) and the Nigeria Inter-Bank Settlement Systems (NIBSS) have unveiled Nigeria’s first national payment card named AfriGo. At a virtual unveiling last week, CBN Governor, Godwin Emefiele, said the card was designed to cater to local needs that the existing card products have failed to address.
He revealed that the card, which will function like other international payment cards, is aimed at boosting financial inclusion in the country, which has become Africa’s largest economy, and reducing dependence on foreign cards such as Mastercard and Visa while saving foreign transaction fees.
The AfriGo initiative follows the CBN’s launch of Africa’s first digital currency, the e-naira, in October 2021.
Emefiele said that although penetration of card payments in Nigeria had grown over the years, many citizens are still excluded.
“The challenges that have limited the inclusion of Nigerians include the high cost of card services as a result of foreign exchange requirements of international card schemes and the fact that existing card products do not address local peculiarities of the Nigerian market,” he added.
Emefiele said Nigeria was joining China, Russia, India and Turkey in launching a domestic card scheme. AfriGo is owned by CBN and Nigerian banks.
Standard Chartered picks the Philippines for fifth global services hub
Standard Chartered says that the Philippines will be the site of its new global business services hub, bringing to five its service centres worldwide.
Saif Malik, the bank’s head of global subsidiaries and client coverage UK at Standard Chartered Bank, said its Global Business Services (GBS) division had selected the country for its next services hub. “We ourselves as a bank will be opening a Global Business Services Center in the Philippines very soon,” he told participants of the Philippine Economic Briefing in London
“We have centres in Malaysia, in China, and we have two centres in India. In India alone, we employ nearly 20,000 people in our GBS services and about 10,000 in Malaysia,” he said.
The GBS is the bank’s multi-disciplinary global competency division managing complex, large-scale, cross-border activities and at the heart of operational processes and technology services, which supports the delivery of products and services to the clients.
Malik noted that the Philippines is becoming a top investment destination. “I see that from a lot of our multinational clients that are working with us in our footprint and the Philippine market is one that’s on everyone’s agenda,” he said.
The Philippines reported a gross domestic product (GDP) growth of 7.6% for 2022, exceeding the 6.5 to 7.5% target set by the Development Budget Coordination Committee (DBCC) and faster than the 5.7% expansion in 2021.
“Congratulations on your fabulous, fabulous growth rate. I think we can use that word fabulous because with what we’ve gone through, I think that is a real standout. And also on the recent issuance of the $3 billion in January, I think that’s a great testament to the strong support that you have in the international community,” Malik said.
Standard Chartered Bank is the first international bank in the Philippines, marking its 150th anniversary in the country in 2022.
Montenegro teams up with Ripple on digital currency pilot project
Montenegro’s prime minister has announced a central bank “digital currency or stablecoin” project with Ripple.
Dritan Abazović revealed on Twitter that the Balkan country is pursuing a digital currency in conjunction with the crypto solutions group. Abazović met with Ripple’s CEO Brad Garlinghouse and vice president James Wallis at the recent Davos economic summit.
Wallis is Ripple's vice president for central bank engagements and central bank digital currencies (CBDCs). Abazović apparently had something like a (CBDC) in mind in his announcement, as he stated in the thread:
“In cooperation with @Ripple and the Central Bank, we launched a pilot project to build the first digital currency or stablecoin for Montenegro.”
The exact nature of the potential future digital currency is unclear, however, as Montenegro currently has no national currency of its own. The country has used the euro as its currency since 2002, when the transnational currency was introduced, although Montenegro is neither part of the Eurozone nor a European Union (EU) member. Montenegro applied for EU membership in 2008 and negotiations commenced in June 2012..
Although some reports suggest that Montenegro’s application could be granted as early as 2025, several EU members have expressed dissatisfaction with the entry of poorer Central and Eastern Europe countries into their union. France has expressed a widely-held view that the EU’s most recent additions were unprepared for membership mostly due to corruption and rule of law issues. They have stated that Montenegro is currently not suited for membership, perceiving the country as under "state capture" by shady politicians tied to organised crime.
Iran and Russia sign bank messaging pact after SWIFT expulsion
Iran and Russia, both largely barred from the SWIFT network, signed a financial messaging agreement at the weekend that would allow their banks to transfer funds between one another, and evade sanctions mechanism that blocks most of their entities.
The memorandum of understanding will allow Iranian and Russian banks to exchange standard financial messages. Officials from both countries held a ceremony in Tehran for the occasion. The two countries had been discussing such an agreement for the past year. The Iranian business website Tehran Bazaar said Iran’s Shahr Bank and Russia’s VTB Bank will be involved in a pilot programme.
SWIFT banned most Iranian banks from using its service in 2019 under pressure from the US. They had previously been barred from SWIFT in 2012 but were permitted to return in 2016 after the Iran nuclear deal was signed the previous year. In 2018, US President Donald Trump removed the US from the agreement and the SWIFT ban was subsequently re-imposed.
In March 2022, SWIFT expelled several Russian banks from the service in response to the invasion of Ukraine, among them VTB Bank.
The signing of the agreement means that 52 Iranian and 106 Russian banks remain connected through Russia’s System for Transfer of Financial Messages (SPFS, which will facilitate economic relations between the two countries, said the deputy governor of the Central Bank of Iran, Mohsen Karimi.
“This system is immune to sanctions because it is based on the infrastructure of both countries,” Karimi added, according to Iranian news agency Mehr.
The agreement is not the first action Iran and Russia have taken together in enabling them to circumvent Western sanctions. Last year, the two countries agreed that mutual trading should be in their own currencies in order to reduce dependence on the US dollar.
BAFT goes live with foreign exchange certificate
The Bankers Association for Finance and Trade (BAFT) has launched its new Certificate in Foreign Exchange (CFX), which includes a series of eight courses that offer an overview of a financial institution’s foreign exchange department and services. https://www.baft.org/education-training/
BAFT says that the certificate is tailored for junior to intermediate level transaction banking professionals, and those who have already completed the Certificate in Introductory Transaction Banking (CITB).
The new course will provide an understanding of the foreign exchange market, what FX products are most commonly used by financial institutions, and a working knowledge of FX as it pertains to a client’s business, including global differences and risk and compliance concerns.
Participants will also review the importance of complying with local country regulations that restrict payments to certain parties in a transaction.
Deepa Sinha, vice president of payments and financial crime, BAFT said: “As a finance professional with more than 20 years of progressive responsibilities in both banking and corporate treasuries, I know that foreign exchange is a complex business.
“This comprehensive new certification will provide other transaction banking professionals with the skills and expertise necessary to master this important area of industry focus.”
The courses will be led by Matt Porio, an adjunct professor of finance at the University of Connecticut and Sacred Heart University in Fairfield, Connecticut. The certificate courses will be available through BAFT’s Learning Management System and take about 15 hours of study to complete.
Standard Bank warns of phishing targeting clients
Standard Bank, Africa’s biggest lender, has warned clients via an SMS of a phishing scam doing the rounds in which fraudsters request recipients to update their bank details.
“If you receive an e-mail advising you to update your bank card details, do not click on the link and please delete the e-mail immediately,” it states.
“Remember, we will never send you an e-mail with a link asking you to update your card number, online banking profile, or your banking details. Please report suspicious activity to our Fraud Line on 0800 222 050 or report fraud on firstname.lastname@example.org.”
Analysts have cautioned that phishing will grow more widespread and dangerous across Africa this year.
The Southern African Fraud Prevention Service (SAFPS), a non-profit organisation that aims to prevent fraud from identity theft and impersonation, last year warned of an uptick of impersonation crimes, through phishing, smishing and vishing.
In 2022, the SAFPS said that incidents of impersonation increased by 264% for the first five months of the year compared to 2021 and the trend in expected to continue this year.
UK Treasury searches for CBDC head
The UK has stepped up progress toward launching a central bank digital currency (CBDC), with the UK Treasury posted a job vacancy on LinkedIn titled ‘Head of Central Bank Digital Currency’.
The Bank of England will work with the Treasury team on the build out of the digital pound. This role mentioned is separate from the current head of crypto-assets and digital currencies but will exist in the already established Payments and Fintech Team.
The posting states that “the successful candidate will be responsible for leadership of HM Treasury’s work on a potential digital pound – a UK central bank digital currency”. This follows comments by Bank of England Deputy Governor Jon Cunliffe in November that the need for a digital pound has been demonstrated by the collapse of cryptocurrency firm FTX.
“We could see an influx of CBDCs being launched over the next 10 years,” said Marcus Sotiriou, market analyst at the publicly listed digital asset broker GlobalBlock. “In fact, in a recent Official Monetary and Financial Institutions Forum (OMFIF) survey, two thirds of central banks said they would issue a CBDC within 10 years.”
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