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World’s central banks go for gold – Industry roundup: 12 January

Central bank gold buying spree continues

The world’s central banks, which stepped up their purchases of gold in 2022, bought a further 50 tonnes on a net basis during November, representing a 47% increase from October’s (revised) 34 tonnes according to World Gold Council (WGC) data.

Of this net total, three central banks accounted for gross buying of 55 tonnes, while two largely contributed to gross sales of five tonnes, showing the strength of demand, says WGC. The latest figures support a 28 December report in the Financial Times that gold buyers were “bingeing” on the biggest volumes in 55 years, led by Russia and China as the main accumulators of the precious metal.

The biggest buyer of November 2022 was the People’s Bank of China (PBoC), which reported an increase of 32 tonnes, the largest reported purchase in November and the first announced increase in its gold reserves since September 2019.

According to the WGC the announcement is significant given China’s historic position as a large gold buyer, accumulating 1,448 tonnes between 2002 and 2019. It remains to be seen whether the buying continued buying in December. At the end of November, PBoC gold reserves stood at 1,980 tonnes (3.4% of total reserves).

Turkey’s central bank continued to buy gold in November, adding a further 19 tonnes to its official reserves (central bank plus Treasury) and lifting its year-to-date net purchases of gold to 123 tonnes – the largest reported by any country – and its official gold reserves to 517 tonnes (27% of total reserves).

The Central Bank of the Kyrgyz Republic added to its gold reserves for the first time in 2022, buying three tonnes in November to increase its total gold reserves to 16 tonnes (+61% year-to-date).

The two main sellers of gold in November were the National Bank of Kazakhstan and the Central Bank of Uzbekistan. Kazakhstan reduced its reserves by around four tonnes to 380 tonnes (-5% YTD), and Uzbekistan’s gold reserves fell by almost two tonnes to 397 tonnes (+10%YTD).

“We have noted previously that it is not uncommon for central banks who purchase gold from domestic sources – as both Kazakhstan and Uzbekistan do – to also be frequent sellers of gold,” commented Krishan Gopaul, senior analyst EMEA at WGC.

“The central bank sector has been one of the highlights of the gold market in 2022, having bought a net 673 tonnes between Q1 and Q3. Looking ahead to the full year picture, it’s likely that central banks accumulated a multi-decade high level of gold in 2022.” Gopaul adds.

In November, traders in the gold market had noted a huge buyer entering the market and purchasing very large volumes of gold — a so-called ‘whale’, which in December was revealed to be the PBoC. In addition to China and Turkey, recent demand for gold has come from India, Uzbekistan, Egypt, Qatar, and Iraq. It is worth noting that many of these countries have expressed an interest in joining the five emerging markets alliance BRICS, which comprises Brazil, Russia, India, China and South Africa.

Many commentators suggest that geopolitical turmoil has triggered the buys. The FT’s Jonathan Guthrie writes that “gold is the currency of fear and mistrust,” and that “the democratic west and the authoritarian east are pulling apart amid mutual recriminations”.

For some countries, fears of Western sanctions increased after Russia was made a pariah state in the wake of its invasion of Ukraine, according to the WGC. Officials in these countries outside the West are rethinking their foreign currency reserves after the sanctions meant Russia’s central bank lost the use of its war chest, hampering its ability to protect the rouble and its banking system.

Global shipping costs returning to pre-pandemic levels

After a period of exceptionally high freight rates and a tight capacity market caused by the Covid-19 pandemic, shippers enjoyed improved conditions in the latter half of 2022, although a new wave of coronavirus cases in China threatens to disrupt global supply chains once more.

Over recent months shipping rates for both dry bulk carriers and container ships have come off the highest levels triggered when the Covid-19 pandemic disrupted the supply chain, causing port congestion, shortage of shipping containers and increased blank sailings by carriers.

As The Economist noted earlier this week, on 9 January 2022, 109 container ships sat off the coast of California waiting for their turn to unload at the ports of Los Angeles and Long Beach. One year later there are almost none.

The newspaper reports that the easing of port traffic and the opening of other supply-chain bottlenecks have triggered a collapse in freight rates from the all-time highs reached during the pandemic. The cost of shipping a 40-foot container from China to America’s west coast is now US$1,400, down 93% from its peak of US$20,600 in September 2021, according to the online freight marketplace Freightos. It is roughly equal to its value in February 2020, before the pandemic struck.

Costs along other major shipping routes are also reducing, which should prove a relief for consumers. The Federal Reserve Bank of New York estimates that 40% of inflation from 2019 to 2021 was caused by supply shocks.

Tan Kim Yong deputy group CEO of Malaysian logistics group Tasco comments: “Big US retailers like Target and Walmart that overstocked during the pandemic due to the uncertainty in shipping, are working through an unexpected glut of inventory. The surge in inventories has resulted in the current excess supply of goods. With a recession on the horizon, consumers in the US are also more cautious and spending less.”

While container freight rates are expected to continue to normalise in 2023, Tan does not expect the drop to be as big as this year given that they have fallen to near their 2019 levels.

“The rates might drop a little bit more or they might stabilise. But I don’t expect the rates to go up in the foreseeable future, especially next year when people are worried about a recession coming,” he adds.

Olam Agri considers Saudi and Singapore dual listing

Singapore-based multinational commodities giant Olam Group, which focuses on high-growth emerging markets, is considering dual listing its agriculture business in Singapore and Saudi Arabia, with plans for an initial public offering (IPO) possibly during H1 2023.

Olam Group subsidiary Olam Agri, a major supplier of animal feed, edible oils, rice and cotton as well as a provider of commodity financial services, plans to capitalise on “rising demand for food, feed and fibre amid a greater global focus on food security”, the company stated.

As well as listing on the Singapore Exchange within six months, it will explore the possibility of listing concurrently on the Saudi Stock Exchange. The decision follows the December sale of a minority stake to the Saudi Agricultural and Livestock Company for US$1.24 billion.

“If the concurrent listing takes place, the Olam Agri IPO would be the first dual-listing for a company on these two bourses and the first ever listing in Saudi Arabia of a non-Gulf Cooperation Council incorporated business,” the company says.

“The decision to target an IPO for [Olam Agri] as early as H1 2023 follows a thorough review in relation to maximising Olam Group’s long-term shareholder value. The decision also considers the global agri-business trends [and] rising food security concerns.”

Soaring commodity prices, largely caused by Russia’s invasion of Ukraine, have prompted warnings from international agencies over risks to the availability of food and fertiliser, particularly in lower income countries.

Olam Group also plans to list Olam Food Ingredients (OFI) on the London Stock Exchange (LSE), an IPO that had been scheduled for March 2022 but delayed due to challenging market conditions. OFI was formed as part of a structural overhaul that followed a 2019 strategic review, which would see Olam’s cocoa, coffee, nuts, spices and dairy business spun off into a separate entity.

Listing the two companies will “strengthen their respective balance sheets [and] improve access to capital markets”, says Olam Group co-founder and chief executive Sunny Verghese.

Last month OFI announced that it had secured a two-year loan facility totalling US$600 million, comprising a revolving credit facility (RCF) and a term loan.BNP Paribas, DBS, HSBC, Mizuho, MUFG and Standard Chartered joined as senior mandated lead arrangers, with HSBC appointed as facility agent. OFI also signed a separate US$250 million two-year RCF this month, with DBS as facility agent. The proceeds of both facilities will be put towards refinancing existing loans and for general corporate purposes, the company says.

European retailers accused of exploiting Bangladeshi suppliers

European high street fashion brands including H&M, Gap, Next, Zara owner Inditex, Primark and Poland’s LPP whose titles include Reserved, as well as German supermarket chains Aldi and Lidl, paid below the cost of production to manufacturers in Bangladesh, claims a report by researchers from the University of Aberdeen and UK-based Fairtrade organisation Transform Trade.

The report, Impact of global clothing retailers' unfair practices on Bangladeshi suppliers during Covid-19, is based on a survey of 1,000 Bangladeshi clothing manufacturers. It claims that the majority of fashion and clothing retailers paid manufacturers the same as prior to the pandemic - despite rising prices of raw materials due to global inflation - causing factories to struggle to pay workers the minimum wage of £2.30 (US$2.80) per day.

The report covers the period March 2020 to December 2021 and found that 90% of high street retailers engaged in “unfair practices”, 86% cancelled orders, 85% reduced prices compared with those agreed in the contract, 50% refused to pay for goods already in transit and production, while 85% delayed payment for goods already dispatched for more than three months.

Transform Trade senior policy advisor Fiona Gooch commented: “When retailers treat suppliers badly by breaching previously arranged terms, it’s workers who suffer. If a retailer fails to pay the agreed amount, or delays payments, the supplier has to cut costs some other way, and this is frequently passed on to their workers, who have the least power in the supply chain.

“We need a fashion watchdog to regulate UK garment retailers, along the same lines as the existing supermarket watchdog. Aldi and Lidl’s grocery buying practices are regulated in both the UK and European markets, but their clothing purchases aren’t, which is why unethical behaviour persists. We need a fashion watchdog to stop unacceptable purchasing practices of the clothing retailers benefiting from large consumer markets, along the same lines as existing protections for food suppliers. Only when suppliers are able to plan ahead, with confidence that they will earn as expected, can they deliver good working conditions for their workers.”

Last month, UK supermarket chain Tesco was sued by factory workers in Thailand over alleged labour exploitation.

Plug pulled on Australia-to-Asia solar power project

The developer of a planned A$25-billion (US$17 billion) project to deliver solar power to Singapore from Australia has collapsed as its two main backers, Australian billionaires Mike Cannon-Brookes and Andrew Forrest, failed to agree on a new round of funding.

The ambitious Sun Cable renewable energy project went into administration after the two backers failed to agree on a path forward for the business.

Administrators from US financial services firm FTI Consulting have been appointed. In a statement, Sun Cable said the appointment was due to an “absence of alignment with the objectives of all shareholders.

“Whilst funding proposals were provided, consensus on the future direction and funding structure of the company could not be achieved.

Unidentified sources said the impasse between Cannon-Brookes and Forrest reflected conflicting views on ways to prop up Sun Cable after the project missed a key milestone in September and was bleeding cash.

Forrest’s Squadron Energy and Cannon-Brookes’ Grok Ventures were willing to invest additional capital in the business, sources said, but the two could not agree on terms. The majority of shareholders reportedly supported Grok’s plan, however as both major shareholders have veto rights, the board was unable to get the deal over the line.

Both Squadron and Grok led Sun Cable’s most recent funding round in March, which raised A$210 million to keep the business funded until late 2023.

Sun Cable was founded in 2018 and planned to send solar-powered renewable energy via an undersea cable from the Northern Territory to Singapore. The operation had attracted widespread support from investors and the federal government

Vying to be the world’s first intercontinental electricity grid, Sun Cable had planned to develop a 4200-kilometre underwater transmission line that would transmit solar power generated in the Northern Territory to Singapore, which could have met up to 15% of Singapore’s demand.

The company is looking to use the administration process to find ways for Sun Cable to access additional capital, which could involve a recapitalisation or sale of the business.

Hawkish ECB to benefit the euro, predicts Commerzbank

The euro, which this week has gained ground against currencies such as the Swedish krona (SEK) and the Swiss franc (CHF) should continue to appreciate thanks to the European Central Bank’s (ECB) tougher policy, predict economists at Germany’s Commerzbank.

In their latest commentary, which describes the single currency as a European outperformer, they note: “The many hawkish comments across the typical dove and hawk camps within the ECB seem to have made a difference. If the ECB stands by its comments, its immediate monetary policy direction is likely to be quite attractive.

“Between ‘possibly not quite determined enough’ and ‘already foreseeably successful’ the ECB is currently occupying a sweet spot by European comparison, in which the Euro is able to benefit from the ECB's pronounced hawkish determination.”

Ahead of the issue of US consumer price index (CPI) data for December, which is expected to see a further drop in the inflation rate, the Commerzbank team expect future CPI data to fluctuate and the market to be unsettled, create volatility for the US dollar (USD).

“It is quite possible that in case of the data remaining within the framework of the expectations or slightly below, everyone will feel confirmed in their view: The market sees the scenario of falling interest rates in the second half to be confirmed and trades the dollar generally lower,” they note.

“The Fed acknowledges a fall in the rate of inflation but does not see this as a reason to consider the inflation pressure to really be falling on a sustainable basis and remains cautious.”

Pressure this week on the South African rand (ZAR) reflects the current debate on a possible change of mandate for the South African Reserve Bank (SARB), according to Commerzbank’s economists, who comment: “The plans of the governing party African National Congress (ANC) are causing uncertainty amongst ZAR investors. They fear for the central bank’s autonomy.”

“It is possible that the rand will catch up in the current market environment if this issue drops off the market’s radar again. However, investors are likely to keep their eyes on the subject medium-term.”

New law hits suppliers to Germany

Companies that supply large German businesses are being questioned about their own supply chains in greater detail since a new law took effect at the start of 2023, reports The Times of London

The paper reports that the law requires German businesses with more than 3,000 employees to assess their supply chains for environmental, social or governance (ESG) issues and then address them, or face fines of up to 2% of their global turnover and exclusion from public contracts for up to three years. From January 2024, smaller German companies will also be included in the requirements.

The Times reports that the legislation is broader than the UK’s 2015 modern slavery legislation, and covers seven other areas, including union rights and environmental degradation. It also requires UK suppliers to German companies to prove their own suppliers are compliant, Thibault Lecat, UK managing director of supply chain specialist Inverto, which is part of the Boston Consulting Group, told the paper. He said questions would include: “Do they employ minors? How do they dispose of waste?”

Lecat described the reporting requirements as an “earthquake” for smaller UK suppliers, many of which were not set up to provide such detailed information. While German companies would want to help their suppliers to comply, he added, in the long term they would take their business elsewhere. “Answering these questions can be very hard. Not answering them could mean losing the business altogether,” he warned.

He advised companies to work closely with their customers on compliance to show that they were onside and update their contracts and codes of conduct with their own suppliers to reflect what is now expected. They also need to invest in software that collects, analyses and reports the information and to visit suppliers to check that they are doing what they are saying.

A draft EU directive expected to become law in the next few years will extend similar supply chain reporting to all companies operating in the EU with more than 500 staff.

Investment platform Public introduces Treasury accounts

US investing platform, with more than three million members, has begun rolling out Treasury accounts through a partnership with Jiko, the financial network for money storage and movement. Treasury accounts are a new account type allowing members to invest their cash in US Treasury bills that are automatically reinvested at maturity and can be sold at any time.

Public’s Treasury accounts offer members similar flexibility to a high-yield savings account, but are currently offering even higher yields.

Public says that Treasury Bills have long been viewed by investors as a low-risk strategy for achieving a reliable yield, and yet, access to them involves hassles like navigating minimum hold period, settlement delays, and auction timelines. However, as T-Bill rates rise to over 15-year highs in the current inflationary environment, Public is removing the barriers that have historically prevented retail investors from benefiting from the safety and assured yield that T-Bills offer.

Members will soon be able to put their cash to work by contributing to a low-risk, high-yielding cash alternatives account in the context of their broader portfolio. Public’s Treasury accounts will be powered by Jiko, which enables programmatic investment in T-Bills backed by the U.S. government and securely held at leading custody bank BNY Mellon. The 26-week T-Bill offering in these accounts is currently yielding 4.8% (as of 11 January 2023), when held to maturity. Public plans to introduce additional T-Bill terms in the coming months.

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