Are Commodity Trading Firms Worth the Lending and Investment Risk?

Corporate Finance & Restructuring

May 19, 2016

Underground Mining Tunnel

Rocked with increased scrutiny, escalating regulation and a barrage of fines and penalties, the commodity trading industry has seen a huge transition from its heyday in early-2007 when it was raking in trillions of dollars to present day, in which firms face devalued commodity values coupled with penalty pay outs worth billions of dollars.

The trend has been widespread, from America to Asia, there’s no lack of companies that have been under the limelight for scandals in the commodities sector, be it the Enron collapse, the investigation into Qingdao Ports and most recently, accounting manipulation allegations against Noble Group.

From price fixing, accounting irregularities and sometimes outright fraud, commodities traders have drawn a great deal of attention, and not only from local financial regulators, but from global organisations as well. Last year, Mukhisa Kituyi, secretary-general of the United Nations Conference on Trade and Development, accused the industry of “corruption and illicit financial flows” and “large-scale trade mispricing” in developing countries.

As well as levying large fines, these stringent regulations and increasing efforts in enforcement have no doubt imposed large reputational risk to commodity traders. All in all, recent events in the market have caused banks and firms to reassess how they continue with their commodity trading and commodity financing businesses. With pressures coming in from all directions, many of the world’s largest banks have scaled down their commodity trading business recently, whilst some have exited the business altogether (e.g. Deutsche Bank, Barclays).

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