Société Générale picks up Commodity Research House of the Year and Commodity Finance House of the Year while BNP Paribas takes Commodity Broker of the Year, Precious Metals House of the Year, and Base Metals House of the Year at Energy Risk Asia Awards 2017.
Much has been made of banks fleeing commodities trading over the past few years – and with heavy regulatory pressures and a structural drop in volatility, who could blame them? But those willing to seek out potentially profitable niches in the asset class, be it types of commodities or regions, are reaping the benefits.
Take Société Générale, successful in both the commodity finance and research house categories in this year’s Energy Risk Asia Awards. One of the bank’s main drivers has of course been China’s substantial commodities markets.
“If you want to be in the metals and mining business you really have to be active in China. The country represents approximately 50% of global demand for a number of commodities,” says Daniel Mallo, the bank’s head of natural resources and infrastructure for Asia-Pacific. “We need to be active in China and we need to understand what is happening in metals in China.”
Gaining a greater presence in China is key to the bank’s long-term bullish outlook on its commodities business, he says. Société Générale has arranged financing on a number of large-scale transactions in traditional oil and gas projects in the country, but has also gained a lot of traction in renewable energy.
Newer, cleaner energy markets are key to the bank’s long-term plan, according to Mallo: “We see two phenomena: liquidity that seems to be channelled into the asset class, and deal flow building up from a low base.”
Over the past 12 months, the bank has supported the financing of the Mount Emerald, Coopers Gap, Hornsdale and Silverton wind farms in Australia, a hydroelectric plant in Indonesia and helped with the financing of three major solar energy deals in Australia.
In Indonesia, Société Générale has helped finance PT Medco E&P Malaka’s Block A Gas Development Project, which will develop approximately 350 billion cubic feet of gas. The project has been under development during strained times in the industry, but the bank’s persistence illustrates its long-term dedication in the sector, says Mallo.
The bank has also extended its regional research capabilities, winning plaudits for its positioning analytics – in which it analyses participants’ exposures – and picking up this year’s research house of the year award.
Société Générale has applied quantitative analysis to positioning dynamics, which have become particularly important for markets such as crude oil, which have been range-bound for large periods of 2017. So says the bank’s managing director, global commodities strategist and head of research Asia-Pacific Mark Keenan, who believes the technique will remain effective well into next year.
“The expectancy is for a floor in oil prices as a function of Opec now controlling output,” he says. “The recent period of price weakness started with the growth in shale oil production out of the US, which naturally acts as a cap to any material upside. The biggest challenge is then to work out what that range looks like, how big it is, and the behaviour of prices when they approach the bottom and the top of it. One of the most effective ways of doing that is by looking at positioning profiles.”
Much of the bank’s research focuses on speculative players’ positioning profiles. Recently, many speculative players have had to work more aggressively in range-bound markets where their upsides and downsides are hemmed in. That’s led them to take bigger positions, which allows researchers at Société Générale to extrapolate price dynamics with greater accuracy.
“By tracking specific aspects of how these profiles change you get a very clear indication of what the vast majority of the market participants are doing, which we can then translate into helping our clients on the corporate side that are looking to manage their hedging more effectively, for example,” he says.
The bank constructs market insights for clients by systematically scrawling through a huge amount of information. Not all of the information comes from what might be considered traditional sources.
“We have algorithms at the bank that look at about 30,000 different sources of information: blogs, newspapers, channels, media and so on,” Keenan explains. “We can tap into that and look at all the number of articles written over a week that talk about hedge fund or speculative positioning, for example.”
Utilising these and other resources – including the bank’s well-celebrated research team – Société Générale has established its weekly newsletter, Commodity Compass, and its sister publication Commodity Compass Positioning Analytics. Both are published from the bank’s Asian offices but have generated worldwide audiences.
Within the publications and elsewhere, the bank presents five robust commodity positioning models: the overbought/oversold model, which identifies commodities that are oversold or bought according to specific metrics; dry-powder analysis, in which a model is applied to assess the amount of speculative activity there is in a different market; the mismatch indicator, built to isolate mismatches in sentiment; the hedge fund profitability indicator, which pulls together commodity hedge fund performance; and a specific set of Commitments of Traders equations, in which the bank has reverse-engineered the Commodity Futures Trading Commission’s COT report to isolate unique positions.
The bank has also developed macro-economic risk models such as the Principal Component Analysis, which is a statistical tool that allows the research team to break down commodity price returns and isolate the major explanatory variables, and a new type of cross-sectional relative strength indicator to help understand how the shape of the forward curves in the oil market might evolve.
“It seems to be the case now that the market is moving away from accepting a black-box model or a closed study in some way, that clients would have to trust to use and don’t fully understand,” says Keenan. “What we have done here with these very transparent, very robust indicators is to show how we think about it, how it’s made, and how you can optimise it as you see fit.”
The flexibility of the tools allows the bank to reach out to new customers and repurpose ideas to fit the tailored approach different firms are asking for.
“Whether you are running a refinery or a pension fund you are going to have different trading objectives,” says Keenan. “It’s a tool that’s the point, and it should be an inevitable part of your trading day, in a very small capacity, but adding some measurable value to what you do. That’s what we try to do with our clients in this environment, and it’s working.”
China’s impact is also evident elsewhere in the awards: BNP Paribas picks up both precious and base metals awards, much of that down to its growing consumer markets in Shanghai and Dalian.
Over the past year, global volatility has been low in precious metals markets, but BNP Paribas has increased its diverse client base – which includes central banks, hedging producers and institutional investors – by around 40%.
“Trading [has been] relatively difficult,” says Mikko Rusi, head of commodity derivatives at BNP Paribas. “We have started to see some recovery based on a variety of factors – geo-political elements, for example. But, for the moment, it’s been an environment where interest rates are rising and volatility is very low. From a bank’s perspective, it’s been most important to have a business that is able to serve clients in these difficult and complex market environments.”
At the start of 2017, BNP Paribas China, a subsidiary of the group, began to offer gold hedging and trading capabilities for Chinese firms, allowing the bank to support precious metals services to corporate clients.
“The focus of development has been in China,” says Rusi. “In precious metals, we have tried to very strongly push our service offering onshore with a couple of different products.”
The bank hopes to capitalise on a growing demand for exposure to precious metals prices, mainly from those Chinese firms aiming to diversify their hedging programmes. More widely, it also plans to support mining companies in their ongoing risk management needs across Asia. The market is ripe, suggests Rusi.
“I think many clients will genuinely want to do some hedging in an environment where you have uncertainty about which direction the price will move in precious metals,” he says.
As an example, the firm got involved in a syndicate of three banks to help an Australian mining client in restructuring its existing hedge book. The restructure allowed the client to better align the delivery profile with expected production. In addition it fixed the delivery price of gold production for the majority of future production, creating debt capacity within the project.
The bank has gone beyond what might be considered normal levels of client engagement to ensure its reputation grows within also China’s base metals markets. For example, an onshore Chinese smelter required financing to help fund copper concentrate imports. The bank arranged a pre-export finance facility with physical offtake, in which the bank was both the arranger of the club facility as well as the sole offtaker for the physical metal delivery. While a trading house would normally take the role of offtaker, arrangements were made for the borrower to deliver an agreed amount of copper to the bank and sales of that copper were used to pay down the loan.
This simple structure of this model supports a client’s funding needs and provides lenders with confidence. It also provides clients with access to the bank’s global network, which is a huge benefit for Asian players.
“When you look at the variety of other Asian jurisdictions, many of them have some specificities that we must continue to cope with and monitor,” says Rusi. “But at least we can offer customers hedging in the London Metal Exchange products and I would say that difficult market access is probably still the greatest issue in China, the biggest market.”
Bespoke products, the ability to offer a number of services and a determination to navigate difficult markets will continue to set the bank apart, say its clients.
“The core strength for us is combining a variety of services that the bank offers, such as lending and hedging, for example as one package,” says Rusi. “In terms of market development, I will say one part of the market that continues to grow rapidly has been more on the bulk side, and iron ore, coking coal for example. I have seen a lot of development in the last 12 to 24 months across all the geographies in Asia.”