15 minute read
Finance
Trade solutions:
Structured trade and commodity finance helps mitigate risk
Financing cross-border and -country trade requires a high degree of certainty and expertise – with as little risk as possible, says SAMANTHA BARNES
The road of cross-border and -country of funding depends on clients’ contribution in trade does not always run smooth. business and relatively strong off takers who That makes mitigation of fi nancial risk pay into a ring-fenced account, and allows a very welcome addition for those facilities to liquidate and roll over. in commodity trading – and more “STCF is about assessing the goods, especially for small to medium companies. having control of goods and ensuring the That’s according to Bobby Madhav, head entire chain of delivery is under the guidance of FNB’s trade, structured trade and of the bank. In STCF you require a skilled team commodity fi nance, who says structured with a long track record in understanding trade trade and commodity fi nance (STCF) instruments,” says Madhav. “The structures provides this benefi t. and partners form part of the offering.”
“The product lends itself to companies who Demetriades says the common costs are in a growth space and need to deliver with the last counterparty that has put money associated with structured trade include on confi rmed orders. Sectors range from out the door,” explains Demetriades. “For letter of credit issuing costs, other bank electronics, fast-moving consumer goods, example, if a trader purchases cargo to supply fees, interest costs, insurance and multiple pharmaceuticals and machinery to soft and into a sales contract against a letter of credit inspection costs regarding cargo, and hard commodities. and the bank fails to honour documentation handling. Benefi ts include cash the payment, the risk lies STCF has an even bigger benefi t in fl ow for more output and with the trader. If you deliver emerging countries due to perceived risks. repaying the loan once successfully, get paid, but “Economies where there are major challenging payment is received.” the vessel sinks on its way factors from instabilities of fi nancial sector
Dinos Demetriades, to the destination, the risk and lack of governance framework lean more chief fi nancial offi cer lies with the bank and the towards STCF structures,” says Madhav. at Pelagic Resources, insurance companies.” “In these markets we fi nd gaps in fi nancing, explains: “Structured STCF allows for mitigation private sector and private fi nancial institutions. trade fi nance is a type of supply and demand and STCF reviews deals and ensures they are of non-conventional price risks. “We can look transactions which can liquidate within a lending, predominantly at fi xed price off takes,” short period.” used in commodity says Madhav. “A key factor All the major banks in South Africa offer trading, which looks at is liquidity management STCF while many trade houses and freight the type and value of the Bobby Madhav for production and sale of companies offer these services too. “For product being fi nanced goods and materials. We smaller traders,” Demetriades observes, “there as a collateral, rather ring-fence transactions, is a shift towards alternative fi nanciers such as than the balance sheet of the borrower. It’s and with fi xed off takes we can manage Teybridge Capital or Challenger Trade Finance, used regularly in developing countries and client pricing and cash fl ows. The quantum which are rapidly growing their presence.” in relation to cross-border transactions. The aim is to promote trade by using non-standard security in high value transactions in bilateral trading relationships.” Tried and tested trade fi nance risk mitigation techniques are used. “There are multiple risks involved in typical structured trade, but the risk usually falls
FAST FACT
The 2020 ICC Global Survey on Trade Finance highlights the potential of increased demand for trade fi nance over the next two years: 86 per cent and 75 per cent in Asia Pacifi c and Africa, respectively.
Source: International Finance Corporation Why Trade Finance Matters – Especially Now, November 2020
– Dinos Demetriades
DID YOU KNOW?
• As of 2019, the trade fi nance gap in Africa was already estimated at $82-billion and is now growing post COVID-19. • While in 2014, 92 per cent of banks surveyed engaged in trade fi nance activities, in 2019 it dropped to 71 per cent of banks.
Source: Trade Finance in Africa Report: Trends Over the Past Decade and Opportunities Ahead 2020
“In tough times the focus should be on efficiency, consolidation and digitalisation.” – Simon Woodward
Electronics payments are now the way forward for foreign exchange across borders.
Mitigating the risk of mercurial exchange rate fluctuations
Savings from risk management are especially important in a contracted economy, says SAMANTHA BARNES
It will take at least two to three years for a recovery to pre-COVID-19 trade levels, says Simon Woodward, sector head of logistics at Rand Merchant Bank. With GDP down 8 per cent from a year ago, logistics is thought to have been hit even harder.
“We expect to see consolidation in the mid-tier sector,” says Woodward. “In tough times the focus should be on effi ciency, consolidation and digitalisation, which will become increasingly important. Many of our clients have fared pretty well considering COVID-19. They have sold off some assets with stellar subsectors carrying them through.”
On the logistics side in Africa, RMB is seeing executives focusing their efforts on SADC countries, including Zambia. But it’s not plain sailing. “Some may have thought a ship blocking the Suez Canal could create opportunities for trade in our ports,” notes Woodward. “Consider that the Port of Durban needs to be dredged to reach an infl ection point on growth. Large domestic logistic companies understand the need to grow capacity by investment in infrastructure beyond South Africa.”
Firms should also take steps so as to handle foreign exchange transactions relating to international suppliers in the most optimal manner, says Woodward. “First, mitigate the underlying risk or forex exposure by hedging that risk or exposure. This will eliminate market and currency fl uctuation uncertainty, allowing the fi rm to gauge costs of goods upfront pertaining to the rate of exchange.
“Second, process the cross-border payment via an online portal where benefi ciaries’ details and banking details are pre-populated and where balance of payment reporting to the reserve bank can be done with ease, ensuring a full payment to the international supplier.”
Woodward recommends a portfolio approach, using a combination of spot, vanilla forward exchange contracts (FECs) and options structures, or the fi rm can use a combination of only spot or vanilla FECs. Each contract and structure has its merits, with their use dependent on the market’s behaviour at the time of execution and the fi rm’s structure.
OUR MERCURIAL CURRENCY
The rand has seen great volatility. Rand Merchant Bank’s Simon Woodward emphasises how prone to sudden weakness the rand can be: “Consider that the USD/ZAR rose from 14.50 to 19.00 as the virus struck - a move of over 30 per cent within a few weeks.
“Our expectation is that the rand will be less volatile this year. Our forecast is for trade to be centred around the 15.20 level. Explicit in our forecast is that the dollar stops weakening.” Woodward cautions that such “blowouts” happen approximately once every four years, presenting huge risks to importers. Currency risk management is vital.
Know your options
Domisa Treasury founder James McKeown says larger forex transactions are always preferable to multiple small transactions. “This reduces total fees as your foreign exchange provider should provide more competitive pricing for larger transactions.”
Of all the currency management tools available to implement a hedging strategy, McKeown says foreign currency accounts are the most important and cost effective. “A foreign currency account is a bank account for the business denominated in a foreign currency. Businesses with reasonable volumes of such transactions could increase profi ts by 5 per cent to 15 per cent by making them through foreign currency accounts with a diligently selected provider.”
Electronics payments are the way forward, and as such play a substantial role in foreign exchange across border payments. Woodward explains: “These systems are designed for straight-through processing from the fi rm to their international suppliers. Benefi ciaries and their banking details are preloaded. Reserve Bank supporting documentation can be uploaded per payment transaction and balance of payment reporting to the Reserve Bank executed at a click of a button.”
Companies can also mitigate currency fl uctuations by engaging in an FEC or an option structure, explains Woodward. “With an FEC, money is exchanged on an agreed future date and at an agreed exchange rate. These contracts provide 100 per cent protection against market fl uctuation but zero participation in favourable market conditions.”
Woodward says option structures are similar to an FEC, with the key difference being that the former provides the buyer of the contact with additional fl exibility, allowing a certain percentage of participation in favourable market conditions.” “Rand gains have been helped by dollar weakness and a superb export performance but mostly just refl ect recovering global sentiment around the economic outlook as the effects of the pandemic become clearer,” Woodward notes. “Gains have been seen on the crosses, although not to quite the same extent as against the dollar: euro and sterling gains have partially restricted the moves on EUR/ZAR and GBP.”
Simon Woodward
“F orty years ago, logistics was not directly associated with the transport business,” says Steven Gottschalk, founder and Group CEO of Value Logistics. “Nowadays, thanks to staggering digital developments and new technologies, logistics and IT hold their own in the transport business. In fact, one can even go to university and study a degree in Logistics – not so when I was starting out.”
Gottschalk launched Value Logistics on 1 May 1981. The company’s fi rst commercial truck was a used 1976 petrol-driven 2-ton dropside Mazda, which now sits at the entrance to Value City, the company’s largest super-hub in Tunney, Johannesburg. On 1 May 2021, Value Logistics’ 40th birthday, Gottschalk got behind the wheel of the Mazda and led a convoy of 550 vehicles out of Value City’s gates and onto the road. At the same time, four other Value Logistics convoys set out from their hubs in Cape Town, Durban, Port Elizabeth and Bloemfontein. It was a symbolic display of the company’s history and current capabilities, and a way for employees to celebrate their company’s success in a COVID-19-compliant manner.
VALUE LOGISTICS SHIFTS INTO SIXTH GEAR FOR THE ROAD AHEAD
SMART TOOLS, SMART PEOPLE
Steven Gottschalk, founder and group CEO of Value Logistics, celebrates four decades of success, talks the evolution of logistics and “The past four decades have been extraordinary,” says Gottschalk. “Our logistics discusses the importance of smart tools and smart people business has evolved into a science that requires the best IT to manage, control and Technological disruption pre-dates the chain solutions. What began as a truck rental optimise our warehouses and fl eets. Our COVID-19 pandemic. However, there’s no and transport business has become one of drivers, for example, are not simply highly doubt that the past year has fast-tracked South Africa’s leading fully integrated logistics skilled behind the wheel, but are also trained to change within the transport and logistics providers. Nowadays, Value Logistics supports use smart tools such as POD scanners to ensure sector, particularly regarding e-commerce and its customers from point of origin to delivery that all deliveries are recorded in real-time on our remote working. with a fl eet of 4 500 trucks and forklifts, 21 master system.” “In January 2020, our nationwide depots, 350 000m² of warehouse
The basic principle of logistics proactive IT team called our and operational space, advanced IT systems is to move product from A to attention to the pandemic and and more than 4 300 employees. B. The rules are simple: do motivated for increased spend “We’re a local business, which means it correctly, cost-effectively on smart tools, systems and that we can make fast decisions in the best and on time. Value Logistics devices,” explains Gottschalk. interests of our customers,” says Gottschalk. uses relevant technologies to “When the country went into “This gives us a lot of fl exibility and control. augment its human and fl eet lockdown in March 2020, our Technology has certainly enabled our growth capabilities to ensure that its entire company was fully set and success, but our smart tools and IT customers’ needs are met on time, every time. Steven Gottschalk, Value Logistics CEO up to work off-site. It was a seamless shift that enabled systems work for us – not the other way round. At the end of the day, our customers’ cargoes
“Our use of advanced IT us to set up a national home make it safely and cost-effectively from point A solutions to manage our deliveries business to support to point B, thanks to our smart people.” fl eets, gather data and ensure driver and our customers’ businesses in just two months vehicle safety is not necessarily unique,” during peak lockdown.” For more information: says Gottschalk. “However, where we differ is that we own our vehicle infrastructure and Over the past 40 years, the company has consistently invested in its infrastructure, Tracey Le Roux +27 82 448 7094 traceylr@value.co.za have specialised teams in areas such as data vehicle assets, people, customers and www.value.co.za analysis and simulation and fl eet safety and services – even during tough economic times. security. We even have a fuel bureau, which The company’s growth has always been works closely with our planning department. in response to its customers’ needs. For Every delivery is optimised to ensure the example, when it’s customers’ needs shifted best routes, maximum capacity loads and in the early 2000s, it launched its distribution satisfi ed customers.” business to provide the requisite supply
MANAGING THE LEGALITIES AND RISKS
Global law firm Norton Rose Fulbright is well-versed in the legalities and complexities of transport and trade and offers a range of services to assist logistics companies
The global trade in goods and services in 2019 was valued at approximately US$19-trillion, according to results released by the World Trade Organization, a 300 per cent increase since 2000. Of this, the data shows that South Africa’s share was about US$220-billion – almost 60 per cent of our GDP.
Logistics is so much more than the multimodal movement of goods – it involves the organisation of the following tasks, among others: • planning of supply chains • establishing communications • creating specialised models of exchanging
“goods as documents” through electronic bills of lading and blockchain • connecting to sophisticated tracking systems through satellites in space • appropriately allocating responsibility for the various risks involved in moving goods • insurance of risks and assets.
To appreciate the challenges that the above presents requires an understanding of many disciplines. Lawyers that specialise in logistics must have an understanding not only of international trade and the many international conventions that govern the transportation of goods, but also of how trades are financed and insured. Regarding the latter, there is a myriad of different insurance options available depending on the goods themselves, the risks being insured, the conveyance being used and the period of cover required.
A single movement of a product may involve several contracts of sale; various contracts of carriage; insurance contracts covering the goods and the carrier’s liability; financing arrangements, and navigating the complex and varied regulatory regimes dealing with the purchase, sale, licensing and transport of goods. A clear understanding of all these aspects, and how they are inter-related is necessary to properly advise clients on their logistics operations.
As the COVID-19 pandemic and the recent cargo ship stranding in the Suez Canal have demonstrated, the carriage of goods remains fraught with risk. When things go wrong a client must be properly advised of the prospects of either succeeding with a claim, or being able to adequately defend it or mitigate the probable loss. In many instances, carrier’s liabilities are curtailed by conventions or contractual limits, or both. Understanding disputes, especially when they may involve many different sets of laws and jurisdictions, is important. It is, therefore, extremely beneficial to clients if they can use the services of a properly connected global law firm to advise on the contractual, financial and dispute related aspects of any logisticsrelated matter.
Risk management oversight is now viewed as one of the most important functions of a board of directors. Companies need systematic processes in place to identify and manage risk. Regulator expectations as to what makes a good compliance programme have changed dramatically in recent years, and the programme continues to evolve.
A supply chain is only as strong as its weakest link; therefore, it has to consider cybersecurity and data privacy protection; ESG and sustainability; increasing regulation and regulatory scrutiny, and incident response and crisis management.
THE NEED FOR EXPERTISE AND EXPERIENCE
Navigating the numerous complexities involved in trade and logistics requires regional and global companies with expertise, equipment and the infrastructure capable of meeting those challenges. Most companies need advisors with the national, regional and continental footprint to assist their customers.
Norton Rose Fulbright with that footprint and a focus on transport and trade is one such company. Its experience in Africa and the developed and developing economies globally gives Norton Rose Fulbright access to experience, precedents, knowledge and capacity to advise anybody involved in trade and logistics in South Africa and Africa on these complex issues.
To this end, among other things, Norton Rose Fulbright offers a service to identify and manage the matrix of risks involved in logistics operations. In addition, it offers numerous complimentary resources for training and knowledge, including monthly webinars to the insurance and marine insurance industry, a knowledge institute offering training and guidance on, among other things, trade and its financial institutions and an Africa blog, which provides up-to-date comment on matters affecting clients in South Africa and Africa.
For more information:
Malcolm Hartwell, Master Mariner and Head of Transport at Norton Rose Fulbright Malcolm.hartwell@nortonrosefulbright.com
Andrew Robinson, Director and SA Chair at Norton Rose Fulbright Andrew.robinson@nortonrosefulbright.com Durban Office: 031 582 5600 www.nortonrosefulbright.co.za
