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Commodity trade costs surge as industry seeks up to $500bn in extra finance

High interest rates, volatile prices and the war in Ukraine have made it much more expensive to finance the commodity trade, forcing the industry to hunt for $300 billion to $500 billion in additional working capital to move commodities around the world.

Changing trade patterns have made the global flow of raw materials less efficient and more costly to finance, and are also likely to drive up consumer prices, according to new research by consulting firm McKinsey.

“Since the end of 2020, we have seen a doubling of working capital requirements in the commodity trading sector,” said Roland Rechtsteiner, partner at McKinsey and lead author of the report. “We could see similar growth towards the end of next year if [further] changes in trade flows are materializing.”

The commodity trading sector, which moves raw materials such as oil, gas, sugar and gold around the world, is the engine of the global economy. However, the cost of financing required to transport these cargoes has risen significantly due to price volatility and higher interest rates.

On top of that, Russia’s invasion of Ukraine has caused profound shifts in global trade flows, often leading to longer and less efficient shipping routes.

One example is coal, which has nearly tripled in price over the past year. Europe imports from Colombia, South Africa, Australia and elsewhere, replacing coal that was previously imported from Russia. As cargo has to travel farther, financing costs are rising.

“Traditional trade patterns have changed this year,” Rechtsteiner said. “This puts us in a sub-optimal system in terms of efficiency and increases costs.”

The McKinsey report predicts average delivery times will increase by 8%, energy prices will triple, and interest rates will rise sevenfold between late 2020 and 2024, and working capital needs for commodity trading worldwide increase by $300 billion. and $500 billion as a result.

Over the past year, even the largest trading houses in the world have had to increase their credit lines and look for new sources of financing. By the end of last year, Trafigura had increased its credit lines by $7 billion to about $73 billion.

Meanwhile, Glencore said it had to place an additional $2 billion in the first half of 2022 to meet margin requirements on commodity exchanges, contributing to a “significant” increase in working capital over the period.

Governments have also had to provide emergency support for utility lines of credit, especially in Europe, where electricity and gas prices were highly volatile last year.

From Germany to Austria to Finland, governments have stepped in to support credit lines for electricity producers and suppliers who have had to meet higher margin requirements due to price fluctuations.

The transition from oil and gas to electricity and renewables could further exacerbate the “regionalization” of commodity trade flows, Rechtsteiner said.

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