Commodity Derivatives, 2nd Edition

CHAPTER 13Commodity‐Linked Financing

13.1 THE FINANCING NEED

The lifecycle of several commodity markets has been analysed in their respective chapters. For example, Figure 5.1 illustrated the supply chain for copper, which consisted of:

• Mining
• Smelting
• Refining
• Semi‐fabrication
• Manufacture of final product

In this chapter we will consider some of the ways in which this production is financed. The first section provides a very high look at project finance, which is then followed by a discussion of the ‘asset conversion cycle’. The last part of the chapter looks at a variety of different financing examples, which may incorporate derivatives to achieve lower borrowing costs.

It is common for institutions to use the term ‘structured commodity finance’ and although there is no single accepted definition it would typically represent transactions that involve more than a simple unsecured bilateral loan. For example, it may involve the bank taking security of the underlying commodity or perhaps a transaction whereby there is some form of embedded optionality.

Traditionally, commercial banks were the providers of credit to commodity market participants. For example, large commodity traders such as Glencore would borrow substantial amounts of money to buy, sell, store, and ship their production. However, such traders can also act as creditors to other companies and countries. Since they are not formally categorised as banks, this type of credit extension has been described as ‘shadow ...