Exclusive - U.S. banks grab commodities trade finance

LONDON Wed Nov 23, 2011 4:10pm GMT

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LONDON (Reuters) - U.S. banks are expanding fast in commodities trade finance as the dominant players, French banks, retreat, bankers told Reuters, with traders saying they feared it still would not be enough to save some small oil, coal and metals players from credit problems.

"The French banks are actively selling loan exposure as dollar liquidity in Europe has shrunk. So naturally U.S. banks are benefitting most. I personally bought into a few large and good trade finance loans," said an executive at a major U.S. bank specialising in energy.

Europe's banks could ditch up to 3 trillion euros of loans to raise capital ratios and meet new rules.

They are also keen to cut assets in dollars, which have become more expensive for them to fund since U.S. banks and money market funds alarmed by the growing debt crisis began retreating from doing business with Europe.

"Traditionally, U.S. banks have been more transaction-focussed rather than trade finance-focussed. Now it is a great opportunity for them to bite back," said an executive at a major British bank specialising in energy.

Several banking executives told Reuters they saw clear signs that Citi (C.N), Merrill Lynch (BAC.N) and JP Morgan (JPM.N) are expanding their commodities trade finance portfolio for oil, coal, steel and iron ore.

Dollars are the primary currency for commodities trade and the retreat of French banks could be a major headache for anyone dealing with oil or copper as rising raw materials prices have increased financing needs.

A new wave of commodities refinancing is expected early next year and this might cripple some firms and boost merger activity.

"There is starting to be some pressure on medium-small companies which will be struggling over liquidity. This will bring opportunity to well-established companies with credit lines and cash," said Ramon Muga, coal & fuels global head of trading at London-based trading house Metalloyd. For a graphics on bank funding strains link.reuters.com/rer25s 1 year euro/dollar cross currency basis swaps link.reuters.com/gam25s Euro vs. US TED spreads link.reuters.com/sev34s

French banks BNP Paribas (BNPP.PA) and SocGen (SOGN.PA) are selling their loan exposure to Russian companies at 90-95 cents on the dollar, sources said, although most firms are believed to be in good financial shape.

In a relatively small but significant development, BNP Paribas decided to cut its U.S. commodities trading operations in a move to cut U.S. dollar-denominated costs .

In 2008, a sharp reduction in credit to the trading industry almost froze global trade flows and led to a sharp fall in commodities prices.

Adding to banks difficulties now are new regulations, BASEL 3, requiring higher levels of capital and reserves which will make trade financing more expensive.

"The further away from France the easier it gets but it's not purely a French issue," said Colin Heritage, Managing Director at Stemcor Trade Finance Limited, the financing branch of privately-owned steel, iron ore and coal trader Stemcor.

"The issue is with smaller traders which have smaller proportions of committed money for their funding," he said.

In a committed credit facility terms and conditions are clearly defined by the lender and cannot be altered.

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The scale of trade financing problems in Europe is evident in Greece where local oil refiners use Iran as the supplier of last resort as banks refuse to provide financing to buy oil from elsewhere.

Bankers and traders say such problems have not yet spread to other nations despite debt worries in Spain, Italy or Portugal.

"If current strong refining margins decline it could prompt banks to reconsider lending to refiners in southern Europe," one trader with a major European company said.

In coal, the credit tightening is already making it hard for the smaller players to survive, opening buying opportunities for big players like Glencore, Vitol and Gunvor, traders said.

Some smaller players might be betting on survival thanks to what seems to be an unstoppable demand for raw materials in China. But that could be a problem too.

"The Chinese banks have been reducing confirmation lines to their customers for European letters of credit. They are not willing to underwrite credit risk from European banks... Your standard-small trading company is going to suffer from this," said a metals trader at a European investment bank.

A source with a chrome producer said that one of the reasons behind a recent sharp drop in iron ore prices was a 30-60 percent cut in credit lines to major players, which in turn had to cut exposure to the market.

"The worry that we have is that the bank crisis will feed into a much larger industrial crisis as confidence falls," said Colin Heritage from Stemcor.

(Additional reporting by Jackie Cowhig, writing by Dmitry Zhdannikov)

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