The cost of financing the commodities trade has increased dramatically due to high interest rates, erratic market conditions, and the conflict in the Ukraine, prompting the sector to look for an additional $300 billion to $500 billion in working capital to maintain the global flow of raw materials.
According to a recent research by consulting firm McKinsey, shifting trade patterns have made the global flow of raw materials less efficient, more expensive to finance, and are also expected to drive up the price of commodities for consumers.
The need for working capital in the commodity trading industry has doubled since the end of 2020, according to Roland Rechtsteiner, a partner at McKinsey and the report’s primary author. If so, we might observe a comparable growth by the end of next year.
The global economy’s driving force is the commodity trade industry, which transports raw commodities like oil, gas, sugar, and gold throughout the world. However, due to price volatility and rising interest rates, the cost of the finance needed to transport these cargoes has increased dramatically.
Additionally, the invasion of Ukraine by Russia has caused a significant shift in global commerce patterns, frequently leading to longer, less efficient shipping routes.
Coal is one example, where costs have more than tripled in the previous 12 months. Instead of buying coal from Russia, Europe is now importing it from Colombia, South Africa, Australia, and other countries. Financing expenses increase when commodities travel farther.
According to Rechtsteiner, “typical trade directions changed this year.” “That decreases our system’s efficiency and raises costs,” the author said.
Between the end of 2020 and 2024, according to the McKinsey report, average shipping times will rise by 8%, energy costs will increase by three times, and interest rates will increase by seven times. As a result, working capital needs for global commodity trading will rise by $300 billion to $500 billion.
Even the largest trading firms in the world have to boost their credit limits and look for additional sources of funding over the previous year. By the end of last year, Trafigura had increased its credit lines by $7 billion, or almost $73 billion.
The first half of 2022 saw a “substantial” increase in working capital for Glencore, which said that it had to post an additional $2 billion to meet margin requirements on commodities exchanges.
Governments have also had to support utilities with emergency credit lines, particularly in Europe where gas and electricity prices have been extremely unpredictable over the past year.
Governments have stepped in to support credit lines for power producers and suppliers who have had to pay greater margin calls due to price volatility, from Germany to Austria and Finland.
According to Rechtsteiner, the switch from oil and gas to electricity and renewable energy sources may make the “regionalization” of commodity trade flows even worse.