Europe's producers and users of industrial metals are scrambling to find alternate sources of funding as regional banks, hurt by the debt crisis and tougher global capital rules, become increasingly reluctant to lend.
The squeeze in lending is also affecting small to mid-size metals merchants, who are turning to global commodity traders for loans to help them trade their goods around the world.
This type of lending is known as commodity trade finance. According to some industry estimates, European banks' share of the global business has shrunk from around 75 percent to 50 percent over the past few years.
But commodity finance is not the only type of bank lending to be hit. Industry experts warn that Europe's banks could sell or decline to renew some 3 trillion euros of corporate loans as they prepare to meet new banking rules aimed at preventing reckless risk taking.
"We speak about this situation like a credit crunch," said Claudio De Cani, the director of Italy's non-ferrous metals body Assomet.
"It is affecting all the sectors of the economy, but for a sector like non-ferrous metals it is more serious because raw material costs are high relative to the final product, so we need bigger cash flows."
Under the new Basel III banking rules, European banks may be forced to hold five times as much capital to cover loans than they do now. The rules are to be phased in next year, but banks are deleveraging now to meet the requirements.
In Europe, concern is increasing that higher bank funding costs will be passed on to customers or lead to further loan cutbacks, potentially hurting economic recovery.
METALS PARTICULARLY VULNERABLE
Analysts say industrial metals are in some respects more vulnerable than other commodities to a lending squeeze, given that producers have tended to build up high inventory overhangs, all of which need to be financed.
The industry is in addition facing tight margins and a decline in demand, not just within Europe but also from China, the world's largest consumer of steel and copper.
Banks meanwhile have little appetite to extend loans to industrial companies when they can make risk-free commissions by helping them raise money in the corporate bond market.
"There is a clear trend in the European industrial sector to reduce dependency on the banking system. They are taking steps such as reducing traditional loans and debt and replacing that by equity or bonds," said Wolfgang Eder, the chief executive of Austrian steelmaker Voestalpine (VOES.VI).
Bigger metals merchants are among those considering tapping the corporate bond markets as well as other sources. But for small or mid-sized metals merchants, producers or users, these types of financing are not a viable option.
TAPPING THE GLOBAL MERCHANTS
A source at a large Europe-based metals fabricator said its clients, which are struggling as demand falls, increasingly prefer to ask merchants for delays in payment terms rather than beseech banks for loans.
"To get finance from banks is not so easy, and some people don't want more finance from banks for balance sheet reasons, so they ask for longer payment terms from merchants. It's also a type of finance if you like," said the source.
In a positive development, merchants with global reach or access to cheap dollars are increasingly willing either to extend payment terms or to fund trade flow of commodities such as metals and fabricated metal products.
Last month, the fund arm of trading house Trafigura TRAFGF.UL, the world's third largest commodities trader, said it was seeking to raise $1 billion from investors for a fund that would invest in both commodities and trade finance deals.
Colin Heritage, managing director of Stemcor Trade Finance, a division of global steel trader Stemcor, said, "Up until four years ago, we focused on helping finance producers. Our efforts were intended to increase volumes of commodity flows coming through our company. Today, the emphasis has moved to helping finance customers, who are buying from us and are struggling to raise bank finance."
Source: Reuters