place and time of consumption. Hence, physical trade will always need to take place, either to bring it from location to location, and/or to bridge the timing gaps.
Commodity trade finance is the financing of the physical trade (purchase and sale) in commodities.
You may hear other financing terms used when discussing commodities. Below we have outlined how these terms differ:
Commodity finance is the generic term for financing everything in the commodity value chain, from production to processing to trade.
Commodity trade finance (what we are focusing on in this post) is a sub-set of commodity finance, referring more to the financing of the underlying exchange of the commodities from supplier to buyer, and is tied to the underlying asset conversion cycle.
Structured trade finance is another sub-set of commodity finance, where specific financing techniques are adopted to minimize the financing risks, mostly in situations where the tenor exceeds the typical asset conversion cycle.
The main players involved in commodity trade finance are:
- Producers – producers typically require longer tenor financing in order to finance the purchase/development of their fixed assets. Repayment is dependent on the cashflow from operations.
- Traders/trading houses – traders typically require short-term financing (tenor is usually between 30-180 days), tied to the asset conversion cycle of their trades – bridging their purchases till the sale of the commodity.
- Primary processors – primary processors typically require a mix of longer-term financing as well as short term working capital financing.
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