Base metals house of the year: BNP Paribas

Energy Risk Awards 2020: portfolio purchase shows bank’s continued commitment to metals markets

Jenny Boyce

BNP Paribas’ January 2020 purchase of a portfolio of listed and over-the-counter metals transactions from Societe Generale has confirmed the bank’s long-term commitment to the market, according to Guillaume Picot, global head of corporate and investor commodity derivatives sales at BNP Paribas.

In contrast to the long line of banks that have pulled out of commodities trading over the last decade, BNP Paribas is adding new clients and boosting talent within its metals sales, trading and structuring business following the portfolio purchase. “This was an opportunity to consolidate our footprint in metals and invest in people,” Picot says of the purchase, which was preceded by a six-month selection process.

At the same time, the bank has been developing investment products to match corporate clients’ hedging needs in illiquid markets and for longer-dated transactions. “This is a big initiative we launched at the end of last year to help corporates hedge illiquid risk by offsetting it into investment products,” says Donatella Cuocci, BNP Paribas’ head of Europe, Middle East and Africa energy corporate sales. “BNP Paribas can do this because it can count on a very diversified client portfolio, and our team focuses on clients and products, but also on monitoring risk.”

Last year, for example, the bank used its presence in nickel trading to assist automotive sector clients with long-dated hedges for electric vehicle (EV) battery requirements. One US client bought a bespoke EV nickel investment solution featuring 10-year nickel forwards to absorb part of the back-end risk of long-dated hedges.

Nickel prices rallied to a five-year high in 2019 due to burgeoning EV market demand and an anticipated export ban by top producer Indonesia. Against this backdrop, BNP Paribas’ automotive clients wanted to replicate existing hedging programmes for other commodities within the nickel space, according to Jenny Boyce, senior corporate metals sales at BNP Paribas.

“BNP Paribas had been successfully managing a long-dated book in nickel for a number of years, which meant there was an established system in place to both value and manage the risk,” Boyce explains. “While there is liquidity out to two to three years on nickel, and clearing out to 63 months, it is important to feel comfortable pricing and managing risk further out, which we are. The key for us was also working closely with our investor team to repackage some of the longer-term risk. This meant we could position ourselves to accommodate any additional volumes the clients required.”

Similarly, when a European industrial approached BNP Paribas last year to manage 6 million tonnes of iron ore inventory hedging, the bank worked with the client in such a way that would minimise market impact. “We were able to differentiate [our offering] from some of the other hedge providers in iron ore with our ability to warehouse risk on some of the larger hedge programmes of 1 million tonnes or more,” Boyce says. “This market is established, liquid, yet increasingly volatile, so being able to accommodate these volumes without leaving a footprint was crucial.”

BNP Paribas also offers clients long-dated iron ore/coking coal basket hedges as a proxy for flat steel, which does not yet have a euro-denominated contract. Boyce says the bank’s ability to dedicate resources and expertise, particularly to Asian-led markets such as iron ore, is crucial to being able to absorb the market and credit risk of large or long-dated transactions in the base metals space. “Through our growing presence in Asia, as well as having trading resources dedicated to building up our volumes and product offerings in the ferrous space, the bank has been able to build up a sizeable book and to position itself to accommodate both higher volume and longer-dated business,” she says.

The continued exit of major players from commodities has caused base metals market participants to question banks’ allegiance to the space, according to Boyce, but she argues that BNP Paribas has continued to prove it is here to stay. “Our purchase of the Societe Generale portfolio is ultimately proof of our commitment to the business,” she continues. “Not only the financial commitment, but the dedication of resources needed to seamlessly transition the whole portfolio of trades and clients has been a clear demonstration to the market of the bank’s commitment and standing in this space.”