Energy Risk Awards 2016
As the world's largest consumer of copper and nickel, China is an essential part of the global base metals market. But it can also be a dangerous place for banks to do business.
That became abundantly clear in May 2014, when Chinese authorities launched an investigation into whether a local warehousing firm used duplicate warehouse receipts to pledge metal as collateral for multiple loans in the port cities of Qingdao and Penglai. The fallout has included hefty losses at firms including Citi, Standard Chartered Bank and Standard Bank, and a tangled web of legal proceedings between banks, trading houses and warehouse operators.
When the scandal broke, BNP Paribas had been working on a plan to offer base metals financing and hedging solutions in China, but it quickly hit the brakes. Its commodities team went back to the drawing board, working with the risk and legal departments to ensure all the lessons of Qingdao had been learned before resuming its push.
"Every single aspect of our operations were scrutinised, vetted and approved," says Amine Bel Hadj Soulami, BNP Paribas's London-based global head of commodity derivatives. "We have a very elaborate process of validation, even if that means we tend to be a bit slower to start things compared to some of our competitors."
Last year, the bank's commodities team obtained internal approvals to develop its offering of onshore Chinese base metals hedging solutions and, in January, the team received the go-ahead to expand to physical trades. BNP Paribas's first onshore physical metal trades in China took place in February. Thanks to such initiatives, the firm has more than doubled the number of its Chinese counterparties over the past 12 months, Soulami says.
Led by Mikko Rusi, BNP Paribas' global head of metals and head of Asia-Pacific commodity derivatives, the bank's Asia metals team provides local companies and onshore subsidiaries of multinational clients with deliveries of physical metals, financing solutions and hedges. BNP Paribas is aiming to "put its balance sheet towards letting a natural flow take place between demand in China and supply in the rest of the world", Rusi says.
"There's a great opportunity to provide liquidity onshore in China for international companies as well as helping Chinese companies to source metal from the West," he says. "This involves financing the metal in intermediate storage locations, as well as refinancing inventories with the markets being in surplus. Even with simple financing, there's always a hedging element that goes around it, and we need to be able to offer a holistic strategy."
There's a great opportunity to provide liquidity onshore in China for international companies as well as helping Chinese companies to source metal from the West
Mikko Rusi, BNP Paribas
BNP Paribas has also continued to provide innovative solutions for clients in its home base in Europe. Such clients have been grappling with a slump in prices: copper, for instance, fell below $4,350 per tonne in January, its lowest level in more than six years.
In one such solution, the bank provided liquidity to metals traders facing large mark-to-market gains on their hedges. Clients that had hedged copper production using futures on the London Metal Exchange (LME) were unable to cash in on the positions until they reached maturity. BNP Paribas offered such clients a deal: it would novate their listed LME positions, taking them over-the-counter, and provide the traders with the positive value embedded in their hedging transactions. BNP Paribas closed such trades with at least five clients during the second half of 2015.
"Essentially, it is a funding solution: the client keeps the hedge, but we provide the funding that the exchange will not," Rusi says. "In a market like this, where the price is collapsing and our clients have their cash stuck at the exchange, they need the liquidity."
In another deal that BNP Paribas executed for a client last year, the bank financed both an aluminium inventory and the transit of the metal from an LME warehouse to a ‘non-queue' location – essentially, a warehouse not subject to sometimes-lengthy queues for taking aluminium out of storage. What was unusual about the deal was that BNP Paribas financed the full transit process, which involved physical logistics as well as a hedge. In the hedge, the bank helped the client lock in the price of the aluminium premium – the price paid on top of the LME price once the aluminium is delivered - using aluminium premium swaps.
Clients praise BNP Paribas for its service. "What we are looking for in a bank is competitive pricing, but also a good relationship and strong research," says a France-based trader at a large packaging company. "We know we can rely on them [for information] on the different flows in the market."