As growth in China, one of the world's biggest consumers of commodities, slowed to its lowest rate since the 1990s, the country's demand for products such as iron ore and base metals also fell. At the same time, a global glut in oil supply resulted in prices plunging by more than 50% between January 2014 and January 2015. For many investors, the attractiveness of commodities as an asset class was waning.
Societe Generale, however, was able to provide attractive structured products to investors searching for commodity sector bargains. On the corporate side, the bank extended structured financing to a Chinese copper smelter at a time when its competitors were tightening credit to China's struggling industrial sector.
"They are able to structure almost any product we have in mind. Even though commodity products are a bit more vanilla than equities, the pricing competitiveness and service in general on commodities is very good. If you want to implement a strategy in base metals, agriculture or commodity indexes, they can do something for you," says Sebastien Dupuy, executive director for product solutions, wealth management, at DBS Bank in Hong Kong.
While other banks subsequently cut back their commodities businesses in the region, Societe Generale increased its firepower in the sector last May by completing the purchase of futures commission merchant and London Metal Exchange (LME) ring-dealing member Newedge Group, which the bank previously co-owned with Crédit Agricole.
"On the flow side, in terms of corporates and other counterparties, both in over-the-counter and listed futures, we benefited tremendously from the integration of Newedge," says Chris Lee, Singapore-based managing director, commodities, at Societe Generale. "We brought over-the-counter solutions to clients who previously only used structures in listed futures, and introduced a wide array of agency execution and clearing services to those who were sophisticated OTC structure users."
We brought over-the-counter solutions to clients who previously only used structures in listed futures
Although the price of oil fell from around $110 a barrel (/bbl) to less than $50/bbl, and the global benchmark S&P Goldman Sachs Commodity Index fell by 40% over the past year, the bank's Seasonal Factor Commodity Index, launched in April 2014, recorded a positive return of 1.5%. The index, which has received investments totalling more than $50 million via OTC swaps and options, draws on market fundamentals rather than technical analysis. It takes exposures to commodities with strong seasonal price movements, such as increased demand for gold during the wedding season in India - typically between late September and January. "While some sovereign wealth funds and institutional investors were reducing their commodity sector exposures, we actually had one sovereign fund increase its investment through this product," says Lee. "We also had sizeable increases from Singapore and Malaysian retail-based asset managers who increased their commodity investments through this strategy."
A big factor behind the bank's ability to structure the index and other products is its research team, a capability appreciated by its clients. "They have a strong research team working in Asia for commodities and a good reputation in terms of structuring capacities in alternative solutions, whatever the asset class. They have improved their structuring capacities in commodities a lot in recent years," says Dupuy.
The bank's oil-linked structured products were another sales success, hoovered up most particularly in March by investors looking for bargains.
"One can imagine that with the oil price down roughly 50% from its peak last year, a lot of investors were looking to take advantage of ‘cheap' oil investment. In March, our oil-linked structured products transactions more than trebled the average run-rate compared to products sold during the same period in previous years," says Lee.
Apart from providing investment opportunities, Societe Generale also succeeded in structuring an offshore financing solution for a Chinese smelter, completed in July last year. The bank structured an offtake agreement for the smelter's copper cathode exports via its Hong Kong subsidiary, granting an initial pre-payment of $40 million with a tenor of 18 months, while also providing LME hedging and the ability to convert the US dollar payment into offshore renminbi.
This came several months after Chinese banks were tightening credit to industrial companies and a month after a commodities financing fraud scandal emerged at Qingdao Port that resulted in western banks also restricting lending to the sector.
"It's true that many banks began to re-examine the entire Chinese metals industry risk management practice and turned overly conservative. Societe Generale's disciplined risk management and selective approach when it comes to counterparties due-diligence, risk assessment and monitoring enable us to do this," says Lee. "Such transactions have clearly enhanced the market's perception of Societe Generale as both a reputable financing and hedging solution bank of choice."
The week on Risk.net, July 7-13, 2018Receive this by email