Commodity traders ill-prepared for liquidity crunch, report says

GENEVA (BLOOMBERG) - Most commodity traders underestimate the risks of a major liquidity crisis that would choke off funding, according to a report by industry consultant Oliver Wyman.

Traders owning assets such as refineries or mines as well as commodity-driven industrial conglomerates have failed to prioritize liquidity-risk management, according to the report "Liquidity Risk: Uncovering the Hidden Cause of Corporate Shocks."

Many unregulated businesses including trading houses haven't taken up the more stringent risk practices adopted by banks since the financial crisis, even though access to capital is the life-blood of an industry that depends on short-term loans backed by physical cargoes to fund operations, Oliver Wyman said. While able to shrug off slumping resource prices, traders are failing to evaluate credit risks that could be produced by payment delays, canceled deliveries and other operational events, it said.

They "have not improved their ability to analyze and mitigate funding shortfalls," according to the report.

Unexpected funding shortfalls caused by counterparties is also a major risk as banks and investors reduce their exposure to commodity-related debt.

"Some prominent independent traders have already begun to report that counterparties are starting to trim their credit lines," Mr Wyman said.

A study released in September by the UK's Financial Conduct Authority found the majority of commodity traders do "not include stress testing and scenario analysis in their assessments of liquidity risk." The FCA report said this could cause "large financing pressures and liquidity risks in the event of stressed market conditions."

Despite market concerns about the debt levels of commodity traders Singapore-listed Noble Group and Anglo-Swiss group Glencore, Vitol Group and Trafigura Pte Ltd. recently raised more than US$10 billion in credit lines with lenders. Vitol, the world's largest oil trader, signed a record US$8 billion credit facility with 57 banks last month. The Vitol loan came a week after Trafigura, the second-largest metals trader, won lower lending rates for US$2.2 billion of credit facilities.