‘We’re strengthening commodity finance portfolio in India’

Almost all commodity prices are trading at multi-year lows. JEAN-FRANCOIS LAMBERT , managing director and global head of commodity and structured trade finance at HSBC, the British multinational banking and financial services company, on what he feels is

Do you plan to expand your commodity portfolio in India? What is the plan?

India has huge commodity trade and our current strategy is to strengthen our portfolio in this space. We are focusing on the large players but also on smaller companies that are part of a big supply chain. In particular, we are targeting agricultural finance, given the incentives here. We work with large supply chains and strive to go upstream, right up to the financing of farmers who are part of these supply chains. Farmers or small businesses associated with large players are our target customers. However, we are also focusing on the higher volume of business in the non-agri segment.

Several commodities' prices are at multi-year lows and there are, globally, several stressed commodity assets. Do you see opportunities for Indian companies to acquire such stressed assets at attractive valuations?

Yes, commodity prices are down significantly. Reuter’s commodity index lost 30 per cent year on year and is down 59 per cent from the peak of 2008. This indicates an end of the cycle and we are now entering a situation where commodities have to find their floor. In a situation where these prices are yet to bottom out, companies should wait for this to happen. So, timing the acquiring of assets and understanding of market dynamics are very important.

Several commodities, including metals and oil, are in an oversupply zone. Producers have started cutting cost. In metals, capacities planned a few years ago are going on-stream now, so prices will continue to be under stress. The good news is that energy cost, a significant part of production costs, has fallen. The overall trend is likely to be of an ‘L’ curve.

Big consortiums in India are in a position to take advantage of the situation to acquire assets but there is no reason for a buying spree just yet. If someone is in a hurry, it is likely they might catch the wrong bus. Savvy players say the rout in commodities is not yet over.

On stressed assets, is the situation in West Asia similar to that in the US or does industry in both regions have different dynamics?

Oil is in an oversupply zone. Producers have started cutting costs. In the US, this has begun and they have been able to bring down production cost to much lower levels. Fortunately, interest rates are low. Also, most companies are working at lower (levels of) capital expenditure (capex). Lowering of cost is, therefore, helping them to sail through these difficult times. With oil, however, there is a natural cap and floor for prices. At a lower price, demand is picking up, while supply diminishes. Prices then bottom out and start rising. When they reach an attractive level, producers, whether in the US or elsewhere, will be tempted to produce more, up to the point where supply exceeds demand. This would cap the price. Prices will slip, producers will reduce supply, until the floor where supply meets demand is reached.

As far as shale oil is concerned, it is a low capex and high operational cost business; conventional oil production is predominantly a high capex and low opex (operating expenses) business. My projections for oil is a price between $40 and $65 (a barrel). The price might fall below the lower end or spike above the higher end of the range but those levels might not sustain, due to natural support and a cap in the context of a demand which is unlikely to pick up significantly.

What is happening with oil is happening with metals after reports of China slowing.

The impact of China’s weaker growth numbers is overblown. Metals want to find a bottom. The markets are over-reacting to bad news and not truly acknowledging the better ones; I think, copper will rebound. China’s (economic) model is commodity-hungry and will remain so for several years. The problems for steel and aluminium are different as China is exporting both but that can’t continue for long.

But, even agri commodities have not been spared and have been falling for some time.

Agri commodities are supply-led. Demand cannot sharply reduce. We should also not ignore the El Niño impact. It is already being seen in corn (maize), cocoa and wheat. This will probably drive some prices up.

Do you see lower commodity prices impacting capital flows?

Yes, several oil producing countries with excess liquidity which were investing in markets abroad have become less wealthy. Wealth is being transferred to the consuming countries through cheaper supply. Lower commodity prices, especially of oil, are changing growth equations as well. Consuming countries should get a boost. Sovereign funds of oil producing countries will be less active and even partially withdraw money but they will be replaced by other investors and notably by developed countries' pension

funds.