High interest rates, volatile prices and the war in Ukraine have made commodity trading more expensive to finance, forcing the industry to hunt for $300 billion to $500 billion in additional working capital to keep raw materials moving around the world.
Changing trade patterns have made the world’s flow of raw materials more efficient and cost-effective, and could raise the price of goods for consumers, according to a new study by consulting firm McKinsey.
“We’ve seen a doubling of working capital requirements in the commodity trading sector since the end of 2020,” said Roland Rechtsteiner, McKinsey partner and lead author of the report. “We can see a similar increase at the end of next year [further] Changes in trade flows will be realized.
The commodity trading sector is the engine of the global economy, moving raw materials such as oil, gas, sugar and gold around the world. But the financing cost of transporting these cargoes has increased significantly due to price volatility and rising interest rates.
On top of this, Russia’s invasion of Ukraine has led to significant changes in international trade flows – often resulting in longer, more efficient shipping routes.
One example is coal, the price of which nearly tripled last year. Europe is importing coal from Colombia, South Africa, Australia and other places, replacing coal that was previously imported from Russia. Financial costs increase as cargo has to travel further.
“Traditional business trends have changed this year,” Rechtsteiner said. “This puts us in a much better system in terms of efficiency, and increases costs.”
The McKinsey report predicts an 8 percent average shipping time, a three-fold increase in energy prices, and a seven-fold increase in interest costs, between 2020 and the end of 2024, and an increase of $300 billion in working capital requirements for commodity trading worldwide. And $500 billion as a result.
In the past year, even the world’s largest businesses have had to increase their credit lines and find new sources of financing. Trafigura increased its credit lines by around $73 billion at the end of last year.
Meanwhile, Glencore had to post an additional $2bn in the first half of 2022 to meet margin requirements on commodity exchanges, contributing to “significant” growth in working capital at the time.
Governments should provide emergency credit lines for utilities, especially in Europe where electricity and gas prices were very volatile last year.
Governments from Germany to Austria and Finland stepped in to support credit lines for energy producers and suppliers that had to meet high margin calls due to inflation.
The transition from oil and gas to electricity and renewables can further exacerbate the “regional” trade flows of goods, according to Rechtsteiner.