Trading environment update
2021 presented us with a challenging trading environment. While banks accelerated their retreat from financing the global commodity trade cycle, which presented us with multiple new lending opportunities, there were also downside effects from shocks such as the Greensill collapse and the rally in global freight rates. Insurance companies were, and remain, under stress from the global pandemic and there was a plethora of smaller supply chain collapses.
While the numbers are not final yet, compared to the -3.5% global economic contraction seen in 2020, 2021 seemingly achieved growth of 5.9%, in line with IMF expectations. Vaccination programs, coupled with a better understanding of the risks and scale of the pandemic, accelerated port and trade route openings in the second half of the year. These positive numbers do mask the effects of uneven rollouts of vaccination, and divergent national policies, which saw a breakdown of consensus. The risk of trade wars, political posturing and supply & demand interruptions mean that specialist trading knowledge to move commodities around the world is once again prized highly.
Against this backdrop, we have seized opportunities for growth and diversification across the financing spectrum. We have onboarded ten new borrowers, including some industry heavyweights, bringing the total number of facilities approved since inception to 27, with a combined value of over $450m. We have bolstered our risk management by migrating to the S&P platform, which, in concert with TriQuesta, enables us to monitor the portfolio with even greater scrutiny.
Trade finance has been slow to move to the digital world, historically reliant on a multitude of paper contracts, however, 2021 has seen a concerted push by the industry to adopt digitisation and lower the barriers to implementing digital solutions. As keen promoters of evolution, we were proud in December 2021 to have facilitated our first digital ledger transactions in silver concentrates, from Peru to China. We did this on the Blockchain platform MineHub. MineHub Trade Finance connects borrowers to their financiers via a secure communication channel, giving access to real-time data on each transaction.
Portfolio update
From a portfolio construction perspective, as we mentioned in our last update, uncertainty in global trade has led us to stabilise our portfolio and position more conservatively. The credit shock from the first wave of the pandemic was exacerbated by the credit insurance market slashing capacity, and refusals to renew insurance. We, therefore, elected to reduce exposure to emerging markets, mitigating risk either through re-structuring loans to include parent company obligors in easier, more accessible geographies, or some cases, not approving new borrowing requests.
The counterbalance to our withdrawal from emerging market risk was deciding to launch an Africa specific trade finance fund with a new partner, which brings a lifetime of in-country African trade experience. The Dhow Kimura African Commodity Trade Finance fund was created in late 2021 and is currently raising seed capital.
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To further mitigate risk, we worked to onboard clients with larger balance sheets and attractive credit profiles, while keeping expected rates of returns for our investors realistic. This enabled us to consolidate our portfolio diversification, coming into December with a portfolio split of roughly 33% to base metals, 33% energy and 33% to Agricultural and soft commodities. This is the optimum level of diversification and as we continue to grow, will work to keep these splits balanced. From an obligor standpoint, we now have more than 50% of the portfolio exposed to UK borrowers, this facilitates communication and expectation, given the relative ease with which we can meet and enforce under UK courts if needed. The rest of the exposure broke down around 15% to the USA, 15% to Europe and 15% to South America, where we finance a copper mining operation. The copper price dropped as low as $4,600 pmt in March 2020, and has been part of a surging commodity bull run as China’s insatiable appetite for the super metal, coupled with the world moving to cleaner electric vehicles has driven the metal as high as $10,500 pmt in May 2021 and since December 2021 has averaged $9,700. 2022 should see continued demand for copper and other transitional metals, as we move to new energy technologies and higher consumer electronic and electric vehicle investment.
New product pipeline
We have been working on addressing the equilibrium between demand for access to our asset class, with the required levels of liquidity demanded by certain investor types. The result is an evolved project on a listed note which we hope to make available via a platform soon.
To enable investors to access our asset class from around the world, we are looking at launching a Shari’a compliant cell. This will complement our Australian trust structure listed on the Macquarie private wealth platform, and our Japanese yen share class available in Japan.
The fragmentation of cross-market correlations, rising inflation, decoupling interest rate regimes and the prospect of military instability, both on the Eastern borders of Europe and further afield around the Taiwan Strait and South China sea, lead us to expect volatile trading conditions for most markets. While we accept potential interruptions and do our utmost to mitigate the risks, we are confident that our core business, that of financing the global trade in raw commodities to satisfy the basic needs of consumers globally, is unlikely to suffer as much as listed liquid markets. It would be clichéd to say that 2022 is full of promise, however taking our experience to date, we see enormous potential for growth in the year ahead.
Contact us
Offices in Europe, Asia, USA, and Australia
Global Contacts e-mail:
Asia: Stephen@kimuractf.com
Australia: Greg@kimuractf.com
USA: Warren@kimuractf.com
