Structured Trade Finance: Strategic Relationships in STF Explored

12 June 2024
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Structured Trade Finance (STF) is pivotal in navigating the intricate landscape of high-value commodity flows globally. This financial approach is also known as Structured Commodity Finance (SCF). So what is STF and how does it work?
A world map with different currency notes on it
It involves a network of lending and investment strategies tailored to support various stakeholders in the commodity sector, including producers, processors, traders, and industrial end-users.

STF transactions are diverse, ranging from warehouse and reserve financing to export financing. Each is designed to address the specific cash flow needs of commodities. This is across different stages—be it in the ground, in transit, or stored in warehouses. These transactions often need a profound understanding of the commodity trade's intricacies. This is exemplified by:

  • Pricing models specific to commodities
  • Derivative utilisation
  • The incorporation of Special Purpose Vehicles (SPVs) in deals.
But how complex are STF transactions?

Strategic Relationships in Action

The complexity of STF transactions necessitates enduring bilateral strategic relationships, forming a cornerstone of commodity trade finance. These relationships prove instrumental due to the multinational and multifaceted nature of STF transactions. This involves many parties, contracts, and financing agreements.

Even the largest firms may lack universal expertise across commodities and global markets. This underlines the importance of strategic collaborations.

An illustrative example is the strategic alliance between SGS and Kezzler, a global commodity inspection and tracking company and a technical innovator, respectively. In 2017, recognising the rising significance of blockchain in STF, SGS joined forces with Kezzler. They provided a unique digital identity, or "digital DNA," for each product and commodity batch worldwide. This collaboration showcases how strategic partnerships can leverage technological advancements to enhance the efficiency and transparency of STF processes.

In emerging markets, local expertise becomes crucial. It can help secure contracts, understand counterparties, and optimise deal structures. Strategic alliances, such as Barak Structured Trade Finance Fund's collaboration with local and international African banks, exemplify how partnering can provide valuable insights, mitigate risks, and help optimal deal structuring.

Risk Mitigation and Cash Flow Management

Commodity trading carries many risks, making strategic relationships indispensable for trading companies. Collaborations with off-takers, financing entities, and even public sector bodies serve to smooth cash flows, mitigate country risks, and enhance the firm's ability to engage in cross-border transactions.

Take the example of Freepoint. A US commodity merchant, engaged in direct investment joint ventures with commodity market participants, diversifying returns and leveraging their expertise in commodity market forecasting.

Yet, strategic relationships not only improve risk management.

They also contribute to firms' credit ratings. They allow for the diversification of funding sources. They enhance the ability to secure regular, predictable finance, crucial in the volatile world of commodity trade.

Building Successful Strategic Relationships

Despite the potential benefits, statistics show that around three-quarters of strategic alliances fail. Building successful strategic relationships requires a thoughtful approach. Defining the collaboration's terms, setting measurable metrics, encouraging collaboration, managing internal stakeholders, and leveraging differences are key principles for success.

Yet, two paramount considerations emerge. The first is choosing the right type of alliance.

This is critical.

Horizontal alliances within STF often face challenges. Whereas vertical alliances that bring genuine commodity market expertise prove helpful. The second is rigorous analysis and well-defined approval gateways. These are essential because strategic alliances, akin to mergers and acquisitions, thrive when based on careful evaluation rather than spontaneous decisions.

Structured Trade and Commodity Finance Explored Further

Strategic relationships form the bedrock of success in Structured Trade Finance. As the commodity trade landscape evolves, firms must embrace approaches from a collaborative perspective. This will help navigate challenges, unlock opportunities, and ensure sustainable growth.

For an in-depth understanding of Structured Trade & Commodity Finance, take a look at Redcliffe Training's Advanced Structured Trade and Commodity Finance course.

FAQ

What is the difference between trade finance and structured finance?

Trade finance revolves around funding the import and export of goods, with a primary emphasis on minimising risks linked to international trade dealings. On the other hand, structured finance encompasses a wider spectrum of intricate financial transactions. These transactions frequently entail the development of tailor-made financial instruments and cash flow mechanisms to address specific requirements. While trade finance is tailored to facilitate trade activities, structured finance is a more inclusive term, encompassing diverse financial strategies designed to meet unique needs extending beyond the realm of trade.
Eager to learn more about structured trade finance? Click below to find out more about Redcliffe Training’s Advanced Structured Trade and Commodity Finance course:

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