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Commodity Traders Face a Liquidity Drought

Since the first lockdowns that happened at the same time globally, the importance of commodities has become the most radical change in trend and it is increasing with time. The second phase of this started when Russia- the Ukraine conflict started.

Over these years the companies and countries owning these commodities have gained profits to levels not witnessed in decades. But there has been another set of companies that gained in this trend and those are the large global commodity traders like Vitol or Trafigura.

This category has increased the free cashflows levels by 3 to 4 times as compared to 2019. And this led to adventurous and stubborn trades in commodity financial markets. For instance, in March 2022 the Nickel price on London Mercantile Exchange increased by 250% in 48 hours. This was driven by a stop loss triggered by a position created by a Chinese Tycoon.

The importance of this was not the price jump or the loss of the position. It was the leverage that was provided by JP Morgan bank for the position. Post this many larger commodity funding banks have reduced the exposure and stopped new loans in the category. This has led to a massive issue for commodity traders.

Recently, JP Morgan and ICBC which are the two largest commodity market liquidity providers in China have stopped new lending. This has brought a local commodity tycoon who owns 25% of the copper market into funding trouble.

If the situation continues or accelerates then there will be a need for nations to provide liquidity to them as a default in any obligation would result in the closure of positions or seizure of physical commodities hampering the supply chain again.


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