30 Years of Commitment to Commodities
Jonathan Whitehead, Head of Commodities Markets, highlights the history and commitment of the bank to its commodities business and explains how it has evolved in line with market evolutions to best serve our clients.
Of all the major global investment banks, not many can claim to have stood by their clients throughout the ups and downs of commodities markets over the last few decades.
From its beginning over 150 years ago, Societe Generale has been involved in the financing of natural resource projects. Jonathan Whitehead, Global Head of Commodities Markets, points out, "being true commodity professionals is what Societe Generale has historically brought to the table. This means providing clients with expert market knowledge, contacts and, most importantly, market access".
“30 years ago, our added value was to give clients access to markets which were very illiquid. The key factor was the availability of real commodity professionals who had the right contacts and the right market access. Today, our value is our ability to provide clients with credit lines, tight pricing and the capability to structure hedging solutions for our clients.”
However, as any business that deals with commodities knows today, this is not enough. Commodities markets deregulation, foreign exchange fluctuations and geopolitical tensions all have significant impacts on the price, value and volatility of commodities and therefore on the treasuries of companies. Having a well established relationship with a bank is essential to implement optimum hedging strategies.
Up to the 70s and early 80s, the commodities business was a regulated and mainly physical market, albeit with a futures market limited to a few month maturity transactions due to lack of liquidity. With the deregulation starting in the 70s – energy and metals first, then agriculturals – the need for hedging became apparent to clients and financial institutions alike.
This is precisely where Societe Generale's Commodities business and derivatives expertise came into the picture. 1986 saw the bank's first derivatives trade in Forex. In 1987 it was followed by the bank's first commodities derivatives on precious metals. The story picks up from there to become one of a truly multi-asset derivatives house.
Initially developed for other asset classes such as Equities or Fixed Income, derivatives products were quickly introduced to commodities as market liquidity increased. Societe Generale Commodities' clients were quick to benefit from the associated developments in technology, product structures, cross-asset hedging and investment opportunities.
"Commodities is a very cyclical and volatile business. Rapidly entering the business without the right contacts, market access or appreciation of clients' business models can lead to equally fast exits" indicates Jonathan Whitehead.
In the latest commodities market downturn in 2013/2014 and in light of increasing costs linked to new and tighter regulations for the financial sector, we have seen a number of banks closing their franchises. As a consequence, many clients had to move their primary relationship. Societe Generale participated in this consolidation trend: when the bank acquired Jefferies' client portfolio in 2014, some of the clients had been passed along to three different banks in 18 months - which can only be detrimental to the good conduct of their businesses.
As well as a Commodities derivatives business, as a bank, you also need to have the balance sheet and financing expertise to provide clients with credit lines, allowing them to implement tailored investing and structured hedging solutions to support the development of their businesses.
"This is where Societe Generale's real value for clients lies, its ability to offer a holistic set of commodities services, based on its diversified banking model", says Jonathan Whitehead.
Societe Generale is notably present in trade and commodity finance through the financing of raw material transactions via collateral letters and other debt instruments. The bank offers a wider range of products than many of its peers thanks to its global project financing capabilities that enables it to support its clients' strategies the world over.
Looking to the future, analysts expect an upturn in commodities. After three years of price decreases, in particular for the oil and industrial metals markets, there has been a drop in investment. Therefore the future supply of commodities is muted and global demand is growing. As a consequence, prices will most likely rise leading to a renewal of investment activity across the sector.
“Today, 30 years after its first Commodity Derivative trade in 1987, Societe Generale is proud to be one of only three banks to have stayed fully committed to the business. The bank has the expertise and market knowledge to satisfy client needs seamlessly.”
Societe Generale maintained a comprehensive service to continuously serve its clients and will once more stand by its clients to help them take full advantage of this market upturn. Furthermore, the bank has invested in technology to embrace the digital transformation of the business, launching electronic trading and hedging platforms, SG MARKETS Commodities and MyHedge respectively.
The bank continues to evolve its commodities business. It is currently expanding into the Iron Ore market which, 3 years ago, was predominately physical with no derivatives activity. Very recently, it has also executed and cleared the first wood pellets contract on Euronext between a Swedish utility and Engie, a global energy company. Renewable energies are indeed an area of growth globally and Societe Generale is proud to be playing a pioneering role in the financing of such projects. Having decided to double its financing of renewable energy projects capabilities to €10 billion by 2020, the future looks promising.