Commodities in 2023: The Changing Face of International Trade

New Trade Patterns: It was the perfect storm: a world of pandemic supply chain bottlenecks, jolted by the invasion of Ukraine. Together with the ensuing sanctions and blockades affecting the Black Sea, commodity prices across the board skyrocketed. Energy security and inventory stockpiling became a political necessity as the macro events of the past 2 years have changed the face of international trade more than in recent memory. Russian oil has found new destinations, the renminbi is increasingly prominent in international trade and China’s relentless need for raw materials took a pause with Covid lockdowns. If there is one contracting philosophy that traders had to learn, it is to expect the unexpected. Often overlooked clauses like force majeure clauses are now heavily scrutinized to cover events once thought of as remote – pandemics, port closures, export bans and sanctions. Contracting and credit assessments in a volatile world require far more analysis than ever before as traders are learning there is no such thing as a complete back-to-back contract: relationships are not always linear and even when they are, events affecting your supplier may not necessarily excuse your performance.

Unsurprisingly, there isn’t a uniform view on 2023. For most commodities, prices are receding to reflect a fading war premium and a global economy teetering on recession (although some analysts are still bullish on the thirst for “green metals” from a chronically underinvested mining sector). Contracts hurriedly cobbled together in the exuberance of a runaway market, can start to look very different in a recessionary climate.

Due Diligence: Ponzi schemes are particularly prevalent in international trade because of the difficulty behind verification of invoices or trades. Receivables can easily be conjured up to give the impression of steroidal growth, with some traders using credit insurance to unlock access to mountains of capital looking for a yield. The recent debacle at FTX serves as a reminder of the many blind-spots when it comes to investing or lending money. There are many inherent human biases at play – the confidence gained from other participants in a deal; the comfort from the face value of financial documents; the reluctance to test numbers or the transaction for fear of missing out and the ability of hype around a company or individual to seduce seemingly sophisticated players. Of the many commodities financing cases that went wrong, it is sometimes bewildering how lenders of hundreds of millions of dollars did not even visit the offices of their borrowers.

Digitization: Digitization of international trade is increasingly becoming a reality, with the benefits of fraud reduction, costs efficiency and greater access to liquidity. The laws around digital assets are trying to catch-up in a borderless world, where traditional concepts such as jurisdiction, governing law and possession are tested (as seen from early crypto cases). But digital assets in international trade will continue to face headwinds in the absence of uniform laws or practices around its use. Electronic BLs for example now have the same legal status as their paper counterparts with changes or imminent changes to the laws in Singapore and UK but questions remain as how foreign courts would treat such assets and the receptiveness to change old mercantile practices around paper documents.

Carbon Credits: The carbon market is at the cross-roads balancing the need to scale with caution over the quality of credits as various bodies jostle to set the standards of carbon credits. Concerns revolve around the issuance, monitoring of underlying projects and subsequent use of credits across fragmented registries, although the introduction of the Climate Action Data Trust in December 2022, holds the potential of reducing multiple use of the same credit by harmonising information across various registries. Carbon claims and offsets are a developing area in need of industry uniformity and legal regulation to facilitate a liquid market.



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