Growing global trade concerns could disrupt international supply chains and hurt smaller trade finance banks as companies shift more of their business to a handful of top lenders, according to market participants and observers.
In January, U.S. President Donald Trump began imposing tariffs on various imported goods, most notably 25% on steel and 10% on aluminum, exempting some countries and prompting retaliatory tariffs from others such as Canada and China. European Commission President Jean-Claude Juncker has warned that the EU will respond in kind to any U.S. car tariffs, and Trump said in August that levies on steel and aluminum from Turkey would be doubled to 50% and 20%, respectively.
Companies are worried. According to financial advisory firm Greenwich Associates, the proportion of large European firms concerned about the mitigation of counterparty risk in trade finance has increased to 51% from 44% over the past year, and more firms are worried about sovereign risk too.
They are changing the way they allocate their business, and bigger banks are taking more wallet share, Tobias Miarka, head of the firm's international business, said in an interview.
"Smaller banks are somewhat losing out and it is much more concentrated towards the top three, or maybe top five, banks," Miarka said. The five banks with the largest share of the market in 2017 were BNP Paribas SA, Deutsche Bank AG, UniCredit SpA, HSBC Holdings PLC and Commerzbank AG, according to Greenwich Associates.
Smaller banks have been investing in trade finance much more than in cash management so as to maintain their relevance for large companies, and to generate quicker returns, Miarka said. But this strategy seems not to have worked as firms divert more business to the leading lenders.
The International Chamber of Commerce found that 90% of the $9 trillion trade finance transactions featured in its 2018 sector survey was provided by just 13 banks. The sample included 257 banks from 91 countries.
Declines across the board
Furthermore, the broader use of trade finance, where buyers and suppliers use third-party funding for trade transactions, has declined across all regions over the past year, which is the first time that has happened in the eight years Greenwich Associates has run its survey, Miarka said.
A worker walks between steel pipes at the Borusan Mannesmann plant in Baytown, Texas, on April 23, 2018.
Source: Associated Press
The proportion of European companies using trade finance in Western Europe dropped to to 65% from 69%, and in Central and Eastern Europe to 57% to 52%. Similar drops were seen in other regions of the world.
There are knock-on effects, too. Geopolitical power struggles have distorted priorities and have slowed down progress in trade finance, Miarka noted. A strong push toward digitization in the sector, for example, has lessened as businesses have rushed to mitigate the imminent geopolitical risks, he said.
Turkey is an example of an economy that has been directly affected by geopolitics. The country's refusal to release Andrew Craig Brunson, a U.S. pastor held under house arrest on suspected terrorist activity, sparked a trade spat with the U.S., which doubled tariffs on steel and aluminum. This increased pressure on the Turkish lira, which had already been falling due to economic and political instability in the country.
Data from Panjiva, a division of S&P Global Inc., shows that the U.S. is by far the largest export market for Turkish steel and aluminum, importing $1.09 billion worth in 2017. Steel is Turkey's fourth-largest export industry, accounting for 7.3%, or $11.5 billion, of total exports in 2017, according to the Turkish Steel Exporters' Association.
Turkish banks offering trade finance services include T.C. Ziraat Bankasi AS, Türkiye Garanti Bankasi AS, Akbank TAS, Türkiye Halk Bankasi AS and DenizBank AS.
Supply chain disruption
So far, trade tensions have had a limited effect on markets, but the bigger issue over the long run will be the disruption of global supply chains, experts told S&P Global Market Intelligence.
The lowering of trade barriers over the past 40 years has allowed firms to shift production to wherever they needed to. But that "wonderful flexibility" is being eroded and the efficiencies derived from capital flows and established supply chains all over the world will be lost, ultimately hurting price-earnings multiples and margins at companies, according to Robert Boyda, head of capital markets and strategy at Manulife Asset Management.
Big transaction banks will likely find ways to deal with the current uncertainty by booking transactions through other countries, according to Dr. Rebecca Harding, an independent economist and trade finance consultancy specialist. As production routes are disrupted, there will be a knock-on effect on supply chain financing.
"We have seen supply chains relocating if [companies] cannot get an exemption from particular tariffs," she said.
European steel producers supply other key sectors such as the automotive industry, construction, and engineering. And if the U.S. imposes tariffs on European car imports, it will be a blow to the whole supply chain, not just automakers, according to Jeroen Vermeij, Director of Market and Economy at the European Steel Association Eurofer.
U.S. President Donald Trump acknowledges the audience after speaking at the United States Steel Granite City Works plan in Granite City, Ill.
Source: Associated Press
This has the potential to affect domestic demand and the downstream market, he said.
"If the trade tensions develop into trade wars, this will affect confidence," he said. A lot of producers in Europe will think twice before investing in new capacity, which will affect their ability to supply corporate clients in their home markets.
He also warned of a potential knock-on effect on Europe from import tariffs against China as this will push more Asian producers into the EU single market and increase competition there. The White House is finalizing plans to put tariffs of up to 25% on $200 billion of Chinese imports, the Financial Times reported Sept. 9, and has threatened to apply levies on $267 billion more.
The ongoing tensions between China and the U.S. could lead to permanent changes in global supply chains, according to Carlos Casanova, economist for the Asia-Pacific region at trade finance insurer Coface. China was already aiming to reduce its import dependency on the U.S. with the Made in China 2025 strategy. Given recent hostilities, it may exceed self-sufficiency targets and also import less from countries such as Germany, South Korea, Japan and Taiwan in the long run, Casanova said in an emailed comment.
He predicted a decline in trade volumes and less buoyant business for banks in 2018 and 2019.
"The challenge lies in understanding where the main pockets of risk are located in order to anticipate any potential losses," he said.
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