Energy Risk Asia Awards 2016
BNP Paribas continues to show a commitment to commodities despite regulation, low prices and slumping revenues forcing many of its peers to retreat from the business. An example of this commitment is the expansion of the French bank's base metals business.
BNP Paribas's presence in the base metals markets is perhaps best recognised in Europe, where a combination of financing and hedging capabilities has benefited clients from automobile manufacturers to physical metals traders. But during the past year, the bank has also been busy building out its presence in Asia.
"More and more in terms of price formation – whether it is iron ore or copper – the markets are driven by what happens in China, and Asia more generally. We are starting to see that the Asian time zone is increasingly busy," says Mikko Rusi, head of Asia-Pacific commodity derivatives for BNP Paribas. "We have seen some of our traditional competitors reduce their presence in Asia, while an area of focus for us has been to improve our market-making capability in base metals in the Asian time zone."
Perhaps most noteworthy was the bank's plan to set up shop in onshore China earlier this year. Led by Rusi, who spent six years as BNP Paribas's global head of metals before taking on his current role in October this year, the China metals team provides local companies and onshore subsidiaries of multinational clients with deliveries of physical metals, financing and hedging solutions. "The Chinese market is becoming bigger and bigger – not only in terms of physical volumes, but also the derivatives market," Rusi says.
But doing business in the country can be tricky. This was demonstrated by the Qingdao and Penglai port scandal in May 2014, where local warehousing firms allegedly used duplicate warehouse receipts to pledge metal as collateral for loans. A number of large banks – including Citi, Standard Chartered Bank and Standard Bank – were exposed to millions of dollars of losses as a result.
BNP Paribas's commodities team obtained internal approvals to develop its offering of onshore base metals hedging solutions in 2015. It was given the go-ahead to expand to physical base metals in January 2016, with the first physical onshore metal transactions conducted in February of that year; this involved physical inventories financed onshore in China. Physical metals trading, both within bonded warehouses as well as onshore locations, started within a few months after that, says Rusi.
Before launching a wholly foreign-owned enterprise (WFOE), the investment vehicle for mainland China-based business, the metals team worked closely with BNP Paribas's Asia-Pacific team in Hong Kong to understand the clients and potential risks associated with operating in the country.
"We have been in the region for a long time, so we have people who know the region well and know the clients well – this is the most important thing," he says. "We also have a knowledgeable risk department that challenges us to do first-class business."
We have been in the region for a long time, so we have people who know the region well and know the clients well – this is the most important thing
Mikko Rusi, BNP Paribas
The amount of active metals clients in Asia has more than doubled since the end of 2014, driven mainly by the bank's onshore China metals capabilities, says Rusi. He points to growing metal volumes on the Shanghai Futures Exchange as an example of the booming metals trade in China and its importance for global reference pricing. The Shanghai Futures Exchange (SHFE) started trading copper and aluminium in 1999; by 2013, the volume of steel bar and copper futures ranked first and second among the world's metals exchanges, according to SHFE.
BNP Paribas trades on the Shanghai Futures Exchange through its WFOE, and having this presence in a growing hub for base metals price formation gives the bank a competitive advantage, Rusi says.
"Being able to trade in the onshore market in China makes you much more aware of what happens and having skin in the game makes you focus on the Asian market differently," he says. "This view is invaluable for providing clients with solutions."
Base metals prices have plummeted in recent years. The London Metal Exchange's index of six industrial metals fell by almost half in 2016 from a 2011 peak. This has strengthened the case for BNP Paribas to diversify its business into long-dated hedging solutions, for example, which are not yet common in China, Rusi says.
"There has been a slowdown in the region, in China, and therefore, the physical business has been slower, which is why we are diversifying into the derivatives markets," he says. "One key thing has been to expand our derivatives capabilities and the offer we give to clients in the region. We are still on a journey of educating clients about the merits of hedging and on boarding clients to do that hedging with us."
Clients praise BNP Paribas for its commitment to offering longer-dated structures and competitive prices.
"In recent years we have increased our business with BNP Paribas," says Gopinath Balasundaram, a member of the corporate supply chain team at Hong Kong-based manufacturing firm Johnson Electric. "We found that they are quite competitive and we do longer-dated trades with them – up to six years. [They are] helpful and quite competitive in base metals compared to some of the other banks, particularly when considering a lot of them are leaving the space."