The Hidden Plumbing of Commodity Finance

Joe Weisenthal (0:02)

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Tracy Alloway (0:18)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:21)

And I'm Joe Weisenthal.

Tracy Alloway (0:23)

Joe, I think I've told you this before, but way back when I was starting in financial journalism, I really wanted to be a commodities reporter.

Joe Weisenthal (0:30)

I get it. It seems fun, it seems real. It seems like one of the few areas of finance that's not just a screen, you know what I'm saying, where there's more to it.

Tracy Alloway (0:42)

Yeah, no, there's a physicality to it, right?

Joe Weisenthal (0:44)

Yeah, but also everyone's like, this is a relationship business. But I feel like commodities, everyone in finance says that, right?

Tracy Alloway (0:52)

Do your banker impression again.

Joe Weisenthal (0:53)

This is a relationship, but everyone says that in finance, this is a relationship business. But actually commodities seems to be one of those areas where actually that's a real thing and not just a cliche and stuff. So I get it.

Tracy Alloway (1:06)

It seems to be very idiosyncratic where one load of whatever commodity might not be completely fungible with the same commodity.

Joe Weisenthal (1:14)

Because we call it commodities and yet, maybe they're not.

Tracy Alloway (1:19)

But I had this romantic idea in my head of what a commodities reporter actually does, which is like, I don't know, go on ships and travel alongside huge things of coal and metal and aluminum and stuff like that, which is probably not realistic.

One aspect of commodities that I never really appreciated was how much financialization there actually is in the market and that there are so many different players in the market. We've sort of touched on it before with the Strait of Hormuz situation where you have the insurers, and then you have the reinsurers, and you have insurers for the freight and for the whole, and for liability, and it just seems so complicated. You have a very similar situation on the financing side.

Joe Weisenthal (2:04)

Sure.

Tracy Alloway (2:05)

It struck me that we have never actually done a commodity financing episode.

Joe Weisenthal (2:10)

No, and I'm really interested in this because again, one of these things, you always hear about capital efficiency, right? This is very important. And so, okay, here's like, let's say we do not know, I don't know what the cost of moving so and so many kilograms of copper from one place to another is. Whatever that cost is, I probably don't want to tie up all of my capital at that. I probably want to put down a fraction of the thing, borrow the rest, etc., then pay off that loan when the ship gets there, etc.,

so that I'm as liquid as possible at any given moment. This is just like, I'm sort of like, this is my first principles. I don't know anything about this space, but I assume that there are a lot of calculations like this within the process of procuring, mining, delivering commodities.

Tracy Alloway (2:58)

Absolutely. Today, we are going to learn about commodity finance. We're also going to try to get a handle on what's going on in the commodities world right now given some of the disruptions that we've seen. I'm glad to say we do in fact have the perfect guest. We're going to be speaking with Lewis Hart. He is, of course, the head of Corporate Advisory and Banking at Brown Brothers Harriman, so someone who lives and breathes commodity finance.

Lewis Hart (3:21)

Thanks, Tracy. Thanks, Joe. It's great to be here.

Tracy Alloway (3:24)

Would you say you know more about commodity finance or 90s hip-hop and R&B?

Lewis Hart (3:29)

That's a tough one. Very close, very close.

Tracy Alloway (3:31)

I'm throwing that out of nowhere. He's a big hip-hop guy.

Lewis Hart (3:36)

Tracy knows me well.

Joe Weisenthal (3:37)

You should go back and talk about that.

Tracy Alloway (3:39)

No, we shouldn't. Okay. What's commodity finance? What exactly are we trying to achieve here?

Lewis Hart (3:45)

It's a good question and the way I think of it, it's like the biggest $20 trillion market that no one talks about. So you think about global trade, about $20 trillion of global trade in goods goes through trade finance programs. Commodity finance is a specialized subset of trade finance, and it's about $4 or $5 trillion.

So as a huge market, it surprises me sometimes that it doesn't get more headlines. But it's not that glamorous. It's boring, and so when things go well, it doesn't really create the drama that headlines are seeking.