The Role of Banks in Physical Commodities

This study explains and illustrates the important business role that banks play in the commodities sectors of our economy. We highlight the size and significance of these sectors and review their business value chains. It demonstrates how the role of financial intermediaries in physical commodities is beneficial in providing businesses access to capital and related risk management services. The study incorporates industry examples to highlight the role of banks in physical commodities and, while it is believed the impact is significant, we have not estimated the overall economic or consumer impact of this role as we have done in other studies.

This report draws on the multidisciplinary expertise of IHS Inc. The study has been commissioned by SIFMA. The analysis and the opinions contained in this report are entirely those of IHS Inc. and we are solely responsible for the contents.

The authors conducted interviews with commodity producers, transporters, converters, end users, bank and non-bank traders and others. We also conducted discussions with our own internal and external networks of industry experts. IHS Inc. supplemented primary research with secondary research including a review of the existing literature, public filings and other accounts to document our fact base and to develop industry case studies.

Read Full Study

 

Excerpt 

Executive Summary 

Banks play an essential role in assuring the smooth functioning of the commodity markets which underpin the  $16.6trillion U.S. economy, and on which consumers ultimately rely. This report seeks to explain that role and how the ability of banks to participate both in financial and physical markets enables them to better contribute to market liquidity and stability, and to meet the needs of companies, consumers, and the overall U.S. economy. This report does so both by explaining the roles that banks play and then demonstrating with five case studies. It also highlights that curtailment of these roles would impair liquidity, increase risk for market participants, reduce energy investment, and make disruptions more likely.

• Why it Matters: Commodities play a large and important role in the U.S. economy
  and are the foundation for overall economic activity.
  • The oil and gas industry alone supports more than 9.6 million jobs in the U.S., and
    contributes more than $1.1 trillion toward U.S. GDP (7.3% of total economic output);
    as a separate country, the U.S. oil and gas economy would rank 16th in the world,
    just ahead of Saudi Arabia.1, 2
  • The U.S. enjoys some of the lowest energy prices in the developed world, providing companies with a competitive advantage and supporting a higher standard of living.
  • Security of energy supply brings important strategic benefits to the U.S.

• The Need: Commodity producers, manufacturers and end users face the risks of
  commodity price movements, but have different needs, time horizons and
  incentives.
  • Commodity price risk is a key concern for participants in the commodity sector, whether buyer or seller. The ability to hedge against adverse commodity price movements improves the ability of each to operate, invest and grow—and in some cases is essential for survival.
  • For example, airlines need stable fuel costs, oil and natural gas producers need revenue certainty to develop reserves, chemical companies need competitive feedstock costs, utilities need reliable sources of energy and developers of wind and electric generation need revenue certainty. Hedging enables small and medium sized companies to maintain more stable cash flow and to raise capital.