Monday, April 25, 2016


Bankers Do Not Understand Supply Chains — So How Can They Do Multi-Tier SCF?

It’s easy to discuss reverse factoring or some other supply chain finance technique from the standpoint of a credit product. But when thinking about supply chains, most bankers I know have a disconnect between how things are made and the credit risk they take to fund how things are made.
To discuss trade and trade flows without having some fundamental understanding of how things are made is a dangerous game.
I will give two examples below to demonstrate what I mean.

Banking Does Not Understand the Value Chain of the Goods It Finances

My argument here is quite simple. Understanding how goods are made is not a simple exercise. Selling money through various supply chain finance techniques without having a fundamental understanding of the chain you are funding is dangerous. Let’s take an example.
Dicalcium phosphate (DCP) is used in livestock feed applications and occupies 40% of the U.S. feed phosphate market. The market factors of DCP are influenced by the dominant phosphate fertilizer market, and this in turn is greatly driven by the supply-demand scenario and prices of the feedstock market (sulfur and phosphate rock.)
Figure: Feed Stock Value chain Analysis
Sulfur is used to produce sulfuric acid, an indispensable feedstock for phosphoric acid production. Sixty-two percent of sulfur demand is from agricultural fertilizers while 26% is from petroleum refining.
Since 80% of the global phosphate production is used in fertilizers, the demand and prices of phosphate in the fertilizer market influence the market conditions in other end-use markets as well.
So, understanding this flow would be pretty important if you are funding agricultural commodities dependent on phosphate.

Bankers Do Not Understand How Prices Are Impacted by Key Inputs

Below are key factors that impact the price of stainless steel.
Figure: Factors Affecting the Stainless Steel Price
There are many forecasting services that provide models to predict prices of many things. TFM’s sister site MetalMiner is one of them.
The value of commodities and hence the value of trade that banks finance has dropped tremendously over the last few years. But having the foresight to see when things will change ahead of the curve by understanding what drives prices is critical. While I have found that no model can forecast the future — and the forecasts get hazier and hazier the farther you go out — understanding the dynamics is extremely helpful in having the right conversations.