Commodities are a key driver of the global economy. Every day, a variety of commodity products such as metal ores, gold, oil, wheat, sugar, coffee, cotton and grains are transferred globally from their place of extraction or production, funnelled through a supply chain where they are consumed or produced into other finished goods. This cycle of demand and supply is undertaken through a complex process involving several players such as commodity traders, brokers, trade financers and producers – representing the commodity value chain.
In recent years, several commodity trading firms have faced a number of significant challenges such as increased price volatility, extended regulatory and compliance and limited economic growth across several regions, all of which created pressure on the business.
As a result, commodity traders have had to employ adequate systems and technologies to manage trades, from their initial execution through to final settlement. Hedging against market price fluctuations, credit risk management and obtaining a comprehensive view of the numerous risks affecting the trading portfolio have all become key priorities.
These factors are affecting the market dynamics in the sense that larger players are increasingly focusing on regulatory matters. Smaller players in the industry are, on the other hand, endevouring to find a niche customer base and be able to leverage competitive advantages in addressing similar issues such as know your customer or anti-money laundering procedures.
This may be creating a window of opportunity for Malta by attracting small- to medium-sized commodity traders in search of an alternative jurisdiction to base operations. Additionally, Malta can seek to attract international traders aiming to centralise trading and supply chain management, thereby benefitting from efficiencies and potential cost savings through rationalisation.
Today, commodity trading is undertaken through a number of strategic hubs around the globe such as Switzerland, Singapore, The Netherlands, Dubai, London, Hong Kong and Houston. This is further facilitated by the fact that certain commodity trade can be location independent, and need not take place at the country exporting the commodity. Until now, Malta’s geographical position has enabled some degree of commodity trading and commodity trade finance. However, certain limitations in the legislative framework affecting the business, coupled with only a small network of commodity trade participants, are hampering additional growth opportunities.
Nevertheless, there are a number of initiatives that Malta could consider in order to further develop growth potential in our commodity trade industry:
We need a concerted effort to attract commodity brokers and banks focused on commodity trade finance through measures such as trade missions, active promotion of Malta’s trade finance services and road shows with key stakeholders.
Local legislation underpinning commodity trading needs an extensive and thorough review to create a framework aligned with internationally-accepted regulations on commodity trading. Foreign legal expertise may be needed to achieve this.
The enactment of a Trade Finance Act which supercedes other regulations and streamlines the legislative process, such as the one in Singapore, is to be seriously considered.
Malta needs a framework enabling the issue of warehouse certificates and receipts that can provide a secure title to stored goods, and which can be used by banks to reduce risk when providing stock financing.
Consideration should be given to changing Maltese civil law to recognise security which is created prior to there being an underlying indebtedness or commitment by a bank or security receiver. This is not possible with the existing framework and puts the local industry at a disadvantage with respect to other hubs.
The litigation process in Malta needs to be improved to allow banks to take possession of a security in an efficient and timely manner.
A licensing regime for commodity traders and brokers should be contemplated.
Consideration should be given to extending the benefits of the Highly Qualified Persons regime to attract global talent to Malta.
Many of the sector’s leading jurisdictions are based out of the EU. Due importance should therefore be given to providing fast-track visa schemes for third country nationals and automatic visas for those transferring from a company branch in another EU location if they have already worked there for a period of time, to ensure that Maltese traders can recruit the best in the business
Malta’s ability to achieve traction in the commodity trading sector requires a common policy consensus, a detailed gap analysis to understand what growth triggers are needed and a strategy to tap into the market and reach potential stakeholders with an attractive offering.
This could have several long-term benefits, making the proposition worth considering as a potential sector that could help herald the next stage of Malta’s economic vision.
Gilbert Guillaumier is an executive director at EY Malta.