Base metals house of the year: BNP Paribas

Energy Risk Awards 2019: Bank provides innovative hedges in volatile and niche markets across the metals complex

Mikko Rusi, BNP Paribas

BNP Paribas

BNP Paribas’ commodities business has tilted towards China’s massive onshore markets in recent years and this didn’t stop in 2018. But, over the past 12 months, the bank has also demonstrated the depth of its global franchise, with a significant expansion of its Europe, Middle East and Africa (Emea) ferrous business, as well as deft navigation of volatility in the aluminium market, to retain its base metals house of the year award.

“Being probably the largest bank in Europe involves having a franchise that enables the firm to offset price risk from its clients, even in some of the most niche areas of the base metals market,” says Mikko Rusi, Singapore-based global head of metals and head of foreign exchange, local markets and commodity derivatives for Asia-Pacific.

This depth of franchise was key to BNPP’s expansion of its ferrous metals business last year, with particular success in the LME steel scrap and rebar contracts. BNPP is a liquidity provider in the contracts, which have seen a ten-fold increase in growth since their launch in 2015, according to Davide Collini, head of metals and agricultural sales for Emea.

With an interested European client base and with one eye on the level of ferrous market activity onshore in China, BNPP saw an opportunity in 2018, and doubled the number of its ferrous metals traders in Europe.

Collini attributes the firm’s success in the scrap sector to its 50% ownership of Turkish lender, Türk Ekonomi Bankasi. The scrap market is an esoteric one with metal sent all over the world to be processed in Turkey, thereby benchmarking the LME scrap market to prices in Istanbul. So in November, when a European utility needed to hedge scrap steel linked to a demolition contract for one of their plants, the bank was able to step in.

“They had significant exposure to the LME steel scrap price in that they were receiving a price indexed to this contract,” says Collini. “So without the ability to hedge, they would have received a reduced revenue stream.”

BNPP was able to put in a credit line within 24 hours enabling it to hedge the utility’s positions. It resulted in the firm accounting for more than 30% of the end-of-month open interest on the LME rebar contract in November, according to Collini.

[BNP Paribas has] a franchise that enables the firm to offset price risk from its clients, even in some of the most niche areas of the base metals market

Mikko Rusi, BNP Paribas

The nexus of the scrap trade may be Europe, but Rusi points to the heavy trading of ferrous-linked futures contracts onshore in China as another incentive to expand into this area. And China continues to act as a major centre of gravity for BNPP, which has both an onshore regulated bank – BNP Paribas China – and a wholly foreign-owned enterprise, BNP Commodities Trading Shanghai. 

In 2017, this enabled the firm to make full use of the opening of the Dalian Futures Exchange to international investors. Last year, BNPP went one step further and is now providing over-the-counter contracts to international clients that allow them to access onshore prices, such as the Shanghai Futures Exchange (SHFE), which are currently limited to Chinese-listed entities.

Onshore Chinese banks, such as BNPP China, are not allowed to trade futures contracts or physical metals, but they can have a licence to trade OTC contracts, which can then be linked to metals.

“Accessing futures in China is difficult, but what we are doing today for international clients is to offer the same risk profile as the SHFE, via an OTC instrument to offshore clients, and that is a new development in the past year,” Rusi says.

The bank then uses its extensive connections with onshore Chinese firms and its wholly foreign-owned enterprise to manage the risks it is exposed to from these contracts, he adds.

Another major theme for BNPP last year was helping clients navigate the extreme volatility in the aluminium market. Prices whipsawed following US sanctions on aluminium giant Rusal, a change to the LME warrant rules on the metal and production issues at Norsk Hydro’s Alunorte plant in Brazil. 

While aluminium prices are benchmarked globally at the LME, there are significant regional premiums. In one notable trade, BNPP was able to finance a portion of the premium prices of aluminium being stored in the US Midwest by a long-standing client. This was despite a highly uncertain market and spiking aluminium premiums in the region. The lender said that few other banks are able to conduct aluminium premium financing and its ability to do so enabled the trading house client to hold three times its normal level of inventory of the metal.