Financial firms enter commodities arena

In the past few years a number of financial institutions have moved into the commodities finance arena, where commodities producers receive funding from banks that secure their loans against future output. But this can be a risky and time-consuming business. Sarfraz Thind reports

Commodities financing can be a risky business. Ask Merrill Lynch. The US dealer’s financing venture in an Indonesian coal mine in 2007 (see box, page 34) would represent a good Harvard Business School case study on how not to go about doing things in this market, says one head of commodities at a major bank. In truth, the activity is one of the most intensive risk-assessment businesses in commodities. “You need to take into account sovereign risk, the financial wherewithal of the company and