Precious metals house of the year, Asia: BNP Paribas

Energy Risk Asia Awards 2019: Gaining Shanghai Gold Exchange licence a stand-out achievement for French bank

Audrey Safra, BNP Paribas

This year’s rally in the gold price – a 24% rise between January and August when it touched $1,550 an ounce (oz)  –  vindicated BNP Paribas’s (BNPP) commitment to its commodity trading operation in China. In October, it was awarded a licence to join the main board of the Shanghai Gold Exchange (SGE) – the first such licence awarded for several years.

“It’s a great success for us – the result of our investment in, and dedication to, China’s gold market over the past three years,” says Audrey Safra, the Singapore-based head of BNPP Global Markets’ commodities derivatives for Asia-Pacific (Apac). “We’ve kept investing in China and developing the platform, and now we hope to start accessing SGE’s spot contracts and develop the derivatives offering around SGE gold in the near future.”

That investment has also borne fruit in BNPP’s broader commodity derivatives business in China, where revenues are up 80% year on year – despite the downward pressures exerted on China’s economy by the simmering trade war with the US.

“We’ve had quite a marketing effort … and have been successful in bringing new clients to the franchise. Our ability to market-make in both China’s onshore and offshore markets makes us unique,” Safra adds.

The bank has pivoted its precious metals business to Asia in recent years. Unlike most of its competitors, its primary market-maker is based in Singapore, after moving from New York. “We are one of the few banks able to provide European-sized liquidity in the Asian time zone,” Safra says.

The bank says this has proved invaluable for both its corporate and institutional clients in the region, in a year that has seen extreme volatility due to movements in US rates as well as due to metal shortages, such as the one in palladium. Driven by soaring use in catalytic converters, that metal has risen to record highs above $1,700/oz, compared with an average inflation-adjusted price since 1994 of around $500/oz.

Aside from providing liquidity to clients in the region, part of BNPP’s appeal, Safra says, is its ability to combine financing and hedging. “We have a very large financing franchise, and a dedicated team in the region in the natural resources area. We can offer a one-stop-shop for clients for both financing and hedging.”

Specifically, she says, BNPP can provide risk management solutions to smaller gold producers who would typically find it difficult to access liquidity from the banking sector.

“When you put the financing in place, having access to a better security package and credit enhancement means we can provide credit lines to allow them to deal more actively with their market risk exposure,” Safra explains. “By sharing the security package, and working very closely with our financing colleagues, we can deploy greater credit appetite to provide derivatives to these types of client,” she says.

Conversely, by enabling the producer to hedge against a fall in the underlying commodity price, BNPP’s corporate financiers can gain comfort that the producer will be able to generate the cashflows to service the debt even in adverse market conditions.

While BNPP prefers to combine financing and hedging, Safra adds that the bank does sometimes provide hedging to smaller, riskier producers who are not currently seeking financing – which can pave the way for financing down the road. “When the time comes for them to finance, once we have put credit lines in place on the hedging side, it means we have a good degree of confidence in the project and the junior miner, and its ability to perform over time.”

The bank is also pushing into emerging precious metals markets. “We’re seeing good traction in rhodium,” says Safra, noting that the metal’s use in catalytic convertors is leading to increased demand.

“This is leading to additional hedging needs from both producers and consumers, but the challenge is that there is no central market or exchange to provide a natural aggregation of liquidity,” says Nishan Hegde, Apac commodity sales for BNP Paribas Global Markets. “This challenge is compounded when clients have longer-dated hedging needs.”

However, BNPP’s large client franchise across Europe and Asia enables the firm to act “as a central repository of liquidity”. The bank offers a cash-settled rhodium product, with the forward book managed by an Asian-based trader.

“We aim to remain on the forefront of innovation in terms of trading capability,” says Safra.