"Margin Calls and Trade Financing Hell" for commodity trading firms

Higher volatility is usually a good environment for commodity trading firms, but that has not been the case for firms that are involved with industrial metals and oil trading in a sanctioned commodity world. Given the size of Russian commodity interests, firms have been shocked with margin shortfalls, shortages of short-term trade financing and letters of credit, basis disruptions, and logistical nightmares from sanctions. Funding becomes a problem when commodity prices spike because the cost of any cargo is higher. Similarly, commodity cash prices that spike and are hedged against futures face the classic problem of being long physicals but having to meet margin calls in cash. Cash shortfalls must be financed, yet a cash futures mismatch reduces the leverage available for these firms.

The bonds for large commodity oil and metals trading firms that have sizable Russian business have fallen significantly given questions on whether firms can meet their margin requirements in a volatility environment coupled with high prices. Trafigura 5-year bonds down 20%; Gunvor bonds 4-year down 30% as of the end of last week. 

Bunge, ADM, Wilmar international, Olam International as public agricultural firms are all showing positive equity returns for year, but they have not been subject to the same sanction issues and have in many cases more diversified businesses outside of metals and oil.

There have been whispers that some firms may need bailouts or at least capital infusions. The events of the last month focus on the problems of leverage, financing shortfalls, and the simple issue that centralized exchange trading and clearing are not a solution to large price shocks.