A $2bn falling-out in the global commodities trade
International commodity trading houses were long underestimated as serious players in finance, in part because they are complex and somewhat mysterious, including to financial regulators and the media.
That remains true even though the largest groups are powerful and profitable on the scale of mainstream financial institutions and deeply entwined with banks, from which they borrow heavily to finance their activities.
Now that insular realm is colliding with the relatively obscure world of trade credit in a $2bn legal battle, bringing groups that span steel mills and high finance into public view.
The FT has a deep dive into how a longtime business relationship between the Swiss commodities trading giant Glencore and the embattled iron ore trader Radiant World devolved into a bitter multibillion-dollar legal battle.
The groups began trading iron ore together around 2008, according to a $2bn legal claim Radiant filed in Singapore against three Glencore entities this week. Then in 2017 they struck a deal that would become costly.
That year a Glencore manager, Radiant founder Pinkesh Nahar and another trader devised an arrangement where Radiant and the affiliated companies would place derivatives trades with Glencore acting as the counterparty. Losses would be rolled forward rather than closed out. And critically, the traders would not be subject to the collateral requirements typical of such a trade.
This led to trouble in the summer of 2021 when iron ore prices climbed to record highs. Radiant and its affiliates had amassed large short positions on iron ore, which crystallised into losses. Glencore demanded repayment of $1.1bn, the lawsuit alleges.
That might’ve been Radiant’s downfall, but Nahar struck a deal with senior Glencore executives and the ensuing years marked a period of rapid growth. Under the deal, the commodities giant would continue working with Radiant, help it raise money and potentially buy a stake in the business that would help propel it to a $5bn valuation in five years, according to the lawsuit. In return, Radiant and its affiliates would slowly pay down the $1.1bn.
But that deal too went sour as Radiant came under pressure over alleged inconsistencies in the documentation underpinning its trades.
Radiant has alleged that any inconsistencies come down to an unusual arrangement with Glencore, which it claims sought to conceal the “true nature” of its relationship while under monitoring by the US Department of Justice as part of a guilty plea to bribery charges by the Anglo-Swiss group in 2022.
Glencore is now among the chorus of banks and financial institutions that allege Radiant used false invoices to secure funding. Glencore said in July that it had cut Radiant off after almost two decades. Documents disclosed by Radiant suggest Glencore’s exposure stands at $480mn, the FT reported this month.
Nahar has claimed that Radiant remains solvent with more than $1bn of assets on its balance sheet, most of which are receivables. But documents related to a freezing order against Radiant obtained in London’s High Court paint a bleaker picture — there is $10,000 of cash left.
About a decade ago the financial world finally began taking commodity traders such as Glencore, Vitol and Trafigura seriously. Now a series of recent large collapses in trade finance may force lenders to pay closer attention to this once obscure corner of the market.