Physical commodity trading sits at the intersection of logistics, price risk, and credit risk. Traders do not move numbers on a screen, they move barrels, tons, and bags across borders, with real exposure to price moves, counterparty failure, and operational failure. The business only works when trading, hedging, and trade finance are aligned with clear risk limits and disciplined documentation.
This guide sets out how physical commodity trading works in practice, how pre financing structures support the supply chain, and how hedging tools and structured trade finance facilities combine to manage risk across the trade cycle.
While each commodity has its own quirks, most trading books group them into a few core buckets.
Energy trading is heavily shaped by benchmarks, quality differentials, freight markets, and geopolitical risk.
Many of these flows reference exchange prices, with premiums and discounts based on quality, location, and payment terms.
Seasonality, weather, and phytosanitary rules drive supply and quality risk, especially in emerging market origination.
These often require tight control of product specs, storage, and end buyer credit risk.
At a basic level, a trader sources product from one party and sells to another, taking a spread between purchase and sale. In reality, the trader manages:
The trade rarely becomes financeable without clear contracts, Incoterms, quality specifications, and delivery windows. Banks and funds want to see how title moves, how payment is triggered, and where collateral is controlled.
Pre financing describes structures where liquidity reaches the supply chain before the final buyer pays. It can sit at several points:
The lender looks at the underlying commodity, price volatility, liquidity, and the quality of the counterparties. Loan to value levels are set conservatively and adjusted for concentration limits, country risk, and tenor.
| Structure | Typical purpose | Key collateral focus |
|---|---|---|
| Pre export finance | Advance cash to a producer ahead of shipment. | Offtake contract, export documents, and sometimes reserves or stock. |
| Inventory finance | Fund stock in storage while waiting for sale or shipment. | Warehouse receipts, collateral managers, and control over release. |
| Borrowing base facility | Provide a revolving line to a trader backed by a pool of assets. | Eligible inventory and receivables, regularly tested and reported. |
A physical trader that leaves every position unhedged is speculating outright on price. Most professional desks prefer to lock in a commercial margin and use exchange or over the counter instruments to stabilise earnings.
The main challenge is basis risk. The hedge references a standard grade, location, and delivery period. The physical cargo may differ on all three. Risk teams therefore track basis, not just flat price, and set position limits accordingly.
Lenders and trade finance funds look at hedging discipline closely. A strong hedging policy with clear limits and daily reporting often makes the difference between a financeable and an unfinanceable book.
Structured trade finance links the financial flows to the physical flows. Instead of lending against the corporate balance sheet alone, the lender builds a structure around title, documents, and collateral control. Common tools include:
These tools reduce counterparty and country risk for both traders and producers, and help align payment terms along the chain.
The core idea is simple. If the borrower defaults, the finance provider has a clear path to enforce against liquid collateral or collection flows.
Both trading houses and their finance providers focus on a similar set of questions:
Structured trade finance works when these foundations are in place. Without them, pricing gets defensive or credit appetite disappears altogether.
Financely works with traders, producers, and industrial buyers to design trade finance structures that reflect real physical flows, not just spreadsheets. Facilities are built around contracts, documents, and risk controls that credit teams recognise.
If you manage or plan to build a physical commodity book and need external capital, you can request structured trade finance support through our platform.
Request Trade Finance SupportPhysical commodity trading is the business of buying, moving, and selling real goods such as oil, metals, and grains. Traders source from producers or other traders, arrange transport and storage, hedge price exposure, and sell to refiners, industrials, or utilities. The margin reflects logistics, risk management, and capital access, not just a price guess.
In a pre export finance, a lender advances funds to a producer backed by an offtake contract and export documents. Repayment comes from the export proceeds. The lender usually takes security over receivables, export contracts, and sometimes reserves or stock. Pricing and loan to value levels depend on credit quality, jurisdiction, and commodity volatility.
Hedging separates commercial margin from market noise. If a trader agrees a spread between purchase and sale, hedging locks in the economics, subject to basis risk and operational risk. Without hedging, one bad price move can wipe out multiple trades. Lenders and trade finance funds usually require clear hedging policies as a condition for significant credit lines.
Structured trade finance refers to facilities where the lender ties its exposure to specific flows of goods and cash. Instead of lending solely against the trader’s balance sheet, the bank or fund takes security over inventory, receivables, and documentary flows, and uses tools such as letters of credit, collateral management, and borrowing base tests to manage risk.
Large traders dominate the space, but smaller and mid sized houses can also secure structured trade finance when they can show clear contracts, credible risk management, and audit friendly reporting. The challenge is often less about size and more about discipline and transparency in how trades are booked and monitored.
A corporate loan generally looks at the borrower’s balance sheet and cash flows at a group level. Trade finance looks at specific transactions, goods, and receivables, and is repaid from those defined flows. The difference is most obvious in commodity structures where title, storage, and hedging are part of the credit analysis.
Disclaimer: This page is for general information only and does not constitute legal, tax, investment, or regulatory advice. Commodity trading and trade finance involve price, credit, operational, legal, and country risk. Suitability and structure depend on the specific counterparties, contracts, and jurisdictions involved. Financely is not a bank or lender. Any facility referenced on this page is provided by regulated institutions under their own licences, approvals, and documentation, subject to eligibility, KYC, AML, sanctions screening, and credit decisions.
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