Awe: Commodities are Natural Hedge to Inflation

In this interview, the Head, Structured Trade and Commodity Finance, at The Alternative Bank, Mr. Gbenga Awe, spoke extensively on the commodities market, its potential, use as hedge against inflation as well as other industry issues. Nume Ekeghe presents excepts:

Introduce yourself and what you do at Alternative Bank?

My name is Gbenga Awe, and I am the group head of structured and commodity finance at Alternative Bank. The group comprises four verticals, including the mining sector, structured trade, trade finance, agric finance, and market and business intelligence

 How big is the opportunity in commodity markets compared to money markets?

The opportunity is substantial. Commodity markets are influenced by geopolitics, which plays a crucial role globally. Recent events, such as Russia’s invasion of Ukraine, have demonstrated the impact on commodity prices worldwide.

 In Nigeria, due to the informal nature of the sector, quantifying the market size is challenging. However, with data from the Nigeria Bureau of Statistics, an estimate of the commodity market size can be derived.

While money market figures are readily available through indices like the All-Share Index, the robustness of the commodity market doesn’t solely rely on easy quantification. Efforts to formalize the sector, including the establishment of commodity exchanges like the Lagos Commodities and Futures Exchange, aim to provide more transparency and data for accurate market assessment.

 With the recent hike in MPR, investors usually tilt towards safer instruments and if the commodities markets and all these various exchanges are coming up, what will be the incentive to come there when there is a safer haven in high interest rates?

 Long before the hike in MPR, investors have been flooding into commodity markets. Commodities bring to the table, a natural hedge against inflation. So, we have seen people entering the commodity markets for the past two years now. It has been growing.

At the apex of it, we have few players with deep pockets. So, what we have seen is over time, for commodities that have export value, the likes of soya beans, the likes of sesame, and the likes of cocoa,  cashew, and Gold which is top on the chain when it comes to natural hedge against inflation.  We also have our gold coins called AltCoin.

On commodities, Cocoa is currently doing about 10 million per ton and we were in Akure in January, then cocoa was about 5.5 million. So, you can see the effect of inflation on the price of cocoa. Even in the international market, the price of cocoa butter which was about $9,000 per ton in January is trending around $12,000. Now, so the effect of inflation within the country and the hike global commodity market is putting a lot of pressure on the commodity markets.

Sesame, three years ago, was doing about N750,000 to N850,000, currently, sesame is doing close to N2 million per ton because commodities is geopolitics and geopolitics rule the world and now there are imported pressures from our neighboring countries.

 If we can focus on gold because gold seems to be a major commodity that we have and it’s something that we are not capitalising on right now. I understand that Alternative Bank has minted gold, can you speak on that, why gold and what are the opportunities for investors?

When we launched the Alternative Bank,  by the way, it has been operational for close to a decade; we just decided to become a stand-alone last year; thanks to regulatory agencies that granted us approval. The launch was tagged ‘gold standard’ because of the exceptional nature of the bank.

 We took a decision to be able to democratise that space to create investment, both for retail investors and for big boys. So, we source our gold within the country.  We have adopted responsible sourcing because when it comes to gold, you need to check all the boxes for responsible sourcing. We source our gold in line with responsible sourcing and we decided to work with partners abroad because we currently don’t have any refinery in Nigeria. If you are to sell gold, we should sell gold in line with international best practices.

We have our partners abroad, we took the gold there, refined and now minted it into coins of 50 grams. And we brought it back into the country having paid appropriate royalties. 

 As at the time we started business, a kg of gold was doing N37 million, a kg of gold now is over N100 million and as I mentioned, gold is a natural hedge against inflation. So, what we’ve done for retail investors it may be difficult to afford the value of the 50 grams of gold which is the size of a coin. The coin is 99.9 nice that is 24 karat so we came up with the idea of tokenization for retail customers to get a share of a coin.

Presently the return on savings today is less than inflation.

So, in terms of the real value of money we are actually worse off.  In an inflationary environment saving suffers. So, what we’ve done is we’ve created the opportunity for retail investors to put in money over time, they enjoy the upside that comes with the value of gold. The gold were bought at different intervals.  At a point about N35 million per kg, it went up to N55 million and now, a kg of gold is way above N100 million.

We are also in a position to work with the federal government and the necessary ministry to develop a framework for sourcing precious metals in a responsible way.

With the fluctuations in exchange rates, how would this affect the price of gold coin in the future?

 Fluctuation in the exchange rate will not only affect gold; it affects all commodities, especially as most commodities are internationally traded. All it takes is to go to Bloomberg or any forum, and you will get the price there.

When you want to go into investment, you must consult your investment or financial adviser because you need to know, and you should be able to do a projection of where this price will be.

But for us at Alternative Bank, we don’t speculate. We trade spots, and what we do, especially for gold, is because, in the non-interest banking space, gold is actually treated like money because when you look at it, it is more or less money.

We support trading in the spot, so you buy and sell. What we advise if you want to go into it is you should know your exit, then you should be clear with your objectives.

 What is the cost of each gold coin and for retail customers, how is this available to retail customers?

The world is going digital now, our app Altinvest is available on Android and App Store. Just download the app, it is user-friendly, you follow through on the onboarding program and it is easy to transact.

 How much is gold coin?

 It mirrors what is available in the market. It is transparent as gold is more or less like currency. The price is not stagnant, it changes.

 For customers who can afford to buy a gold coin, can they access to the physical coin?

 You can access it. I also mentioned the concept of tokenization; if it’s tokenization you can’t take it gold because you’re buying a fraction of the gold.

Then you can also buy and we can help to keep it because you know gold is a high-value item so we also offer custodian services, and you can store it with us. We are the bankers of gold to Lagos commodities and futures exchange, at a point in time they work with us to launch what is called Eko gold coin. So, we provide custody services for the gold.

What are the commodities are you trading at Alternative Bank?

 Currently, we have stocks of soybeans and sesame, and we will be venturing into cocoa derivatives. At Alternative Bank, we emphasize value addition. While some people export raw cocoa, the major processors are our clients. Therefore, we also engage in trading derivatives, including cocoa powder, cocoa cake, and cocoa butter. Among these, cocoa butter is the most expensive and is traded in multiples of cocoa cakes.

We trade sesame and soybeans, and the stock we currently hold for soybeans is close to 5000 metric tons. We operate aggregation centers and warehouses, and in addition to the services we provide, we engage in our own direct trading.

I am going to have to take you back to gold again. You mentioned you are  able to get the raw materials from here and then you export it. Are there any plans to actually mint them in Nigeria, are there talks with any investors to come and set up shop here so you don’t have to export because it is a similar situation with crude oil where we have to it take out to refine

 We have a partner that is talking to us and the discussion is in advance stage to have a gold refinery and is right at the top of our agenda. Because when you look at it really it is the problem across Africa, the only refinery that is LBMA certified is the one in South Africa, we have one in Zimbabwe is not LMBA, in Ghana, Mali and many more not being certified.

What we are saying is, let us even have one in Nigeria, so that we can get a modicum of refinery up to starting level.   It can be triple 9, it can be  99.95 but the value addition which is called beneficiation is happening on our soil. And as I mentioned, discussion is ongoing to make that happen in the shortest possible time.

 What do you recommend as a way forward for the sector? What will be your recommendation to the federal government to move this sector forward?

 It is important to commit to certain frameworks, and a certain standard. We are willing to partner with governments both at national and sub-national levels but you know mining is on the exclusive list. So, the bulk of it is to be done at the federal level. But we have some states that have gotten their licenses to mine.

 If you want to strengthen your currency and you have reserve underneath it you can monetize and financialise commodities.

The government needs to be watchful; they need to constantly monitor the investment environment to know if are we lagging in terms of competitiveness, and what can we do in the sector to drive necessary investment into it.

Lithium is also a commodity that everybody’s talking about now, as a bank, we are also doing a lot in that space. But what we are doing is that the era of just breaking rock and taking it out is gone. No matter what there must be a form of beneficiation and that is also a language we are getting from the Federal Ministry of Mines that beneficiation is key through value addition. We have gotten it wrong for a long time in the crude space, we should not replicate that in the solid mineral sector that is just coming up.