How China’s steel sector is streamlining and simplifying trade finance with Contour
As the world’s largest exporter of steel, China exports this crucial material that is used across various industries like manufacturing and transportation. Trade finance is an important part of delivering steel to customers around the world, but the industry still relies on outdated processes to complete transactions.
Future forward: Digitising the steel sector
China is the world’s largest exporter of steel. In 2020, the country exported just under 51.4 billion metric tons of its production, according to Statista. Its steel is exported globally, to meet the growing demand from industries like autos, consumer electronics and building materials.
Iron ore is one of the key raw materials that is required for steel to be produced. For that, China’s steel companies typically turn to Australia and Brazil, the world’s top two iron ore producing countries, whose raw materials are essential to the manufacture of steel.
For the raw material to cross borders, the Letter of Credit (LC) is one of the most important trade finance instruments, as it allows trading partners with limited trust to transact. However, much of the industry is still stuck in an inefficient way of communicating with counterparties and relying on paper-based documents that are couriered across continents.
Genesis M and Toptip Holding are two players who are heavily involved in the trade of steel. Both are subsidiaries of China’s Zenith Steel Group, which is ranked among the top 500 private enterprises in China. A manufacturer and distributor of steel, Zenith has an annual steel production capacity of 11.8 million tons.
Toptip’s digital transformation
Toptip Holding is an international trading company based in Singapore that focusses on steel-related products like iron ore, scrap steel and coking coal.
Before Toptip started using Contour’s blockchain-based network to digitise their LC application, it took two to three rounds of back-and-forth between counterparties to get the application underway. From the exporter to the importer to both parties’ banks, submitting and receiving feedback during the application process was done manually.
The biggest benefit of joining Contour’s blockchain-based network is direct and transparent communication with their supplier and banks on one network.
“With all our counterparties on Contour’s network, the LC application process is done with the click of a button. We can also view everyone’s comments in the application process which has improved the efficiency of submitting a LC,” said Ivy Zhong, Head of Operations at Toptip Holding.
Toptip’s first transaction in 2021 involved their bank, DBS, and iron ore producer, Vale. In a faster and more efficient process, Zhong estimated at least two to three days of time and working capital saved. The company has continued using Contour’s platform since to digitise its LC application process.
“We recognise that digitisation is a powerful enabler to simplify the highly complex nature of trade finance, especially for processes relating to letters of credit. Digitising trade processes is also an increasingly relevant and heightened priority for corporates to survive and thrive in the new normal and will form an integral component for resilient trade ecosystems of the future,” said Sriram Muthukrishnan, Group Head of Trade Product Management at DBS Bank.
Genesis M: Going digital
It was a similar story when Genesis M decided to embark on its digital journey in April this year.
By issuing its first fully digital LC on Contour, the company was able to receive the required raw materials for production much faster.
“Going digital helped us to achieve a shorter production turnaround time, and we managed to reduce our operational costs by at least 10 to 15 percent,” said a Genesis M spokesperson.
ING Hong Kong was the issuing bank for this transaction. Previous pilots run at the bank showed that the time spent on processing LCs was cut from the usual five to 10 days to under 24 hours.
“The pandemic and recent geopolitical events have caused, and continue to cause, colossal disruptions to global supply chains and trade logistics. By digitalising the letter of credit process, we hope the cost efficiency and time savings will help our clients manage the challenge a little more smoothly,” said Cindy Toh, Head of Commodities, Food and Agriculture for North Asia at ING.
She added: “World trade in 2021 was estimated to be around US$28.5 trillion. We believe around half of the volume was conducted by LCs; that means the potential cost savings we’re looking at is at least US$2.85 trillion.”
Digitising a crucial part of the trade finance process helps China’s steel companies streamline and simplify their operational procedures, here are the three takeaways.
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