At the end of last year, several European banks announced that they would be scaling back their commodities trading and financing activities as a result of the credit crunch.

This means a lack of letters of credit (L/C) for traders and likely rises in the price of certain commodities.

Refining pressures

One of the latest traders to bemoan the lack of financing is European refiner, Petroplus Holdings, which owns five refineries.

The Swiss-based group surprised markets when it disclosed that lenders had frozen a US$1 billion credit facility.

Price hikes

Petroplus, which described the facility as "critical to allow the company's operating units to meet their obligations when due" is expected to cut production of refined products.

Analysts predict that other refiners may follow suit and that shorter supply of refined products will push prices up.

Deep cuts

Amongst banks to say they are trimming their commodities trading arms are Société Générale, which has closed its US energy trading unit, and BNP Paribas.

But the deepest cut in commodities trading so far is probably at Credit Agricole, which has said that it will not only stop trading commodities, but also substantially stop financing commodity trades.

Banking analysts expect the trend of cutting back on commodities trading and financing to spread to yet more banks, with the inevitable consequence that L/Cs will become harder to come by.

Global outlook

The bleak outlook for commodity traders is not confined to Europe.

Major US trader of many commodities, Cargill, is axing more than 100 jobs worldwide from its energy, transportation and metals operations.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.