What to Know About Structured Commodity Finance for Base Metals

Last Updated: May 2024

Table of Contents

What is structured commodity finance?

To gain a deeper understanding of structured commodity finance, dive into its definition, workings, and benefits. Discover how this financing solution can help you manage your base metal investments efficiently and effectively. Learn how structured commodity finance works, and how it can provide a range of benefits to investors in the form of risk mitigation, cash flow management, and more.

Definition of structured commodity finance

Structured commodity finance is a financial technique that involves the structuring and financing of physical commodities and their underlying assets. This financial instrument aims to make it easier for commodity producers, traders, and distributors to manage risks associated with commodity trade.

By using structured commodity finance, companies can secure loans or credit facilities from banks and financial institutions that are backed by their inventory or future production output. This allows them to obtain funds at better rates and terms than they would get using traditional loans. In addition, structured commodity finance provides more flexibility in cash flow management, mitigates price risks associated with commodity movements, and enhances supply chain efficiency.

One unique feature of structured commodity finance is the use of collateral management agreements (CMAs), which require borrowers to pledge their physically held commodities as collateral with a third-party custodian. The CMA ensures that the lender has a lien on the pledged assets while also managing storage and transportation logistics.

A notable example of structured commodity finance took place when Glencore purchased Viterra in 2012. The acquisition was financed through bridge-to-bond financing where Glencore commissioned a consortium of banks for CAD 6.1 billion ($6 billion). Structured around specific pre-existing contracts between Viterra’s clients and Glencore’s trading team, this deal reflected the benefits of utilizing structured commodities finance for executed deals like these.

Structured commodity finance: where commodities get a makeover and become financial superstars.

How structured commodity finance works

In the complex world of commodity finance, an efficient system that simplifies trading and managing risks is essential. Here’s how to get started with Structured Commodity Finance (SCF):

How SCF Works
Definition Securing loans with physical commodities as collateral
Key Players Commodity Traders, Financial Institutions
Benefits Risk Management, Supply Chain Optimization
Types of Loans Pre-Export Financing, Warehouse Financing

One unique factor is that the borrower’s ability to repay the loan depends on the success of the commodity trade and not just their creditworthiness. With a wide range of financing options through various types of loans such as pre-export or warehouse financing, SCF offers businesses new ways to optimize their supply chains.

Looking to lower operating costs and obtain better pricing on raw materials? Consider exploring this innovative financial tool and reap its benefits. Don’t miss out on opportunities to improve your business’ finances with SCF. Structured commodity finance: because sometimes you just need a little structure in your life, even if it’s in your coffee beans.

Benefits of structured commodity finance

Structured commodity finance provides several advantages to both lenders and borrowers. This financing model offers customized solutions for commodity producers and traders to mitigate their risks, streamline their processes, and improve their cash flow.

  • Structured commodity finance enables borrowers to secure cost-effective financing with flexible repayment terms that align with their business cycle.
  • Borrowers can leverage off-balance sheet financing by using the underlying commodity as collateral.
  • This type of financing mitigates risk for lenders by creating structures that match the specific needs of each borrower.
  • The collateralized nature provides security and reduces credit risk for both the lender and borrower.
  • With investment-grade ratings, structured commodity finance often comes at a lower cost of borrowing than other short-term loans.
  • Borrowers also receive added benefits in risk management by participating in hedging activities through swaps or derivatives.

Structured commodity finance is an intricate process that requires expert knowledge to create tailor-made solutions. Borrowers’ requirements are put under considerations with industry trends studied closely in tandem. Any nuances or caveats need meticulous attention depending on project scope and scale.

When a global oil major faced the challenge of raising funds for an energy development project costing over $10 billion, it embraced this type of financing. The result was a massive success: thanks to structured commodity finance, credit rating agencies recognized the transaction as a secure source of funds, which resulted in a more significant investment from stakeholders worldwide.

Don’t let the term ‘base metals’ fool you, it’s not just a fancy name for boring commodities like copper and zinc.

Base metals in structured commodity finance

To get a deeper understanding of base metals in structured commodity finance, explore the importance of base metals, what they are, and the types of base metals commonly used within structured commodity finance. Whether you are new to structured commodity finance or looking to gain a more nuanced insight, examining these sub-sections will provide you with a comprehensive insight into investing in base metals.

What are base metals?

Base metals refer to a group of metallic elements that are widely used in industrial applications due to their unique properties. They include copper, zinc, nickel, lead, tin and aluminum among others. These metals are produced either through mining or recycling processes and they are traded on commodity exchanges around the world.

Investors and traders can use structured commodity finance to participate in the trading of base metals both as physical or cash-settled contracts. This strategy involves leveraging structured debt products that rely on the commodity as collateral. The objective of using this technique is to reduce risk by offsetting price fluctuations against other instruments.

It is worth noting that base metal prices are highly dependent on supply and demand dynamics both regionally and globally. To maximize profits, investors need to stay up-to-date with market trends as these can affect prices significantly.

To make the most out of investing in base metals through structured commodity finance, it is advisable to employ fundamental analysis techniques such as technical indicators or chart patterns that help identify key market trends and make informed decisions based on these insights. Additionally, it is important to work with reputable brokers who provide accurate data and analysis tools for easier decision-making.

Why settle for stocks when you can invest in commodities made of metal? Base metals: your portfolio’s tough love.

Importance of base metals in structured commodity finance

Base metals are an integral part of structured commodity finance. The significance of these metals lies in their widespread use in industries such as construction, transportation, and manufacturing. Financing deals that involve base metals as collateral provide a low risk-high return opportunity for investors.

In addition to this, the market demand for base metals is constantly on the rise due to rapid industrialization across the developing nations. This has led to stable pricing trends for these metals and thus, they make an attractive option for lenders and borrowers alike.

It is crucial to note that different types of base metals have varying levels of importance in structured commodity finance deals. For instance, copper is considered a critical metal due to its extensive application in various sectors like electronics and construction. On the other hand, zinc and lead are more suitable for long-term financing arrangements due to their inherent characteristics.

Pro Tip: Conducting thorough research on the pricing trends and market outlook for different base metals can help enhance investment decisions in structured commodity finance deals involving these metals.

Who knew base metals could be so exciting? Copper, zinc, and nickel are like the Avengers of structured commodity finance.

Types of base metals used in structured commodity finance

Structured commodity finance includes financing for base metals used in various industries. These metals are crucial raw materials that help in the production of automobiles, electronics, and other goods. The following table lists the different types of base metals used in structured commodity finance.

Metal Usage Important Countries of Production
Copper Electronics, Construction Chile, Peru, China
Aluminum Packaging, Aerospace China, Russia, Canada
Zinc Galvanizing, Die Casting China, Peru, Australia
Nickel Stainless steel production, Batteries Indonesia, the Philippines, Russia

It’s important to note that copper is the most commonly used metal in structured commodity finance. Other lesser-used base metals include lead and tin. It’s worth understanding the specifics of any chosen metal to ensure successful financing.

When considering financing options for a base metal project, it’s essential to select a financing option that is tailored towards your specific needs. This could involve working with a financier who has experience handling similar projects or taking advantage of government initiatives aimed at promoting investment in mining projects.

In addition to this, investors should also consider diversification strategies to mitigate potential risks associated with fluctuations in global commodity prices.

Structured commodity finance for base metals – because sometimes it takes more than just a strong foundation to build your portfolio.

Structured commodity finance for base metals

To gain a comprehensive understanding of structured commodity finance for base metals, you need to know how it applies to base metals, the components involved, and the key players in the field. This section will provide you with a detailed insight into the world of structured commodity finance for base metals. Each sub-section, which covers how it applies to base metals, the components involved, and the key players, will give you a different perspective on the topic.

How structured commodity finance applies to base metals

Structured commodity finance is an efficient tool for trading base metals. The process of financing the trade of commodities against a set of future deliveries is widely used in the base metal industry due to its diverse benefits. To better understand how structured commodity finance applies to base metals, let’s explore its crucial components.

Component Explanation
Future Deliveries Commodity is traded against a set schedule of delivery
Collateral Required collateral by financiers
Risk-sharing Sharing risk between traders and financiers
Inspection & Arbitration Independent inspection and arbitration

It’s worth noting that structured commodity finance isn’t synonymous with traditional bank loans. It’s specifically designed to cater to the unique needs of trading base metals, which involve intricacies that require careful consideration.

Base metal traders need extensive financing solutions that allow them to operate freely in an ever-fluctuating market. The benefits structured commodity finance offers include hedging risks as well as providing vital liquidity.

Don’t miss out on the opportunity to maximize your profits with structured commodity finance for trading base metals now!

If you thought the components of a car engine were complex, wait till you hear about the components of structured commodity finance for base metals.

Components of structured commodity finance for base metals

Derived from the commodity market, structured finance for base metals comprises of multiple components. Common financing structures include pre-export finance, reserve-based lending and streaming. Each element varies in terms of payment mechanism, risk distribution, maturity period and tenor. A detailed overview of the essential building blocks is provided below.

Component Description
Collateral Management Control over inventory and quality assurance to mitigate repayment risk.
Hedging Use of derivatives to limit exposure to fluctuating metal prices.
Offtake Agreement Sale contract for delivered goods as a means of revenue generation.
Tenors The duration over which financing is extended determines interest rates and cash flows.

One unique feature of structured commodity finance for base metals is its ability to draw comfort from the intrinsic value of the underlying assets. Additionally, the complex financial instruments employed require a significant amount of due diligence before execution. Securing transparent information on reserves and pricing also poses its own set of challenges.

Given the diverse range of funding options available to borrowers in today’s market, investors who wish to acquire an edge must remain informed about what structured commodity finance can offer. Failing to keep up with developments in this area could result in missed opportunities that impact bottom lines.

Bankers, traders, and miners walk into a bar…and the structured commodity finance for base metals industry is born.

Key players in structured commodity finance for base metals

Structured finance attracts big names in commodities trading. The following table provides insights into key players in financing the transactions related to the base metals.

Company Name Key products/ services Clientele
BNP Paribas Structured lending, hedging and advisory services Mining companies, refineries and fabricators
Goldman Sachs Risk management, trading and structuring solutions Investment banks, hedge funds and corporates
Citi Working capital financing, risk management and commodity supply chain solutions Producers, traders and end-users

Apart from standard product offerings, some offbeat firms offer innovative solutions in structured finance for base metals.

Insiders reveal that one of the largest copper smelting companies once suffered a blow when it could not repay a sizable loan taken against its produced copper cathodes’ inventory after prices plummeted rapidly. Legally binding clauses were entertained to seize the seized inventory as collateral to release monies to the lender.

Hoping for a smooth ride in structured commodity finance for base metals is like hoping your umbrella will protect you from a hurricane.

Potential risks in structured commodity finance for base metals

To understand potential risks in structured commodity finance for base metals with market, political, and operational risks as solution, let’s review each sub-section. First, market risks involve fluctuation in commodity prices and supply and demand factors. Next, political risks can arise from regulatory and legal environments, government changes, and social issues. Finally, operational risks may come from mismanagement, fraud, or natural disasters. Knowing these risks can help mitigate any negative impacts on your investments.

Market risks

The uncertainties and unpredictability of the market pose significant risks in structured commodity finance for base metals. Fluctuations in metal prices, supply and demand imbalances due to global economic conditions or political unrest can adversely affect the investments. Furthermore, currency fluctuations can also affect the value of commodities, leading to a risk of losses for investors.

These risks are compounded by the fact that base metals have limited storage capacity and require specialized warehousing facilities, making it difficult to manage inventory levels. Counterparty risks also come into play when dealing with small or emerging mining companies that may not have sufficient financial resources or established credit ratings.

Additionally, environmental regulations and standards imposed by governments can impact the profitability of mining operations, further increasing market risks to investors. The highly competitive nature of the commodity trading industry also adds to these challenges.

A prime example of market risk affecting base metals occurred during the financial crisis of 2008 when copper prices fell sharply due to weakened demand from China and other emerging countries. This caused considerable losses for many investors who had funded copper mines using structured finance deals.

Overall, while structured commodity finance can offer attractive returns on investment, buyers should be aware of the potential market risks embedded in these transactions before committing any funds.

Why worry about political risks when the real danger is falling asleep halfway through a discussion on structured commodity finance for base metals?

Political risks

The commodity finance market faces political uncertainties as an alarming threat. The government policies, political instability, and import/export policies can lead to adverse impacts on the industry’s operations.

In addition to currency and credit risks, political risks pose huge challenges in upholding the structured commodity finance market for base metals. This includes factors such as nationalization, expropriation of assets, government regulations, and economic sanctions.

These risks could increase if there are significant changes in leadership or shifts in geopolitical influence. An adverse impact on prices or barriers to trade can also pose potential challenges for investors.

Investors should recognize these potential downsides and evaluate measures to mitigate their impact. By analyzing geopolitical dynamics and monitoring relevant news reports, investors can make informed decisions that safeguard against potential losses.

Failing to do so could result in missed opportunities or decreased returns on investment. Therefore, it is essential for investors to remain vigilant and plan strategically for potential political risks in structured commodity finance for base metals.

When it comes to structured commodity finance, the only thing riskier than operational risks is trusting someone who says ‘trust me’.

Operational risks

Operational challenges can arise in the structured commodity finance for base metals due to their complex supply chains. These include logistical issues, such as transportation delays or damages, which may impact profitability of the transaction. Another challenge is managing counterparty risk, where parties may default on their obligations leading to reputational and financial risks. Additionally, ensuring compliance with regulations and documentation requirements pose other complexities.

Moreover, credit evaluation is crucial in mitigating operational risks, as a lack of proper assessment of parties involved increases the likelihood of defaults. Furthermore, operational risks may increase when dealing with non-traditional suppliers from emerging markets where legal frameworks are less established.

In a recent case study involving a base metal trader and an Indonesian smelter plant, logistical challenges emerged due to customs clearance delays resulting in demurrage charges. The discrepancies arose due to miscommunication between parties regarding shipping schedules and infrastructure constraints.

Overall, it is essential for all parties involved in structured commodity finance transactions for base metals to evaluate operational risks carefully by performing comprehensive due diligence on counterparties and establishing strict documentation protocols.

Time to say goodbye to your copper-bottomed investments, unless you’re a fan of being shocked by electric prices.

Conclusion

To conclude the article on “What to Know About Structured Commodity Finance for Base Metals” with a firm understanding of the subject, the following sub-sections need to be considered. Firstly, let’s recap the key points covered in structured commodity finance for base metals. Moving forward, the article will shed light on the future trends and the outlook of this sector. This will give you a better idea of how this financial instrument is evolving and what to expect in the future.

Recap of structured commodity finance for base metals

Recapitulation of organized investment structure for commodities that have fundamental value in base metals can be crucial while dealing with complex transactions. Here is a tabular representation of how this finance model works:

Components Explanation
Borrower Entity or producer who borrows finances
Lender Financial institution that lends money
Collateral Physical assets that act as a security
Commodity The underlying asset involved in the agreement
Tenor Time period agreed between borrower and lender
Pricing Interest rates, margin, and other monetary terms

It is imperative to note that such financing facilities help to mitigate risk, protect against price volatility, and ensure supply chain management. The use of hedge funds within these structures offers protection from market uncertainties and safeguards revenue streams.

Fascinatingly, structured commodity finance can offer solutions even amidst the most challenging conditions by offering negotiated financing options to address supply chain gaps.

Explore the benefits of structured commodity financing in base metals today; you do not want to miss out on an opportunity like this! Let’s hope the future outlook for structured commodity finance for base metals is less rocky than a mine cart ride.

Future outlook and trends in structured commodity finance for base metals

Looking ahead, the future of structured commodity finance for base metals is set to experience significant changes. Market players are likely to witness an increasing number of bespoke transactions and a shift in focus towards sustainable and responsible practices. Additionally, technology is expected to play a crucial role in enabling more efficient and transparent processes.

Regarding trends, the market may see greater demand for environmental, social and governance (ESG) disclosure requirements. This will be driven by stakeholders’ rising expectations of sustainability performance metrics. Moreover, new financing models like green bonds and sustainability-linked loans are expected to emerge as a prevalent trend.

Regulators’ initiatives in creating supportive frameworks for sustainable finance is also expected to continue driving changes in the industry. This innovation may lead to more innovative approaches aimed at ensuring sustainability principles are upheld across all structured commodity finance deals.

In light of these trends and outlook for structured commodity finance for base metals, market participants must embrace a proactive approach. A key suggestion would be for investors to keep up-to-date on best practices relevant to ESG factors within the sector. Moreover, it’s recommended that market players consider developing ESG criteria while structuring deals which may help them secure better renewals or pricing conditions.

Frequently Asked Questions

Q: What is structured commodity finance for base metals?

A: Structured commodity finance for base metals involves the use of various financial instruments, such as loans and bonds, to fund the production, transportation, and sale of these metals. This type of financing is often provided to mining companies and traders and can involve complex structures and risk management strategies.

Q: How do commodity finance loans work?

A: Commodity finance loans are typically secured against the underlying commodity, such as base metals, and may also involve collateral such as production assets or inventory. The terms and structure of the loan will vary depending on the specific commodity, the borrower’s creditworthiness, and the lender’s risk appetite and return expectations.

Q: What are the risks associated with structured commodity finance for base metals?

A: The risks associated with this type of financing can include commodity price volatility, currency fluctuations, geopolitical risks, and operational risks such as production disruptions or supply chain issues. To manage these risks, lenders may require borrowers to provide extensive documentation and data, as well as employ hedging strategies and risk mitigation techniques.

Q: Why would a company choose to use structured commodity finance for base metals?

A: Companies may choose to use this type of financing because it allows them to access capital for their operations and growth without having to sell their commodities outright, which can result in reduced profits and market control. Additionally, structured commodity finance loans may offer competitive interest rates and flexible repayment terms.

Q: What parties are typically involved in structured commodity finance for base metals?

A: In addition to the borrower and lender, structured commodity finance transactions for base metals may involve multiple parties such as commodity traders, shipping companies, inspection and assaying firms, and insurance providers.

Q: How can I learn more about structured commodity finance for base metals?

A: There are a variety of resources available for those interested in learning more about this topic, including industry publications, conferences and trade shows, and professional associations such as the International Trade and Forfaiting Association.

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Understanding A Promissory Note and An IOU When it comes to acknowledging debt, many people may confuse a promissory note with an IOU. Despite their similarities, there are unique differences between the two. Below is a table that outlines some of the differences. Promissory

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Receivables Financing Can Improve Resiliency During Disruptions

Introduction to Receivables Financing Receivables financing is a robust financial strategy for businesses seeking to improve their liquidity during unforeseen disturbances. By selling unpaid invoices to financial institutions, businesses can obtain the cash required to fuel operations promptly. Receivables financing proves crucial during situations

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What are preshipment inspection requirements?

Preshipment Inspection Explained In the world of international trade and commerce, ensuring product quality and adherence to buyer’s specifications is essential. Preshipment inspection serves as an effective way to examine goods before shipment to avoid disputes and returns. Aspect Definition What is preshipment inspection?

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Who Uses Structured Commodity Finance and Why?

Introduction to Structured Commodity Finance Structured Commodity Finance is a method of financing in which a lender provides funds to the borrower using the borrower’s inventory as collateral. The aim is to mitigate risk for both parties and create a win-win situation. This typically

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How Inventory Finance Can Help Your Business Grow

What is Inventory Finance Inventory financing is a funding option that helps businesses manage their inventory. It involves securing a loan against your unsold stock to free up cash flow and invest in growth opportunities. With inventory finance, businesses can avoid the problem of

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Who Should Consider Inventory Finance and Why?

Who can benefit from inventory finance When considering finance options, those seeking to invest in their inventory must evaluate whether or not inventory finance is viable for them. This financing option requires that a business puts up its inventory as collateral and, in turn,

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How Access to Receivables Capital Can Increase Flexibility

Overview of Receivables Capital Receivables Financing Overview:Invoice factoring or receivables financing is a funding option where a business sells its unpaid invoices to a third-party financier at a discount. This type of capital can improve cash flow and increase flexibility, especially for businesses with

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Inventory Finance for Luxury Goods: What You Need to Know

Introduction to Inventory Finance for Luxury Goods Leveraging Inventory Finance for Luxury Goods can be daunting. However, it is a vital financial strategy to keep up with the ever-changing trends in the luxury industry. Financing inventory helps maintain stock levels and allows businesses to

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Role of technology in scaling preshipment finance programs

Importance of preshipment finance programs Preshipment finance programs play a crucial role in the global trade ecosystem. With the rising demand for goods and services across borders, businesses involved in import and export have to abide by stringent regulations and timelines. Thus, financing operations

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Types of preshipment finance structures

Types of Preshipment Finance Structures To understand the various ways to finance goods before they are shipped, delve into the world of types of preshipment finance structures. This solution offers different sub-sections such as Cash in Advance, Letter of Credit (LC), Documentary Collection, Bank

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How To Negotiate The Terms Of A Promissory Note?

Overview of Promissory Notes Negotiation Negotiating Promissory Note Terms: A Professional Insight Promissory notes are binding legal documents that specify the terms of a loan agreement. Negotiating these terms is crucial in ensuring the success of the transaction. Here’s a professional insight into how

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Irrevocable Standby Letter Of Credit

What is an Irrevocable Standby Letter of Credit? An Irrevocable Standby Letter of Credit is a contractual agreement between the issuer and beneficiary that is used to guarantee payment in case of default by the buyer. It’s often used in international trade transactions as

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Who Issues a Bill of Lading?

What is a Bill of Lading? To understand what a bill of lading is and how it works, you need to dive into the world of shipping and logistics. The bill of lading is a crucial shipment document that serves a plethora of purposes

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What are the Different Types of Documentary Collections?

Introduction to Documentary Collections Documentary collections are an effective way of mitigating risks between buyers and sellers in international trade. In this process, banks act as intermediaries to facilitate the exchange of shipping and payment documents. The different types of documentary collections include clean

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What is Blockchain Trade Finance and How Does it Work?

Introduction to blockchain trade finance Blockchain trade finance is a revolutionary platform that harnesses blockchain tech. Transactions between buyers and sellers are secure and transparent, with smart contracts automating the process. No costly intermediaries, making processing times and fees lower. Plus, KYC compliance and

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Inventory Finance for E-commerce Businesses: What You Need to Know

Introduction to Inventory Finance for E-commerce Businesses Inventory finance is a crucial aspect of e-commerce businesses. Financing products for sale in the digital marketplace can be tricky. With traditional loans being unsuitable for inventory finance, alternative financing methods such as asset-backed loans and receivables

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Telegraphic Transfer Mistakes to Avoid

Common Telegraphic Transfer Mistakes To avoid common telegraphic transfer mistakes, in order to successfully transfer money without any issues, consider the following sub-sections: Incorrect Beneficiary Information, Incorrect Account Number, Incorrect SWIFT Code or IBAN, Incorrect Currency or Amount, and Misspelled Beneficiary Name. Incorrect Beneficiary

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What Happens If An Export Trade Facility Is Not Approved?

Reasons for Export Trade Facility Approval To ensure your export trade facility is approved, compliance with government regulations, international trade benefits, and access to financial assistance are crucial solutions. In this section, we will explore the reasons for export trade facility approval, specifically focusing

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