Philippe Chalmin reflects on the recent decline in commodity trader financial performances and says that those who survive the years of famine, following years of plenty, have been private family-founded companies
What is the future of international commodity trading companies?
This is the right time to ask that kind of question - we are now seeing revenues as well as the bottom lines of many traders sharply declining in 2015, compared with earlier years. In fact, there has always been a strong correlation between prices on world commodity markets and the prosperity of the companies that trade on them. High prices usually mean strong volatility and allow highly efficient trading companies to maximise their profits. On the contrary, low prices induce flat markets on which it is more difficult for them to earn their living. This has indeed been the case for the last 50 years.
The commodity shock of the 1970s was a first golden age for commodity traders that in the 1950s and 1960s were still minor players. It was the time of the famous "merchants of grain" such as Cargill, Continental, Dreyfus, Bunge, and Andre, of metal traders inventing oil markets (Phibro and then Marc Rich). Their prosperity lasted till the mid-1980s. Then we had 20 years of depressed markets which were marked by the collapse of many big players such as Phibro, Conti, and Andre.
Commodity markets reached their bottom at the end of the century and since then, we have had a new commodity boom which lasted until 2014. A new generation of commodity traders emerged mainly based on oil, namely Vitol, Mercuria and Gunvor. With metals it was Trafigura, Noble and, of course, Glencore, and with agriculture we had Olam. They surfed on rising prices and indeed their growth has been astonishing in the new trading hubs of Geneva and Singapore.
But since 2014, things have changed. Markets have entered a new era - which could last at least a decade - of low and depressed prices. Traders have to adapt to that new situation and for some of them, this will be more of a hard landing than a soft one.
In recent weeks, we have seen the problems of Glencore, Noble or Olam as well as the closure of the commodity desks of certain "Wall Street Traders" (with the notable exception of Goldman Sachs).
Back to basics
After years of exuberant growth, it's time to go back to basics. First of all, we should forget the idea that there will be a rush to the equity markets. History shows that commodity traders are usually private companies and that the whole concept of quarterly financial reporting as part of the listed company discipline is an anathema to them. Second, they will probably concentrate on their core business. For example, why would an oil trader enter into the food markets? Third, one should be sceptical about the arrival - especially in Asia - of new players linked, in Singapore or China, to sovereign funds.
What is sure that commodity markets are set to remain highly unstable. Climatic events such as El Niño and La Niña have a deeper impact than in the past. The "commodity curse" among exporting countries mean that geopolitical troubles will make the headlines and add to market nervousness. In times of depressed prices there should be less volatility on a day-to-day basis, although the behaviour of oil in recent weeks tells a different story. The world will still need commodity traders to move commodities around the world and to assume all the risks linked to those operations not only on the financial side but, above all, on the physical side of the trade. More than purely "screen traders", we are still in need of traders able to manage commodity flows and to adjust to demands on the ground.
While there are some high-profile exceptions, history shows that commodity trading companies that have survived in the long run through crises and hard times, are generally private companies owned by founding families or their staff.
The difficult times ahead might prove that this historical fact is still valid. Time will tell...
Philippe Chalmin is professor of economic history and commodity markets at Paris-Dauphine University.
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