Commodities trading faces big changes
By Javier Blas in London
The commodities trading industry will embark on its biggest transformation in three decades as companies boost investment, according to a report co-authored by an industry veteran executive.
The forecast comes amid an increasing level of deal making in the sector, exemplified by the merger proposal between trader Glencore and miner Xstrata to create a $80bn group in natural resources production and trading.
Graham Sharp, one of the founders of commodities trading house Trafigura and an adviser at consultancy Oliver Wyman, wrote in the report that the trading industry was about “to undergo its largest transformation in 30 years”.
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The transformation would arrive as the market questions whether the decade-long commodities supercycle has peaked after the cost of raw materials surged on the back of the industrialisation and urbanisation of China and other emerging nations.
The report, published by Oliver Wyman on Wednesday, calls for the “the dawn of a new order in commodity trading”, saying that on the back of Glencore there will be more commodity trading acquisitions, investments and public offerings as “the industry establishes a formidable global asset footprint for the future”.
Commodities traders are slowly expanding from their traditional “middleman” business model of buying and selling raw materials, where margins are razor-thin, to investing into production, refining and logistics. The report says traders can “reach rich profits” in the past exploiting their intelligence of markets.
“But that is not longer a recipe for success in a world of easily accessible and reliable information,” the report states, arguing that traders will invest in hard assets.
Vitol and Gunvor, two of the world’s largest oil traders, have bought this year three refineries from bankrupt Swiss-based oil company Petroplus. Louis Dreyfus Commodities earlier this month issued its first bond in its 160-year history as the food trader launches an ambitious capital expenditure programme. And Cargill, the world’s largest agricultural commodities trader, last year closed its biggest acquisition ever, spending $2.1bn to buy animal feed producer Provimi.
The expansion into assets will prompt traders to reconsider their traditional funding model, the report states.
“Since large investments tie up precious capital for a long period of time, commodity traders’ growing financing requirements are increasingly at odds with both their ownership structures and the high-volume nature of their businesses,” the report states, adding that trading houses will consider going public, issuing bonds and selling minority stakes.
But some trading houses would prefer to court private equity investors and sovereign wealth funds as a way to avoid the need to follow the model of Glencore, whose flotation in London last year thrust the industry into the limelight.
Several SWFs have already taken stakes in listed trading houses, with CIC of China investing in Noble Group and Singapore’s GIC recently revealing a 5 per cent stake in New York-listed Bunge. Temasek, another SWF of Singapore, is also a leading shareholder in Olam and Aabar of Abu Dhabi is one of Glencore’s largest shareholders. Qatar Holding is set to become a shareholder too in Glencore if the merger of the trader with miner Xstrata comes to a close.
Courtesy: The Financial Times