Commodity trading faces big changes

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The commodities trading industry will undergo its biggest transformation in three decades as companies ramp up investment, according to a report co-authored by a veteran industry executive.

The forecast comes amid a growing level of deals in the sector, exemplified by the proposed merger between trader Glencore and miner Xstrata to create an $80 billion natural resources production and trading group.

Graham Sharp, one of the founders of commodity trading firm Trafigura and adviser to consultancy Oliver Wyman, wrote in the report that the trading industry was about to “undergo its biggest transformation in 30 year “.

The transformation would come as the market wonders whether the decade-long commodity supercycle has peaked after commodity costs soared due to industrialization and urbanization in China and other countries. emerging.

The report, published by Oliver Wyman on Wednesday, calls for “the dawn of a new order in commodities trading”, saying that thanks to Glencore there will be more acquisitions, investments and public offerings in commodities trading as “the industry establishes a formidable footprint of global assets for the future”.

Commodity traders are slowly shifting from their traditional “middleman” business model of buying and selling commodities, where margins are razor thin, to investing in production, refining and logistics. The report states that traders can “make rich profits” in the past by leveraging their market intelligence.

“But this is no longer the recipe for success in a world of easily accessible and reliable information,” the report states, arguing that traders will invest in sustainable assets.

Vitol and Gunvor, two of the world’s largest oil traders, bought three refineries from bankrupt Swiss oil company Petroplus this year. Louis Dreyfus Commodities issued its first bond in its 160-year history earlier this month as the food trader launches an ambitious investment program. And Cargill, the world’s largest agricultural commodities trader, completed its biggest-ever acquisition last year, spending $2.1 billion to buy animal feed producer Provimi.

Asset expansion will cause merchants to reconsider their traditional funding model, the report says.

“As large investments tie up valuable capital for a long time, the growing funding needs of commodity traders are increasingly at odds with their ownership structures and the high-volume nature of their business,” says the report, adding that trading houses will consider going public, issuing bonds and selling minority stakes.

But some trading houses would rather woo private equity investors and sovereign wealth funds to avoid having to follow the model of Glencore, whose London IPO last year sent the industry under the hood. spotlights.

Several sovereign wealth funds have already taken stakes in listed trading houses, with China’s CIC investing in Noble Group and Singapore’s GIC recently revealing a 5% stake in New York-listed Bunge. Temasek, another Singaporean sovereign wealth fund, is also a major shareholder in Olam and Abu Dhabi’s Aabar is a major shareholder in Glencore. Qatar Holding is also expected to become a shareholder of Glencore if the trader’s merger with miner Xstrata comes to an end.

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