Shaken by soaring raw materials, trading houses adapt to survive

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Commodity crises have a habit of changing the trading world.

A price rout and a brief loss of creditor confidence amid the 2008 financial crisis put commodities titan Glencore Plc on its way to a public listing. After prices recovered in the years that followed, merchants like Trafigura Group, Gunvor Group and Louis Dreyfus Co. began tapping public bond markets for the first time.

Now, the fallout from the war in Ukraine is fueling another upheaval. For some of the bigger players — many of whom are still owned by their employees or founders — that likely means raising additional funds and attracting new investors to drive business forward. Small traders may not survive at all.

Companies that buy and sell crucial materials, from oil to metals to grain, are scrambling for cash to meet margin calls with prices soaring as war rocks markets. As the pressure mounts, traders are reducing activity, sapping liquidity and threatening to only make markets more volatile.

The concern was clearly evident when leaders of major trading houses met in Lausanne, Switzerland, this week.

“Everyone in this room has been working to adjust their liquidity, their financial solutions, but also to scale their business based on commodity prices,” Muriel Schwab, chief financial officer of oil trader Gunvor, told the Financial. Times Commodities Global. Mountain peak.

At present, trading houses have the opportunity to make a lot of money as volatility opens up opportunities, for example through arbitration agreements. But it is becoming more and more difficult as they struggle to cope with huge cash requirements to save positions or create new ones.

For example, Trafigura has been in talks with private equity groups for additional funding, people familiar with the matter said this month. This included with Blackstone Inc. for approximately $2-3 billion in preferred stock or a similar hybrid instrument, but no deal was reached. He also approached Apollo Global Management Inc., BlackRock Inc. and KKR & Co., the sources said.

Over the past six or seven months, Engelhart Commodities Trading Partners has halved its positions in energy to metals markets as liquidity has dried up. And on the London Metal Exchange, the number of open positions on the most important base metals exchange fell to its lowest level in 15 years.

Financial exchanges “allow us to do business at scale, move products to where they are needed and manage our risks,” said Jeff Dellapina, chief financial officer of independent oil trader Vitol Group. “So far it’s worked well, but you know constraints and constraints become a factor.”

Commodity prices have jumped 30% this year as the war further limits supplies. This means businesses, especially those with large physical books, need additional credits to cover rising business costs and the cargoes they ship around the world. When prices rise sharply, they reach funding limits.

Some of the biggest are now seeking relief funding. In recent weeks, Mercuria Energy Group Ltd. got $2 billion from the banks and Trafigura got new packages twice.

These revolving credit facilities offer welcome relief. But orders to receive more credit can take days, and when hundreds of millions of dollars of margin can be called in minutes, traders could draw entire lines to have cash immediately at hand, by paying interest even if they are not used.

Equity

The low equity of sole traders also limits the amount of credit that some can obtain from financiers. While companies like Glencore, Bunge Ltd. and Archer-Daniels-Midland Co. are publicly traded with a large market capitalization, most are privately owned and generally prefer to give profits to shareholders in the form of dividends or share buybacks.

This model is now being challenged as it becomes more critical to find credit. And raising capital immediately could be a game changer right now.

Gunvor CEO Torbjorn Tornqvist told the FT conference that the company could raise funds from outside investors as a growth option. The company has “always” been open to this, he said.

“For us to really, shall I say, exploit the potential of the business, it would be desirable to explore additional equity,” he said. “We are open to finding an alliance that could increase the size of the company.”

Last year, billionaire Margarita Louis-Dreyfus sold 45% of the eponymous agricultural trader to an Abu Dhabi sovereign wealth fund last year. While big traders are now moving quickly to meet the challenges, there is a growing feeling in the industry that not everyone will be able to survive.

“As we get through these crises, and let’s not forget that we come out of two and a half years of Covid, there will be another set of consolidation in the commodity trading industry,” Trafigura’s chief financial officer said. Christopher Salmon.

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