20 Apr Big commodity traders to seek scale in pursuit of prosperity
The world’s biggest commodity traders are set to get even bigger as they scale up to try to reverse the first serious dip in revenues this decade and combat margin pressure across oil, metals and grains markets.
The forecast, from consultants Oliver Wyman, comes as top oil traders have expanded their volumes aggressively during a three-year downturn and talk of consolidation has swirled around the agricultural industry amid a global grain glut that has depressed prices and volatility.
The consultancy, one of the few to closely track the largely private trading industry, says in a new report that gross revenues across the sector declined 6 per cent to $41bn in 2016, necessitating the push for greater scale.
Vitol and Mercuria, two of the world’s biggest oil traders, have recently snapped up parts of Noble Group’s energy trading business, while Glencore — the world’s biggest metals trader — has been eyeing a merger with grain trader Bunge as a possible route to expanding its agricultural arm.
“The commodity industry is confronting a new, less profitable reality,” the authors say in ‘The Endgame for Commodity Traders’.
“Within a few years, the industry will have a different profile — one that is even more dominated by the biggest players.”
Oliver Wyman, which was advised by Trafigura co-founder Graham Sharp on the report, said that industry gross margins — or the amount made on trades before deducting costs such as tax, salaries and bonuses — had flatlined at about $44bn in the middle of this decade but were now falling.
The hardest hit were small- and medium-sized traders, defined as having less than $500m in gross margins per commodity class, which they say experienced roughly 30 per cent more volatility in earnings than the biggest operators.
The flip side was the biggest traders were able to capture a greater share of profits, with two-thirds of the pot in both oil and liquefied gas trading going to those making gross margin above $500m — double the level of six years ago.
“Greater resilience permitted the industry’s largest players to take greater risks and, in turn, that meant they could strike the bigger, more profitable, multiyear deals,” the report says.
Oliver Wyman identified Vitol, Trafigura, Glencore and the trading arms of oil majors BP and Royal Dutch Shell as the biggest beneficiaries.
They highlighted the $9bn of long-term cash-for-oil loan deals that Vitol arranged in 2017 with Kazakhstan and Iran, while BP and Shell have signed 15-year agreements for LNG from PTT Thailand.
Investment in technology and automation have also helped cut operating costs by as much as a third, the report says.
Digitisation and technology is increasingly moving away from mid and back office administrative tasks, with top traders now using data from satellites and radar to help monitor commodity flows and inventories, allowing them to make better informed trades in opaque markets.
“In the end, the advantage of scale and digitisation will go hand in hand,” the report says. “Each feeds the other.”
For mid-sized traders to compete in this increasingly competitive environment they may need to build scale through partnerships in areas in which they still have an advantage, the report says.
“One thing is clear: The circle of players able to keep up is shrinking rapidly and the challenge for traders today is facing the hard, cold reality of what it will take for them to survive the endgame,” the report concludes.