Commodity traders are sharing bumper spoils with their workers as the industry emerges as one of the biggest winners from the coronavirus crisis.
Trafigura’s record trading results last month provided a first glimpse of a blockbuster year for an industry dominated by a small group of mostly privately owned companies that can reap huge rewards by navigating the ups and downs of volatile commodity markets.
Its 850 top staff received a near $600m cash windfall, bringing to $3.5bn the total paid out to partners since 2015.
“Covid hit the whole world but not every region at the same time,” said Christophe Salmon, chief financial officer. “That meant we could divert a cargo . . . to where there was a premium.”
Commodity traders are the ultimate middlemen, linking the suppliers of raw materials — often in developing countries — with consumers in wealthy and fast-growing ones, earning wafer-thin margins but on huge volumes.
Their global footprint and network of terminals, storage facilities and shipping fleets meant they were perfectly set up to capitalise when commodity prices cratered in the second quarter, according to Roland Rechtsteiner, a partner at Oliver Wyman and co-author of an annual report on the industry.
In oil, the companies took advantage of panic selling to snap up cheap barrels of crude and immediately sell their cargoes forward at higher prices in the futures market, locking in almost risk-free profits.
They were also able to exploit price arbitrages caused by the spread of Covid-19. This was also evident in metals where China’s quick recovery from the pandemic boosted demand at the same time mine production in African and South America was hit by lockdowns.
Trafigura’s net income come soared 84 per cent to $1.6bn In the year to September, on turnover of $147bn. In oil trading — a market whose huge swings took US crude prices briefly negative in April, gross profits surged threefold to a record $5.3bn, while in metals they jumped 30 per cent to $1.53bn.
Other traders are also on track to notch up big profits for 2020. Glencore’s trading arm reported a doubling of earnings before interest in the six months to June to a record $2bn, while net income at Mercuria was a record $277m in the second quarter.
Senior traders and executives said the structure of the oil market was the biggest factor behind the industry’s performance last year.
Gunvor CEO Torbjörn Törnqvist said 2020 had been a good year for the Geneva-based company, although it had taken impairment charges on its refineries owing to the pandemic. Trafigura also recorded $1.5bn in writedowns and impairments against the value of its industrial assets.
“In terms of gross profit we did very well and our balance sheet is stronger,” said Mr Törnqvist, adding that the second quarter of 2020 was probably the “best on record for the industry.”
“I am not sure we will see those conditions again. Between the Opec-Russia price war and collapse in demand, it was a perfect storm. Every trading house made a lot of money.”
Senior traders and executives including Russell Hardy, chief executive of the world’s biggest independent oil trader Vitol, said the structure of the oil market was the biggest factor behind the industry’s strong performance in 2020.
“If you had been here in 2008-09 you knew what to do because it was the same game,” said Mr Hardy, referring to the oil market “contango” — when longer-dated futures prices trade at higher levels than near-term counterparts — that boosted profits across the industry in the aftermath of the global financial crisis.
Mr Rechtsteiner said 2021 was likely be another good year for the industry because markets remained choppy and there was a wider range of possible outcomes.
“My expectation is that we are going to see a lot of volatility over the coming quarters,” he said. “We are starting to deploy vaccines but we don’t know how effective they will be and how they will change behaviour. It could be a very interesting year.”
However, the industry is facing increased regulatory scrutiny and questions about business practices, in particular the use of agents to win business.
Physical commodity trading often involves operating in countries that have been hotbeds of corruption, or where it is difficult to secure business without agents who network with government officials to help land deals.
Last month Vitol agreed to pay over $160m to authorities in the US and Brazil after admitting bribery in three countries and trying to manipulate oil benchmarks. Glencore and Trafigura are also facing corruption probes.
“Historically, corruption and bribery have no doubt been endemic across the commodity trading industry and our investigation into Vitol and its competitors’ acts in Brazil alone revealed a mass of squalid deals,” said Ed Davey of campaign group Global Witness.
Although the sector is moving away from the use of middlemen, Jean-Francois Lambert, a consultant and former trade finance banker, said the investigations would be a concern for all stakeholders including banks, which extend huge amounts of credit to the sector.
“Corruption allegations involving one trading house stain the whole sector,” said Mr Lambert. “Collective discipline is therefore no longer an option but a necessity.”