Commodity Traders – Winners & Losers

If you drive from the city of Geneva along the shore of Lake Geneva, you will first pass by the UEFA-headquaters in Nyon and soon after reach a place called Lausanne. 

It’s a nice swiss city with just 130’000 inhabitants, but worldwide known because Lausanne hosts the global headquaters of over 50 sport-associations from equestrian or hockey to fencing and rowing, then the International Olympic Committee or the International Court of Arbitration for Sport.

This week however, Lausanne is for once not the meeting-point for international sports, but for the ‘Global Commodities Summit’. Is no coincidence that Switzerland is the venue for such an event. The small country without any natural resources is the world’s biggest trading-hub of commodities (see graph). And, as in sports, the business of commodities produces winners and losers. 

Basically, there are two kinds of commodities: 1. Grown commodities such as coffee, cocoa, corn, wheat, or soybean are called ‘soft’ commodities. 2. Mined commodities like oil, copper or gold are known as ‘hard’ commodities.

Among the participants of the ‘Summit’ at the Beau Rivage Palace is the global elite of oil-traders. In oil, supply is up, demand is down, and it appears that some of the conditions that created crude’s rapid price slump in the last 20 months could remain in place for some time to come. So you would probably expect, the oil-traders are depressed.

The contrary is true. For Vitol, the world’s biggest independent oil trader, the year 2015 was one of its most profitable in the 50-year history of the company with a 15% increase in net income to 1,6 billion USD. Higher profits were also posted by some of Vitol’s competitors like Glencore, Gunvor and Trafigura. However, it’s important to know, that these companies made their money as oil-traders not primarily on the general long-term trend of crude-prices but on its short-term volatility.

Volatility is a measure of the short term up’s and down’s of prices. In oil, the uncertainty created by the slump in China or OPEC’s squabble over production targets sent the ‘Crude Oil Volatility Index’ at the Chicago Board Options Exchange to its highest level since 2008, thereby creating a paradise for traders.

They buy oil, when the price is short-time under pressure of yet another record-output of Russia, Saudi-Arabia or Iran, store the stuff and sell it again when news or rumors of a production-freeze or geopolitical troubles let crude-oil prices spike – and if it’s only for a few hours. 

This happens exactly yesterday, as oil surges over 3%  on a “report from Russia” that Saudi Arabia and Russia have agreed to follow through with a production freeze and this ‘news’ offered a first-class trading- respective selling opportunity to make quick money. Members of OPEC and outside producers such as Russia are meeting in Doha, Qatar next Sunday to discuss freezing output – and based on earlier experience of such meetings, a further trading chance (this time to buy, because the producers won’t agree and crude tanks again) might be just around the corner. In addition, the oil-traders use a part of their trading-profits as juicy loans to cash-strapped producers who are really suffering from the generally low oil-prices. 

Let’s then move to the losers at the ‘Summit’ in Lausanne. They come from a sector that gets less public attention than oil – the ‘soft’ commodities. Prices of grain or wheat are under pressure. After several record-harvests in the US and China, the silo’s are full and trading-profits hard to get, since soft commodities have a lower volatility than oil. These factors are hurting the big ‘soft’-players like Archer Daniels, Bunge, Cargill and Dreyfus, commonly known as the ABCD-trading-companies, that over the last century dominated the global agricultural flows.

In addition to the unfavorable market- and trading conditions, the european/american ABCD-trading houses are facing growing competition from Asia. They’ve lost their dominance for instance of Brazil’s commodity-exports to Asian trading houses, including China’s state-owned COFCO (China National Cereals, Oils and Foodstuffs Corporation) that bought 45% of Brazil’s soybean, corn and soybean meal exports last year, while ABCD’s count was only 37%.

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Traders of ‘hard’ commodities like oil profit from the high volatility, while companies that trade ‘soft’ commodities like wheat or soybeans have a hard time.