For commodity traders operating in the Information Age, just good old trading doesn’t cut it anymore.
Unlike the stock market in which transactions are typically based on information that’s public, firms that buy and sell raw materials thrived for decades in an opaque world where their metier relied on knowledge privy only to a few. Now, technological development, expanding sources of data, more sophisticated producers and consumers as well as transparency surrounding deals are eroding their advantage.
“Everything is transparent, everybody knows everything and has access to information,” Daniel Jaeggi, the president of Mercuria Energy Group Ltd., said on Thursday at the Global Trader Summit organized by IE Singapore, a government agency that promotes international trade.
Sitting next to him at a panel discussing ‘What’s Next for Commodity Trading: Drivers, Disruptors and Opportunities’, Sunny Verghese, the chief executive officer of food trader Olam International Ltd., lamented declining margins. “The consumers and producers are trying to eat our lunch. So we got to be smart about differentiating ourselves,” he said.
As market participants’ access to information increases, the traders highlighted the need to more than simply buy and sell commodities as profits from arbitrage — or gains made from a differential in prices — shrinks. That means getting involved in the supply chain by potentially buying into infrastructure that’s key to the production and distribution of raw materials, and also providing financing for the development of such assets.
Mercuria, for instance, is pooling together resources from its corporate finance, venture capital, risk management and legal teams to execute “more complex, structure-type deals,” according to Jaeggi. When oil prices crashed in 2014-2015, the trader channeled funds to producers of U.S. shale for pipeline development in exchange for cargoes as access to capital and equity shrunk, he said.
Last year, the company engineered a logistically complex trade to export U.S. oil after a four-decade ban on exports was lifted. It combined railways, barges, pipelines, trucks and a ship-to-ship transfer in the Caribbean to transport American crude to Africa for storage, joining others such as Vitol Group, the world’s biggest independent oil trader, in finding increasingly innovative ways to ship supplies overseas.
Kho Hui Meng, the head of Vitol’s Asia arm, said at the Singapore event that it will be crucial to consider the potential impact of the rise of electric vehicles and how that may threaten gasoline’s dominance as a transportation fuel. Traders may need to “secure your own captive outlets” for gasoline to ride out a possible oversupply, he said.
Skin in the Game
Vitol will continue investing in infrastructure assets such as service stations, storage and refineries to complement its trading business, the company said earlier this year. The trader said in March it was leading a venture buying a network of 1,700 service stations in Turkey from OMV AG for $1.5 billion. Through its holding in Vivo Energy, Vitol also has an interest in more than 1,700 service stations in Africa. Rival Trafigura Group Ltd. agreed to buy a stake in an Indian refinery last year.
“The most valuable commodity out there is information, and the most useful information is the proprietary, critical information that you obtain from your own supply chain,” said John Driscoll, the chief strategist at JTD Energy Services Pte, who has spent more than 30 years in the petroleum trading industry in Singapore. “You have to have skin in the game. You have to have access to assets, whether it’s infrastructure, terminals, vessels or refineries.”
It’s critical for commodity traders to evolve as margins have declined because of more transparency and “price arbitrage has disappeared,” said Olam’s Verghese. For example, the number of price quotes published by agencies such as S&P Global Platts and Argus, which assess the value of commodities globally, have increased about 15 times since 1990, according to Verghese.
‘Arbitrage is Dead’
While “arbitrage is dead,” traders will “continue to have substantial opportunity and disruption but the way of capturing that opportunity becomes more sophisticated,” Mercuria’s Jaeggi said.
Mercuria and Vitol see opportunities in the global shipping industry ahead of the implementation of new fuel standards. From 2020, all cargo and crude tankers will be mandated to burn lower-sulfur bunker oil under new environment rules by the International Maritime Organization.
“This is going to happen in a very short time frame, and people are not ready,” said Vitol’s Kho. “The industry, on both ends, are just talking and hoping it will never happen. I think it presents tremendous opportunity, if you can position yourself the right way for this.”