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Commodity trade houses seek to rule in core markets, exit others
May 11, 2016 / 12:22 PM / a year ago

Commodity trade houses seek to rule in core markets, exit others

LONDON (Reuters) - Commodity trade houses are going back to their roots and focusing on what they know best, whether it’s energy, metals or agriculture, while shedding peripheral activities.

From the world’s largest independent energy trader Vitol’s retreat from agricultural markets, to trade house Gunvor pulling out of metals and Archer Daniels Midland disposing of its chocolate and cocoa businesses, traders are concentrating back on their historically strong activities.

The shift follows a period of rapid expansion and diversification for trade houses, partly triggered by the gap left by banks’ departure from physical commodity trading, along with a collapse in profit margins from oil trading in 2010-11 that encouraged energy traders to try other areas.

“Over the past several years, particularly some of the oil traders, but also other traders have done very well in their core areas, but when they have branched out it hasn’t been overwhelmingly successful,” said Craig Pirrong, a professor of finance at the University of Houston and an expert on commodity trading.

The profits of trade houses were mixed in 2015, with those focused on energy mostly faring better than metals or agriculture, but the reversion to core activity is broadly consistent across the sectors.

At the same time, the companies responsible for moving vast amounts of the world’s oil, metals and grains around the world are seeking to expand in their major markets, particularly via infrastructure and new regions.

This is consistent with trade houses’ business model of owning assets in the middle of the supply chain, such as storage or transportation, to trade around.

“If you look at the asset investments that have been made, they’re typically in the midstream, that’s the operating mode of a commodities trader going all the way back to how houses like Cargill and (Louis) Dreyfus began in agriculture,” said Richard Payne, managing director of commodities at Accenture.

TRIED AND TESTED

Louis Dreyfus Company B.V., which has traded grains for more than 150 years, is planning to grow its operations in Russia where infrastructure investments are needed for grain exports, along with China.

One of the “ABCD” quartet of companies dominating agricultural trading, alongside ADM, Bunge and Cargill, Dreyfus is also considering options ranging from joint ventures to the sale of certain assets in its fertilisers, metals, juice and dairy units.

In energy and metals, Gunvor and Trafigura have both said they will focus future growth in their core areas.

Gunvor chief financial officer Jacques Erni said in March the firm’s investment team is focusing on midstream assets, but is not looking to diversify outside of oil and gas.

“We take a conservative approach and we have good experience and know-how in oil and gas and we prefer to concentrate on that side rather than going into sectors where we don’t have the same expertise,” Erni said.

Trafigura’s chief executive Jeremy Weir said at the FT Commodities Summit in April that the firm would look to increase the volumes it trades in its core competency areas of oil, metals and minerals, supported by infrastructure investments.

Trader and miner Glencore bucked the trend having amassed production assets via its takeover of miner Xstrata in 2012, but the recent sale of a 40 percent stake in its agriculture unit reinforces the trend of focusing on core activities, in its case, energy and metals.

One drawback of investing across multiple commodity markets is the management attention, working capital and risk management required.

“The more you take on the more diversion you have, do you really have the management that’s going to be able control all this?” said Robert Piller, commodities lecturer at the Geneva Business School.

“Perhaps some of the synergies of having a broad spectrum of commodities hasn’t been shown to be as compelling as first thought.”

Editing by Veronica Brown and David Evans

Our Standards:The Thomson Reuters Trust Principles.
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