This book discusses how successful commodity traders operate, not only in regards to oil trading (Vitol, Trafigura, Glencore, …), perhaps the most well-known area of commodity trading, but also coal and metals trading (Glencore, …) as well as trading in agricultural products (Cargill, …). This well-written book chronicles how trading developed from pre-War II until today. It chronicles how a small group of traders revolutionized international trade and also came up with a way to link trading to the financial markets. Countries rich in natural resources, but often isolated and run by dictatorial regimes, become thereby linked to the global economic system.
The book also discusses the darker side of trading, namely a world of immense wealth and political power, typically gained by pushing legal systems to the limit, with little-to-no concerns for ethical dysfunctionalities. As also discussed, there are indeed many examples of overstepping boundaries between what might be considered legal and what might be illegal.
The book thus recounts the actions of a large array of traders, ranging from Marc Rich to Ivan Glasenberg, from Philips Brothers and Cargill to Glencore. It is about a mix of big money, strategically important resources, and a willingness to operate close to the edge of what might be considered legal. The book is about transparency and casting light on the often opaque world of privately held trading companies, with little or no public disclosure of information.
The pioneering of commodities trading can largely be traced back to firms such as Philips Brothers and Cargill, as well as to individuals such as Marc Rich, who spent more than 20 years at Philips Brothers before starting his own firm, based in Zug, Switzerland. The pipeline across Israel, from Eilat (Red Sea) and Ashkelon (Mediterranean Sea) was central to how Marc Rich’s success was built, allowing oil, primarily from Iraq, to be distributed in the world markets. This also turned to be a break-up of the so-called “seven sisters” cartel of major oil companies which had controlled the oil business so far. A good example of how Marc Rich was able to develop barter trade deals may be the 10-year contract with Jamaica, allowing the country to supply alumina at a fixed price, in exchange for oil. There were, of course, considerable financial needs involved in such arrangements, and Societé General did indeed play a prominent role here.
But, in the end, Marc Rich ran out of luck. A big bet to “corner” the market for zink failed. The financial strains increased dramatically. Two new trading companies emerged from the turmoil and partial collapse of Marc Rich + Co., namely Glencore and Trafigura, the former being partly financed by Hoffman-La Roche.
The book then details how traders were able to take advantage of the collapse of the former Soviet Union, with massive aluminum trading and then oil trading, and when so-called oligarchs had been able to acquire large physical assets for much less than their intrinsic values. Cuba’s ability to continue to function after the Soviet’s collapse by trading sugar for oil, all organized by the large Geneva-based trader Vitol, is also covered.
These major strategic shifts fundamentally changed the nature of commodity trading. A major shift occurred when the trading houses started to aquire physical mining assets – for instance mines - so as to control more of the value chain and also to improve trading performance. Ivan Glasenberg, the CEO of Glencore, was the main proponent for this strategy. First, he and Glencore made a series of coal mine acquisitions. This was meant to support one of Mr. Glasenberg’s special areas of competence, namely coal trading. It goes without saying that the volume of coal eventually controlled by Glencore was considerable.
Glencore also acquired a controlling stake in Xstrata, a diversified mining company also headquartered in Switzerland. Eventually the two companies merged. Major copper deposits in Congo were also acquired.
It should be noted that to add on and acquire physical assets to trading activities seemed to be possible only in cases where there was a possibility to consolidate some ownership, so as to be able to gain some market power, such as for coal and minerals. For agricultural products, on the other hand (corn, wheat, soybeans, coffee, cocoa, juices, …), there were typically too many independent producers (i.e., farmers) to make this consolidation possible. And, when it comes to oil production, interests were of course so considerable that takeovers by traders would be totally unrealistic and unacceptable for oil-rich nation governments.
The second shift was brought on by the expansion of derivatives, futures and options markets for commodities. These financial vehicles linked commodity trading to the broader financial markets. Thus, it was now possible to trade in commodities without physical transfers of these. All that was then needed was a contract to deliver a particular commodity sometime in the future, or to have an option to pick up a particular commodity sometime in the future. The “old” style of trading had been mostly physical, with physical positions of commodity assets, and thus also exposure for the traders to adverse price developments during the period of the holding of such assets. Many old-style traders were unable to make the transition to paper-based trading, and failed.
The third fundamental change in commodity trading had to do with an increasing emphasis on fundamental analysis of patterns of supplies, as well as of demands, including the factoring in of political analysis. For instance, the rise in oil prices stemming from the embargo of Iranian oil, led to a considerable windfall gain for Phibro Energy (the successor of Philips Brothers) which had forecasted this, even to the extent that the company had chartered in 11 large VLCC crude oil tankers to store oil in the interim. These was by now a strong shift towards protecting, maintaining and building one’s reputation, in contrast to the “wheeling-dealing” mentality of past years’ trading. Sophisticated analysis conducted from the trader’s offices, was now the modus operandum, in contrast to the typical traveling to various “hot-spots” of the past.
But there was still some reminiscence of the “old” way of doing things. Bribing was still rather common, but of course typically denied by the various traders. Iranian oil was widely thought to be traded, as an extension of the so-called “oil-for-food” program. And, Russia was suddenly in a financial squeeze due to a wide array of price collapses among many commodities. The country was forced to export more oil, and the new Geneva-based trading company Gunvor handled most of this. Another company, Vitol, handled the sale of crude oil from eastern Libya on behalf of the rebels, in exchange from refined products such as gasoline. The African Republic of Chad entered into a long-term contract to sell its oil (at fixed price) with Glencore. In return, the government of Chad received considerable financial support. There are many examples of such “shadowy” deals in the book.
From the above, and as pointed out in the book, it is becoming clear that many traders had risen into quite prominent positions of political power.
As noted, most trading firms were privately held. In 2011, Glencore became the exception, by going public then. A total of 7 dollar billionaires were created, including of course Ivan Glasenberg himself, who is reported to have gotten 9.3 B.$ from the IPO. Perhaps this might be seen as symptomatic of the immense amounts of wealth that had been created by commodity trading.
So, why should you read this book? First of all, the book is interesting reading in itself. The two authors are both reputable contributors to BBC, Bloomberg, Financial Times, etc. The authors have done truly extensive background research and have conducted many interviews. Impressive!
But, more than this, commodity trading is of course a good example of relative asset-light strategies. And, to become more asset light is perhaps a trend that many might be interested in exploring. Options and futures are perhaps a particularly important key here. The book provides very good insight regarding how to deal with such derivatives. Trading in stocks, currencies and even commodities are becoming key tools for many financial officers. This book represents a credible guideline here!
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