The Trillion Dollar Trade While Regulators Have Banks in Their Sights, Powerful Commodity Trading Firms Mostly Fly Under the Radar
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COMMODITIES TRADERS CLOCKWISE FROM TOP LEFT: REUTERS/BEAWIHARTA, KEVIN ZHAO, TIM WIMBORNE, DAMIR SAGOLJ, NICKY LOH, TODD KOROL, YUSUF AHMAD, ROMEO RANOCO, JO YONG-HAK THE TRILLION DOLLAR TRADE While regulators have banks in their sights, powerful commodity trading firms mostly fly under the radar. Here’s a guide to the biggest in the business BY JOSHUA SCHNEYER biggest trading houses. in tech or telecoms. Many amass speculative NEW YORK, OCT 21 They form an exclusive group whose loosely positions worth billions in raw goods, or hoard regulated members are often based in such commodities in warehouses and super-tankers OR THE SMALL CLUB of companies tax havens as Switzerland. Together, they are during periods of tight supply. who trade the food, fuels and metals worth over a trillion dollars in annual revenue U.S. and European regulators are cracking thatF keep the world running, the last decade and control more than half the world’s freely down on big banks and hedge funds that has been sensational. Driven by the rise of traded commodities. The top five piled up $629 speculate in raw goods, but trading firms Brazil, China, India and other fast-growing billion in revenues last year, just below the remain largely untouched. Many are unlisted economies, the global commodities boom global top five financial companies and more or family run, and because they trade has turbocharged profits at the world’s than the combined sales of leading players physical goods are largely impervious to OCTOBER 2011 (This story has been corrected. See details at the end of story) TRADING HOUSES OCTOBER 2011 financial regulators. Outside the commodities business, many of these quiet giants who Invisible giants broker the world’s basic goods are little known. Their reach is expanding. Big trading firms How the top 5 commodity trading companies by revenue compare to other selected industries now own a growing number of the mines Latest annual revenue - $ billions that produce many of our commodities, the 900 ships and pipelines that carry them, and the 800 Tesco warehouses, silos and ports where they are 700 CVS Ford stored. With their connections and inside Caremark JPMorgan knowledge -- commodities markets are mostly 600 Nestle Daimler ADM 500 Koch Ind. Hon Hai free of insider-trading restrictions -- trading Carrefour General Allianz China Mob houses have become power brokers, especially Motors IBM 400 Bank of Cargill in fast-developing Asia, Latin America and Telefonica America Hitachi 300 VW Verizon Africa. They are part of the food chain, yet help Berkshire Glencore 200 Wal-Mart Hathaway HP shape it, and the personal rewards can be Nippon Toyota huge. “The payout percentage of profits at the 100 Vitol Axa Samsung AT&T commodities houses can be double what Wall 0 Street banks pay,” says George Stein of New Consumer Autos Financials Commodity Technology Telecoms York headhunting firm Commodity Talent. Staples trading companies Switzerland-based Glencore, whose initial Source: Thomson Reuters public offering (IPO) in May put trading houses Reuters graphic/Scott Barber 06/10/11 in the spotlight, pays some traders yearly bonuses in the tens of millions. On paper, the billion in 2010 were twice those at Apple Inc. the deepest pockets, and the best risk partial float made boss Ivan Glasenberg $10 As well as the 200 tankers it has at sea, Vitol management.” billion richer overnight. owns storage tanks on five continents. In addition to proprietary trading curbs, U.S. regulations are now pending to limit the U.S. regulator voted on Oct. 19 to impose HOW BIG ARE the biggest trading houses? Put banks’ proprietary trading -- speculating with position limits in oil and metals markets. it this way: two of them, Vitol and Trafigura, their own cash. The new rules don’t apply to That gives banks who trade futures cause for sold a combined 8.1 million barrels a day of trading firms. “Trading houses have huge concern, but since physical players usually oil last year. That’s equal to the combined oil volumes of proprietary trading. In some cases receive exemptions to limits -- because they exports of Saudi Arabia and Venezuela. it makes up 60-80 percent of what they do,” are categorized as bona fide hedgers -- Or this: Glencore in 2010 controlled 55 said Carl Holland, a former price risk manager trading firms should go unscathed. percent of the world’s traded zinc market, and at oil major Chevron Texaco, who now runs The trading houses’ talent and deep 36 percent of that for copper. energy consultancy Trading Solutions LLC pockets translate into incredible power. Or this: publicity-shy Vitol’s sales of $195 in Connecticut. “They have the most talent, “Most commodity buyers in the world are price takers. The top trading firms are price makers,” said Chris Hinde, editor of London- Food and fuel kings based Mining Journal. “It puts them in a tremendous position.” Largest commodities trading houses by revenue The sort of position that has allowed 2010 revenue - $ billion Vitol to do a brisk oil business with the U.S. Vitol 195 government, the besieged Syrian regime, Glencore 145 and Libya’s newly empowered rebels Cargill 108 simultaneously over the past few months. In Koch Industries 100 April the company dodged NATO bombs and ADM 81 a naval blockade and sent an oil tanker into Gunvor 80 the battered Mediterranean port of Tobruk to Trafigura 79 extract the first cargo of premium crude sold Mercuria 75 by rebels at the helm of a breakaway Libyan oil Predominantly trades: Noble Group 57 Energy company defying Muammar Gaddafi. Louis Dreyfus 46 Agriculture Vitol also discreetly supplied Libya’s rebels Metals or cross-commodities Bunge 46 with $1 billion in fuel, Reuters has learned -- supplies they desperately needed to advance Wilmar International 30 on Tripoli. Vitol’s early running gave the firm Arcadia* 29 an edge with the country’s new political Mabanaft* 15 stewards. As it turns the pumps back on, Olam 11 Libyan oil firm Agoco has allocated Vitol half Hin Leong 8 of its crude production to repay debts. While its savvy traders were doing deals in *Estimate Source: Thomson Reuters, Company reports eastern Libya, Vitol, along with rival Trafigura, Reuters graphic/Vincent Flasseur 17/10/11 2 TRADING HOUSES OCTOBER 2011 kept refined product supplies flowing to the And it’s not just the Europeans. Executives a global price benchmark -- fell to 400,000 besieged government of Bashar al-Assad in of Illinois-based ADM, formerly Archer barrels per day from more than 1 million in the Syria as his troops attacked civilians. Trading Daniels Midland, were jailed for an early late 1980s. A few traders seized the chance to houses were able to do this because international 1990s international price-fixing conspiracy for buy what amounted to almost all the available sanctions on Syria do not ban the sale of fuel into animal feed additive lysine. After Minnesota- supply. Price premiums for immediate the country, but they did not have to fight off based Cargill built a huge soybean terminal supply spiked, sapping margins for refiners much competition for that business. on the banks of the Amazon River in 2003, it worldwide. U.S. refiner Tosco sued Arcadia was targeted by Greenpeace and subjected to and Glencore for market manipulation; the DESPITE A RELATIVE lack of regulatory Brazilian government injunctions for allegedly case was settled out of court. oversight, such reach does In metals, stock in warehouses attract scrutiny. “There has can be tied up for years as loan always been some concern collateral, allowing the same about the trading firms’ traders who dominate the metals influence,” said Craig Pirrong, market to control a huge chunk a finance professor and of world supply -- an apparent commodities specialist at conflict of interest that has drawn the University of Houston, criticism from the UK parliament. who points out that some “The warehouses seem to have firms “have been associated an infinite capacity to absorb with allegations of market metal, but a very small capacity manipulation”. to release it,” said Nick Madden Public and regulatory of Novelis, the world’s top rolled attention usually rises with aluminium producer. prices. A spike in world food Trading houses saw the opportunity prices in 2007 stirred an to leverage metals warehousing after outcry against the largest the 2008 financial crisis. Of the six grain trading firms; when major metals warehousers only one, oil prices surged to a record Dutch-based C.Steinweg, remains $147 a barrel in 2008, U.S. independent. Trading houses Congress probed the role of competed with banks for the spoils -- oil trading firms, but found Glencore, Trafigura and Noble took no smoking gun. But in May one warehousing company each, the U.S. Commodity Futures Goldman and JP Morgan the others. Trading Commission sued And unlike commodities Arcadia and Parnon, both producers, such as U.S. oil giant owned by a Norwegian Exxon Mobil, trading firms don’t shipping billionaire, for just make money when prices allegedly manipulating go up. Most rely on arbitrage -- U.S. oil prices three years playing the divergence in prices ago, amassing millions of at different locations, between barrels they had no intention different future delivery dates, or of using. The companies between a commodity’s quality in dispute the charges. different places. Some transgressions That’s what Koch, Vitol and make headlines. A Trafigura- others did in 2009 when they chartered tanker was parked 100 million barrels of intercepted in the Caribbean in oil in seaborne tankers. Thanks 2001 on suspicion of carrying to a market condition known as illegal volumes of Iraqi crude. contango -- a period when buyers In a settlement, Trafigura BEANS: A worker stands on sacks of cocoa in the port of Abidjan last May.