Top independent oil trading houses are boosting their metals and agriculture trading businesses to capture current volatility and expected supply shortages in the long term.
Over the past few months, Vitol Group, the world’s largest independent oil trader, has returned to trading in agriculture after six years, while Gunvor and Hartree Partners hired traders to trade agricultural derivatives and increased exposure to base metals, Bloomberg reported this week, quoting sources with knowledge of the hires.
Energy traders have made huge profits off the volatility in the oil, LNG, and coal markets over the past year. Now they are betting on volatility in agriculture and metals prices amid disruptions of crops supply chains following the Russian invasion of Ukraine and the Chinese reopening in the short term, and the long-term energy transition necessitating a lot of copper, lithium, aluminum, and nickel, to name a few.
Record-High Oil Trading Profits
The market volatility and the change in energy trade flows of the past year have led to record-high profits at the top independent commodity traders.
Privately held Vitol Group, the biggest independent oil trader in world, made more profits for the first half of 2022 – $4.5 billion – than for the entire 2021 when it earned $4.2 billion, sources familiar with the financials told Reuters last year.
Despite lower traded volumes, Trafigura booked a record profit for the financial year that ended September 30 in an unprecedented energy market volatility after the Russian invasion of Ukraine. Trafigura, one of the biggest independent oil and commodity traders in the world, reported a net profit of $7 billion for the year ended in September, more than double the profit from the previous fiscal year and more than all the profits from the previous three years combined.
“The past year saw our people work hard to solve the disruptions created by unprecedented market volatility and the big structural shifts that are shaping our industry,” said Jeremy Weir, Trafigura’s Executive Chairman and CEO.
Gunvor Group booked $841 million in net profit for the first half of 2022, more than the profit for the full 2021 financial year, and more than triple the profit for the first half of 2021.
“The vast majority of profits will be retained within the company to leverage further global growth and to position Gunvor as a relevant force in support of the Energy Transition and energy security. Investments in non-fossil fuels will continue as a part of this effort,” Torbjörn Törnqvist, Chairman and CEO of Gunvor Group, said in a statement in July 2022.
Metals And Agriculture Opportunities
Commodity trading has boomed over the past five years, McKinsey & Company said in a report last month.
Commodity trading value pools have jumped, nearly doubling from $27 billion in 2018 to an estimated $52 billion of EBIT in 2021. Most of the growth was fueled by EBIT from oil trading, which were estimated to have surged by more than 90% to $18 billion during the period. The overall value in commodity trading will continue to grow, McKinsey says.
And the financial results of commodity traders tend to correlate more with volatility than absolute price, the consulting firm said.
According to McKinsey, the changes in the global commodity markets will raise structural volatility, disrupt trade flows to open new arbitrages, and fundamentally alter commercial relationships. All this could be an opportunity for the biggest commodity traders.
“The energy transition now under way is an economic and physical transformation that cuts across and integrates the various global food, energy, and materials systems,” McKinsey notes.
“A reordering of asset values and cross-commodity relationships would more strongly intertwine the price volatility of traditional commodities with that of new green commodities—and vice versa,” wrote the authors of the report, McKinsey’s partners Roland Rechtsteiner and Joscha Schabram and consultant Arun Thomas.
Looming Shortage Of Energy Transition Metals
Analysts and industry players expect demand for metals critical for the energy transition to spike in the coming years, while supply is playing catch-up, at least for now. Investment in new mining hasn’t taken off yet.
This year’s investment in metals mining is set to rise by 3% year over year to $149 billion, with copper leading growth, but the level of investment will still be barely above the lows of the downcycle, Wood Mackenzie said earlier this month.
“There is little sign yet that the mining majors are prepared to loosen the shackles and embark on a new phase of organic investment in the new capacity critical for the transition – copper, cobalt, lithium, nickel and aluminium among them,” WoodMac’s Chairman and Chief Analyst Simon Flower wrote.
Despite the recent drop in metals prices, especially of copper, due to sufficient stockpiles and still sluggish Chinese demand, commodities are set to jump later this year as everything points to the Chinese reopening “being A-OK,” Jeffrey Currie, global head of commodities research at Goldman Sachs, told Bloomberg TV this week.
In a note on Monday, Goldman Sachs said we would see later this year “widespread commodity shortages.”
By Tsvetana Paraskova for Oilprice.com
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