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Tags: oil | traders | diversify | food

Oil Traders Diversify Into Food and Metals in Quest for Profits

Monday, 17 June 2013 01:47 PM EDT

Energy trading houses are diversifying into food commodities and metals, which makes them likely to invest in assets such as port capacity as they copy their rival Glencore Xstrata to escape excessive reliance on oil.

Oil giants Vitol and Mercuria have expanded in agricultural commodity markets by recruiting traders in the past 18 months, while Gunvor and Mercuria have also hired metals specialists and begun trading for the first time.

Traders and analysts say there is limited money to be made solely as a middle man, leaving acquisitions of port and storage assets as the most effective next step.

The four "ABCD" companies that dominate the global trade in agricultural goods, Archer Daniels Midland Co, Bunge Ltd., Cargill Inc. and Louis Dreyfus Corp. all have extensive operations along the supply chain.

So do top metals players Glencore and Trafigura.

"Most of the traditional agricultural companies have got assets, it's not crucial, but it's probably useful as it helps you manage your supply better and therefore manage your performance risk better," said Steve Jesse, head of agriculture for Europe and Americas at Commonwealth Bank Australia.

ABN AMRO's global head of agricultural commodities, Suzanne Larsson-Nivard, said she expected energy companies to acquire assets including storage and port capacity, to ensure a substantial position in agricultural markets.

A spokesperson at Vitol, which sourced around three quarters of its more than $300 billion in revenues last year from oil, said it was aiming to boost its turnover by diversifying.

While revenues have been growing among the top five energy traders, margins have been disappointing. By expanding their operations they broaden their growth opportunities.

"There's a trend of energy and metals trade houses moving into the agricultural markets," said Andrew Kerr, founder of commodity recruitment firm Opportune City Resources.

"It's diversifying the book. They were already in the big commodities such as oil and in order to see growth they are looking to diversify."


Oil prices have stayed roughly steady for a couple of years near the $100 a barrel levels where lynchpin OPEC producer Saudi Arabia wants them.

Robert Piller, director of Aupres Consult and commodities lecturer at the Geneva Business School, said this stability has offered fewer opportunities to exploit price dislocations.

"Traders get frustrated by thin margins and are always looking to increase them. It's a less volatile period for oil prices and now they are huge companies trying to figure out how to grow," he said.

Other trade sources said that energy traders were motivated by Glencore Xstrata's success story and had noted that it consistently had bigger margins outside of energy markets.

Glencore's $30 billion takeover of miner Xstrata was clinched this year. Glencore has built on its trading business through acquiring assets along the supply chain, notably via its $6 billion purchase last year of Canadian grain merchant Viterra.

Many large traders in the sector share a common history with the Zug-based giant and have senior staff who trained under oil trader Marc Rich, whose firm was later renamed Glencore.

"It's about using financial clout to gain exposure to new markets combined with a little bit of 'be like the Jones.' They want to replicate Glencore Xstrata," said an industry source, familiar with oil traders' strategies.

Glencore's adjusted EBITDA (earnings before interest, tax, depreciation and amortization) margin by commodity sector over the past three years shows that on average energy was the weakest of the three, energy, metals and agriculture, averaging just 0.6 percent.

In 2012, the same margin for energy was 0.4 percent compared with 2 percent for agriculture and 3 percent for metals.

However, grains traders said that margins could also be thin in their market, which was why agricultural asset investments were likely to be an inevitable next step for the new entrants.


Crops are weather dependent and this uncertainty can boost volatility, while rising demand from emerging economies has fueled a bullish long-term outlook for food markets.

"The increasing demand for agricultural products from China continues as strong as ever. It's urbanization and improving wealth and living standards of the population which is driving demand growth for certain commodities," said Commonwealth Bank Australia's Jesse.

Besides investing in assets, industry sources said that another way that energy traders could succeed in new markets was by setting up barter deals between oil and other commodities.

This was a strategy used in the 1990s by Vitol shortly after its entry into the sugar market. It supplied Cuba with oil products in exchange for sugar exports, two sources familiar with the matter said.

"Some big players could take advantage of their strong position in certain markets to capture other commodities export business flow there," said Philippe Steiner, vice president of Commodity Trade Invest, a commodity trade finance specialist.

© 2023 Thomson/Reuters. All rights reserved.

Monday, 17 June 2013 01:47 PM
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