By Archie Hunter
Commodity crises have a history of changing the trading world.
A price rout and brief loss of creditor confidence amid 2008’s financial crisis set commodities titan Glencore Plc on the path to a public listing. After prices recovered in the years after, merchants like Trafigura Group, Gunvor Group and Louis Dreyfus Co. moved to tap public bond markets for the first time.
Now, the fallout of the war in Ukraine is fueling another shake-up. For some of the biggest players — many of which are still owned by their employees or founders — it probably means raising extra cash and pulling in new investors to keep business going. Smaller traders risk not surviving at all.
The companies that buy and sell crucial materials from oil to metals to grains are scrambling for cash to meet margin calls with prices whipsawing as the war rattles markets. With pressure building, traders are reducing their activity, which saps liquidity and threatens to only make markets more volatile.
Concern was clearly evident when executives at key trading houses met in Lausanne, Switzerland, this week.
“Everyone in this room has been working toward adjusting their liquidity, their financial solutions, but also adapting the size of their business in view of commodity prices,” Muriel Schwab, chief financial officer at oil trader Gunvor, said at the Financial Times Commodities Global Summit.
Right now, trading houses have the chance to make big money as the volatility opens opportunities, such as through arbitrage deals. But doing so is becoming harder as they struggle to keep up with huge cash requirements to back up positions or put on new ones.
For example, Trafigura held talks with private equity groups for additional financing, people familiar with the matter said this month. That included with Blackstone Inc. for around $2 billion to $3 billion in preference shares or a similar hybrid instrument, but no deal was reached. It also approached Apollo Global Management Inc., BlackRock Inc. and KKR & Co., the people said.
In the past six or seven months, Engelhart Commodities Trading Partners halved its positions in markets from energy to metals as liquidity dried up. And on the London Metal Exchange, the number of open positions across the most important base-metals bourse has hit a 15-year low.
Financial exchanges “enable us to do scale business, move product where it’s needed and manage our risks,” said Jeff Dellapina, CFO of independent oil trader Vitol Group. “To this point it’s worked OK, but you know, the strains and the stresses are becoming a factor.”
Commodities prices have jumped 30% this year as the war further constrains supplies. That means companies, particularly those with large physical books, need extra credit to cover increased trading costs and the cargoes they ship around the world. When prices rise sharply, they’re hitting funding limits.
Some of the largest are now seeking backup funding. In recent weeks, Mercuria Energy Group Ltd. secured $2 billion from banks and Trafigura twice obtained new packages.
Such revolving credit facilities provide welcome relief. But orders to receive more credit can take days, and when hundreds of millions of dollars of margin can be called in minutes, traders could be drawing entire lines to have cash immediately at hand, paying interest even if it isn’t used.
Low equity bases at independent traders also limit the amount of credit some are able to draw from financiers. While companies like Glencore, Bunge Ltd. and Archer-Daniels-Midland Co. are publicly traded with large market capitalization, most are privately owned and typically favor giving profits to shareholders as dividends or share buybacks.
That model is now being questioned as it becomes more critical to find credit. And raising equity immediately could be a game changer right now.
Gunvor Chief Executive Officer Torbjorn Tornqvist said at the FT conference that the company may raise equity from outside investors as an option for growth. The company has “always” been open to that, he said.
“For us to go and really, shall I say, exploit the potential of the company, it would be desirable to explore additional equity,” he said. “We are open to find an alliance which could increase the size of the company.”
Last year, billionaire Margarita Louis-Dreyfus sold 45% of the eponymous agricultural trader to an Abu Dhabi sovereign wealth fund last year. While big traders are now moving fast to address the challenges, there’s a growing sense in the industry that not everyone will be able to survive.
“When we go through these crises, and let’s not forget that we are getting out of two and a half years of Covid, that there will be another set of consolidation of the commodity trading sector,” Trafigura CFO Christophe Salmon said.
©2022 Bloomberg L.P.