Commodity traders are working more closely with governments to ensure the security of energy supply and support new green value chains, a report by US management consulting firm Oliver Wyman has said.
“By doing so, the job of a trader transitions from a market broker to an investor reshaping supply chain. Examples include trading firms working with European governments to secure gas imports, thereby diversifying energy sources and playing a critical role in enhancing energy security,” the firm said in its report ‘Commodity trading’s coming of age - From market brokers to industry shapers’ said.
Similarly, traders can play a crucial role in bolstering metal recycling value chains, for example battery metals, which are expected to see tight supply markets due to years of under-investment in new mining projects.
Demand for transparency
“Commodity traders are now increasingly required to operate with greater transparency to avoid public backlash. Due to the growing impact of these trade flows on geopolitics, governments are becoming more vigilant. The trading firms that have already shown success with government partnerships understand the importance of building trust,” the report said.
Recyclers and automakers will ultimately be prompted to create closed-loop supply chains by the substantial incentives in the US Inflation Reduction Act and the European Critical Raw Materials Act, and traders have the opportunity to step in and support these new supply chains, it said.
With new leadership and significant cash reserves, commodity trading firms can seize the opportunity to revamp for the future. To build further institutional value, the leadership needs to look beyond short-term market swings by steadily investing in long-term market opportunities in reconfigured supply chains, the energy transition, and their trading platforms, the report said.
Significant retention
Commodity trading firms have retained a significant portion of their rising gross margins between $70 billion and $120 billion as cash on their balance sheets during the last five years, said Oliver Wyman.
The huge cash will now be controlled by a new wave of executives as a result of which commodity firms could benefit. “This huge reserve is shifting to the control of a new wave of leaders. Since February 2022, at least 20 senior executives in commodity trading firms have stepped into new positions, including the roles of chief executive officer, chief financial officer, and heads of trading divisions,” the management consulting firm said.
About 75 per cent of these senior executives have tenures that are below the average tenure of their predecessors five years ago. “With significant amounts of cash at their fingertips, the new guard of senior executives must now choose how to invest,” said the report with contribution from its partners and consultants.
‘Greater optionality’
For commodity trading firms, the benefits could come from investments across assets and in upgraded operating models, risk management, and culture. “Investment in assets gives traders greater optionality and influence over the commodities they trade.” it said.
In 2023, the commodity trading industry rebalanced after fundamental disruptions in cross-commodity trade flows in 2022, when trading gross margins reached a record of about $150 billion.
“As commodity markets settled and supply chains stabilised, gross margin declined to around $100 billion in 2023 and reverted to the positive trend it has followed for the past several years,” the report said.
This signifies two things. Peculiar events dominated 2022 and the record margins seen were not sustainable. However, structural factors that drive commodity trading profitability remain in place. “Ongoing tightness of supply in major commodities means potential future shocks to commodity markets could cause extreme volatility,” it said.
Oliver Wyman said metals and mining showed the steepest decrease from the highs of 2022, mostly driven by the price of coal returning to 2021 levels, down 50 per cent from 2022, reducing the potential for profits.