They make hundreds of millions of dollars in profits each year and have unparalleled knowledge of the flow of vital commodities around the globe. Yet when the world’s biggest commodity trading houses have gone out looking for equity investors, they’ve found few takers.
From energy giant Gunvor Group Ltd. to storied agricultural merchant Louis Dreyfus Co., traders have tried and failed to get cash injections by selling minority stakes to strategic partners. Instead, the funds required to boost liquidity or monetize insiders’ shareholdings have come from piling on debt or selling assets -- far from ideal at a time when earnings are already weakening.
“The nature of the commodity trading business makes selling a minority stake very complicated,” said Jean Francois Lambert, an industry consultant and former trade finance banker at HSBC Holdings Plc. “This business relies on a handful of savvy traders and that is difficult to manage if you are not a trader yourself.”
Part of the problem is that the commodity trading business, largely dependent on volatile markets and sophisticated risk management, is notorious for big swings in profit. Vitol Group Ltd., the world’s biggest independent oil trader, posted net income of almost $2.3 billion in 2009, slumping to about $837 million in 2013 before rising to $2 billion in 2016 and then dropping to $1.5 billion in the following year.
Tough Years
The past few years have been tough for the traders with declining earnings making it difficult to find investors. It’s been exacerbated by increased competition and a technology shift that’s made key market information -- once known only to a handful of traders -- widely available to all.
For oil traders, a market structure that provided easy money in 2015 and 2016 from storing crude to sell later at higher prices has disappeared. Metals merchants are only starting to do better after years of lackluster results due to weak prices. Agricultural traders are still struggling with bumper crops and a lack of significant weather disruptions that have crimped profits and reduced the price volatility that traders crave.
“The commodity trading industry is on a path that’s not sustainable. The typical margin for a trading company is about 0.5 percent of turnover,” said Mercuria Energy Group Ltd. Chief Executive Officer Marco Dunand. “The trend is going to continue. It is not cyclical, it’s structural. So we may need to see consolidation.”
Attempts to find minority investors have been been complicated by the fact that many trading houses have one dominant shareholder in control, leaving any small holder with exposure to the business risks and earnings volatility but very little control over running the company.
Unsuccessful Attempts