Trafigura CFO warns of commodity industry stress

Trafigura CFO warns of commodity industry stress

The crisis in global energy markets will force some smaller commodity traders out of business and trigger a wave of consolidation in the sector, a senior executive at one of the world’s biggest trading houses has warned.

Christophe Salmon, Trafigura’s chief financial officer, said an increase in capital needed to keep goods moving around the world since Russia invaded Ukraine would squeeze smaller trading houses out of the market.

“As we get through these crises – and let’s not forget we are coming out of two and a half years of Covid – there will be another round of consolidation in the commodities trading industry,” Salmon told FT Commodities Global. Summit in Lausanne on Wednesday.

The comments come amid broader concerns about a liquidity crunch sweeping through commodity funding. Europe’s biggest traders have pleaded with banks and governments to offer “emergency” aid to avert a liquidity crunch as sharp swings in commodity prices drive up the cost of trading.

The global commodities trading industry is dominated by big names such as Trafigura, Vitol and Gunvor, but Salmon said many smaller traders face a host of issues ranging from rising capital requirements to lack of resources. access to credit.

“The barriers to entry into our industry as supply chain managers are increasing,” he said.

Traders at the FT conference expressed concern that tough conditions such as banks demanding high initial margins – cash to cover futures – had contributed to a breakdown in the smooth functioning of commodity markets , especially gas and nickel.

Fears over hydrocarbon supplies from Russia, the world’s second-largest gas producer and third-largest oil producer, rattled markets. Europe has yet to impose sanctions on Russian energy exports, but banks, shipping companies, insurers and refiners are self-sanctioning and avoiding touching the country’s oil.

However, Stephen Paris, chief financial officer of Oryx Energies, which focuses on Africa, said it was possible for small businesses to thrive provided they had a clear point of distinction.

“We are labeled as a trading company, but we are actually a trading, supply and distribution company. And the main difference is that we are almost covering the last mile of distribution,” he said. Oryx has a network of service stations across sub-Saharan Africa.

Jacques Erni, chief financial officer of BB Energy, a Dubai-based trading house, said it was possible to find niches overlooked by bigger rivals. “We still have a size where we can serve regions for their supply,” he added.

Salmon at Trafigura said cuts in commodity finance would trickle down to consumers.

“We are already in a vicious circle in the futures market. I want to emphasize the impact this will have on the physical market,” he said. “We are increasingly engaging with governments to inform governments of the likelihood of market disruptions, which means stock-outs of certain products in certain regions.”

European gas prices jumped to over €300 per megawatt hour this month before falling back below €100, while Brent, the international oil benchmark, has risen 20% since the invasion of Ukraine to reach $118 a barrel.

Traders expect to have higher levels of working capital linked to more barrels at sea, as Russian oil has to travel further to Asian customers and replacement supplies for Europe also have to spend more time. in transit.

Salmon’s observation on the viability of small traders comes amid uncertainty over the future of Gazprom’s UK trading arm, which Boris Johnson’s government is set to put under ‘special administration’, a de facto nationalization. The unit is vital to the supply of cheap energy to many UK industrial businesses.

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