Commodity Giant Steps out of the Shadows

MarineLink.com
Thursday, April 17, 2014
Photo: Trafigura

A detailed new case study scrutinizing the risk-management Swiss-based Trafigura is the latest effort to "demystify" the once-secretive commodity trading industry, just big merchants seek to fill a void being left by Wall Street banks.

The study, "The Economics of Commodity Trading Firms," comes as U.S. regulators mull new restrictions on banks' physical commodity trading, a crackdown some large energy companies say would rob them of credit-worthy, transparent counterparties and leave them at the mercy of shadowy and risky firms.

Facing higher capital requirements and regulatory pressure, some banks like JPMorgan Chase & Co have already quit the business of shipping cargoes of crude and storing metal, opening an opportunity for the mostly privately-held trading houses like Trafigura and Mercuria to take up new customers.

"A number of these firms have become very large - too large to ignore, if you like," said Anthony Gowers, global head of corporate affairs at Trafigura, explaining the rationale for the study. "So even those of us who remain private companies feel the need to explain themselves somewhat more in public."

The firm approached Craig Pirrong, a well-known professor of finance and commodity markets commentator at the University of Houston, last July to commission an independent review of the commodity trading industry, with the goal of "demystifying" it.

The resulting 63-page report, based on public filings and interviews with around 10 senior Trafigura traders and a number of C-level executives last September, reached a conclusion similar to several previous reports: relative to Wall Street banks, merchant trading companies' size, function and balance sheets make them far less likely to be sources of systemic risk.

The finding itself is perhaps less surprising than the depth of detail laid out about a company that until last year had never issued a public annual report, in an industry that until the past few years had shunned the public spotlight.

Pirrong has studied commodity markets for 25 years, but said his sojourn in Switzerland provided his first glimpse into a trading firm's "inner sanctum."

"The way they characterized it was that this was sort of our 'coming-out,'" he said. "We haven't had that much of a profile in the past, and we're introducing ourselves."

He used Trafigura, a firm that recorded revenues of $133 billion in 2013 trading everything from oil to iron ore, as a case study to illustrate how trading houses manage the risks of storing, transporting and refining raw materials.

Among his findings: the firm normally has up to $1 billion posted at collateral with clearing houses; about 15 percent of all its trades are uncleared over-the-counter transactions; and it has invested some $550 million over the past three years to build the information technology system to manage its business.

The Dangers of "Shadow Institutions"

The study's central finding was that because commodity trading firms have stronger balance sheets, less leverage and a minimal role in supplying credit to the broader economy, they are not a significant source of systemic risk.

The study comes as the Federal Reserve solicits input for new rules that could pare banks' involvement in the raw materials supply chain over concerns that a catastrophic event could jeopardize the financial system.

In a series of letters, U.S. energy companies warned that pushing banks out of physical commodities will leave them doing business with unregulated entities.

"Recent history is filled with examples of the dangers of unregulated, shadow institutions taking on a large role in the financial system," according to one letter from natural gas industry groups.

Gowers said more transparency could dispel those fears.

"Probably the biggest reason for suspicion is that the industry has historically tended to say 'We're private, mind your own business,' and that's no longer acceptable," he said.

(Reporting by Anna Louie Sussman; Editing by Jonathan Leff and Meredith Mazzilli)

  • Photo: Trafigura

    Photo: Trafigura

Maritime Reporter June 2015 Digital Edition
FREE Maritime Reporter Subscription
Latest Maritime News    rss feeds

People & Company News

DNV-GL Approves Kongsberg Engine Room Simulators

Kongsberg Maritime has received DNV-GL certification for three of its latest engine room simulator models designed to provide in-depth training on the K-Sim Engine simulator platform.

Container Shipping Lucky to Break Even in 2015

A toxic mixture of overcapacity, weak demand and aggressive commercial pricing is threatening liner shipping industry profitability for the rest of 2015, according

CMA CGM's OPDR Acquisition Approved by EU

The CMA CGM Group announced that the European Commission has approved its acquisition of OPDR. In order to finalize the acquisition, which was announced on November 25, 2014 by Jacques R.

Bulk Carrier Trends

Dry Bulk Market Crisis: Opportunity or Threat?

The shipping industry is experiencing the biggest dry bulk market recession since the 1980s, as uncertain global economic outlook and increased imbalance between

Lakes Limestone Trade Tops 4 Mln Tons in June

Shipments of limestone on the Great Lakes totaled 4,042,766 tons in June, an increase of 6 percent compared to May, and 9-plus percent compared to a year ago, according

Diana Agrees Charter for M/V Coronis

Diana Shipping Inc. announced today that through a separate wholly-owned subsidiary, it entered into a time charter contract with Sandgate Maritime Ltd for one of its Panamax dry bulk vessels,

Finance

Greece Port Operations Update

An update on Greece’s port operations and local conditions was issued today by maritime services provider Inchcape Shipping Services (ISS).   According to ISS,

Container Shipping Lucky to Break Even in 2015

A toxic mixture of overcapacity, weak demand and aggressive commercial pricing is threatening liner shipping industry profitability for the rest of 2015, according

Dry Bulk Market Crisis: Opportunity or Threat?

The shipping industry is experiencing the biggest dry bulk market recession since the 1980s, as uncertain global economic outlook and increased imbalance between

Energy

Shell's Icebreaker Vessel Damaged in Alaska

Royal Dutch Shell Plc's  icebreaker vessel Fennica returned to the Dutch Harbor in Alaska with a small breech in the hull, raising concerns about the company's

DNV-GL Approves Kongsberg Engine Room Simulators

Kongsberg Maritime has received DNV-GL certification for three of its latest engine room simulator models designed to provide in-depth training on the K-Sim Engine simulator platform.

Japan's MHI Bags Indian Oil's LNG Storage Tank Contract

Indian Oil Corp (IOC) has awarded a contract to build two football stadium-sized liquefied natural gas (LNG) storage tanks at its upcoming Ennore LNG import terminal

News

Tunisia Reassures Yachters Following Terror Attack

A week after a terrorist attack in Tunisia, local superyacht businesses are reassuring yachters that security has been increased at Tunisian ports despite numerous cancellations.

Shell's Icebreaker Vessel Damaged in Alaska

Royal Dutch Shell Plc's  icebreaker vessel Fennica returned to the Dutch Harbor in Alaska with a small breech in the hull, raising concerns about the company's

Djibouti Training Center Build on Pace

The construction of the Djibouti Regional Training Centre (DRTC) in Doraleh, Djibouti is moving forward in earnest, with a view to completion by the end of September 2015,

 
 
Maritime Careers / Shipboard Positions Maritime Contracts Maritime Standards Naval Architecture Navigation Offshore Oil Pipelines Port Authority Ship Repair Ship Simulators
rss | archive | history | articles | privacy | contributors | top maritime news | about us | copyright | maritime magazines
maritime security news | shipbuilding news | maritime industry | shipping news | maritime reporting | workboats news | ship design | maritime business

Time taken: 0.2705 sec (4 req/sec)