War brings an unpleasant windfall for commodity traders

That’s an awkward but inevitable truth: war in Ukraine is proving to be quite good for the business of the world’s leading commodity traders.

Glencore Plc expects its full-year trading profit to once again exceed its targeted range after a major first-quarter performance, while crop giant Bunge Ltd. increased its earnings estimates for the year by more than 20% after reporting its own amazing results.

Since Russia’s February invasion of Ukraine, commodity markets have been thrown into disarray. It has raised prices and cut supply, creating a shaky environment for consumers of raw materials but the perfect conditions for trading houses. Commodity traders transporting the world’s resources have been able to take advantage of volatility, arbitrage loads through the web of sanctions and supply disruptions to keep the material afloat.

“What we have always found is that in times of high volatility, high prices and high volume are when we have the opportunity to make the most money,” said Bunge’s CFO John Neppl at a conference call following the release of the company’s booming results for the first quarter.

To be sure, that activity does not come without risks. The rise in volatility has put commodity traders’ balances under enormous pressure, with massive daily price movements triggering billions of dollars in margin calls across the industry.

Profits also come with increased control from policy makers and central banks, concerns over industry liquidity and a perceived lack of market supervision.

“Yes traders are nimble, they find solutions and absorb risks that the whole world does not want to take,” said Jean-Francois Lambert, an industrial consultant at Lambert Commodities. “So when the market is very volatile, they have huge margins, it’s a reality.”

If companies did not do their job of transporting goods from one place to another, nations would find it much harder to find the necessary resources, from diesel to food, he said.

Lack of grain

Together, Russia and Ukraine are some of the world’s largest exporters of wheat, corn and sunflower oil. Disruptions to plantations in Ukraine and the challenges of paying for Russian grain have helped raise prices to several-year highs.

Before the war, Ukrainian ports along the Black Sea were entrances to much of the region’s grain could be loaded onto ships en route to Asia, North Africa, and the Middle East. Now they have become part of the war, blocked and shelled.

While importing countries such as Egypt, Algeria and China are fighting for food, traders with positions outside the Black Sea such as Viterra and the so-called ABCD group of large crop traders – Archer-Daniels-Midland Co., Bunge, Cargill Inc. and Louis Dreyfus – has been able to offer buyers grain from alternative sources such as France, the United States and Brazil.

As crude oil prices have remained high, it has taken cooking products such as palm oil and soybean oil higher, benefiting traders’ crushing margins.

ADM has not yet raised its earnings estimate for the year, although some analysts already have. It said this week that it expects the 2022 results to exceed last year’s results, without going into detail.

Combined with a shortage of crops in South America, disruption in the war-torn region will “drive continued tightness in global grain markets for the next few years,” ADM CEO Juan Luciano said in a conference call Tuesday.

Whip energy

In the energy world, independent dealers such as Vitol Holding BV, Trafigura Group, Gunvor Group Ltd. and Mercuria Energy Group Ltd. all closely held and do not publish quarterly results.

Still, signs of strong performance suggest. For example, the shortage of diesel, which has recently caused prices to rise around the world, was well marked by some of the group.

Some of the largest trading units are within the broader business of large energy companies, which means more disclosure of performance. TotalEnergies SE saw its first-quarter profit rise three times as oil and refining margins rose, while rival Shell Plc has indicated that results for its gas trading segment are “expected to be higher” than in the fourth quarter.

“The recovery in energy prices seen since the second half of 2021 intensified following Russia’s military aggression against Ukraine,” TotalEnergies CEO Patrick Pouyanne said in a statement on Thursday, adding in a later earnings call that margins could be further improved.

Metal dislocation

Meanwhile, Glencore, the world’s largest commodity trader, said on Thursday that its marketing department will record profits “comfortably” over the upper end of its $ 2.2 billion guidance range to $ 3.2 billion this year.

The company is active in energy and also agricultural products through its stake in Viterra. But it is the metal trade where it really dominates, holding positions anchored by a number of mining and smelting assets.

Jefferies analyst Christopher LaFemina in a note on Thursday reiterated his buy rating for Glencore, calling it a “top choice” for UK mining companies. “Commodity market shifts and supply shocks have created extraordinary arbitrage opportunities for Glencore’s marketing business,” he said.

© 2022 Bloomberg

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