Firms find they can no longer thrive on volatility after building up a physical presence
LONDON—For years, the secretive club of the world’s largest commodities traders thrived on volatility and sometimes tiny price differences in the raw materials they trade—styling themselves as nimble middlemen able to profit whether markets were rising or falling.
These days, many outfits are very different animals and that’s causing unusual pain amid today’s commodities-market rout.
During a decade of booming commodities prices, many of these trading firms put billions of dollars into mines, pipelines and storage terminals. Those bets were supposed to help their traders understand supply and demand, while providing their trading floors with a ready source of supply. But they also made them more exposed to falling prices in markets in which they have built up a physical presence.
Just how much, however, is difficult to gauge, since many of the biggest traders are still privately held and disclose little. Even the trading floors of big, publicly listed traders—including Glencore PLC of Baar, Switzerland, and Hong Kong-based Noble Group Ltd.—are difficult to value because they have so few peers.
“The issue is that there’s an opacity around the trading business that makes it hard to model,” said Sanford C. Bernstein analyst Paul Gait. “When you’ve got a mine, you can work out minute by minute what that mine is worth. It’s much harder to do that with a trading business.”
One of the hardest hit in the recent market carnage has been Glencore, once a privately held trading firm that, under Chief Executive Ivan Glasenberg, listed shares in 2011 and then became one of the world’s biggest, diversified miners after swallowing up Xstrata in 2013. Shares have swooned this year amid falling prices in most of the commodities it mines, high debt and concerns over its investment-grade credit rating, which it needs to keep trading costs down.
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