The oddities of the highly circumspect Commodities market hardly become public knowledge - thanks to the handiwork of its players. No wonder, common people have little idea of even the big names in business like Vitol, Glencore, Trafigura or Louis Dreyfus. These are trading giants quietly and discreetly lifting tons of raw materials around the globe.
The only exception could be made of Cargill - the largest food and agricultural company in the United States with interests in energy, metals and industrial products. But it’s prudent to note that despite being a USD 100-billion company and so well-known in public, Cargill continue to be what it was at inception - a family-owned enterprise.
Most of the commodity traders are privately held with opaque business models and shielded financial information. The prime reason lies in the way they do business - by capitalizing on market loopholes. Transparency is obviously a deterrent to growth.
Market inefficiencies in this trade stem from all quarters, which agile and adept middlemen - the trading giants - spot as business opportunities on behalf of several buyers and sellers spread across the world. These include:
Commodity origins are necessarily detached from their markets, as a result, information on changing demand-supply scenarios are routed through traders who act as aggregators of information by virtue of their global reach and match demand and supply wherever and whenever price imparity resides.
Most small producers and buyers lack the machinery to form a direct market, both in selling or sourcing their produce. This fact spells a thriving business for traders who effect trade flows in the most profitable directions.
A well developed transportation infrastructure comes at a premium - one that sources commodities from the remotest of regions. Obviously, traders with efficient cargo fleet capacities beat transport bottlenecks and reap supernormal profits.
Most players, of developing countries in particular, lack the credibility and advancement to approach international banks and institutions for securing cost-effective loans. On the other hand, mega banks and financial powerhouses have limited presence and knowledge when it comes to the dark corners of the world. The giant traders bring the two parties together as the most acceptable counter-parties. Needless to say, they also make heavy profits from credit tenor off-takes and loan syndications.
Commodity trading can be likened to a chess game where traders act as strategists with the sole aim to control trade flows across the value chain of origination, logistics and finance. The game is all about causing checkmates before the market realizes. The business models differ from player to player. The smaller ones prefer to remain flexible rather than own fixed assets, mid-sized traders seek to leverage from investing in anchor assets placed along key value chains while the mega players often own production assets to lock in long-term trade flows and price upsides.
Put simply, Buy Low, Sell High is the market mantra. But more than price, it’s the volume that drives the business. The sole aim is to control commodity flows while striking a fine balance between the degree of control and the cost of control.
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