As an important milestone in its expansion, the company moved its headquarters to the Swiss city of Zug — a municipality that, in addition to low corporate and personal income tax rates, offers high-tech technology and telecoms infrastructure and a service infrastructure of banks, insurers, consultants and IT companies catering for the needs of commodity traders. We recently paid a visit to the group's headquarters in Zug.
MET has grown big
Founded in Hungary in 2007, today MET Group is active in the natural gas markets of 26 countries and 19 international trading hubs operating through its local subsidiaries. The group’s international operations are playing an increasingly important role – the latest available figures from 2015 show that MET’s Hungarian subsidiaries (MET Magyarország, MET Power Hungary and the Dunamenti Power Plant) contributed only about 17% to total group revenues of €4.4 billion. (E2 Hungary, a joint venture of MET Holding and Magyar Telekom, was launched only on 1 January 2016.)
Today the company is a significant natural gas trader in Central and Eastern Europe and in 2015 traded more than 16 billion cubic metres of natural gas, double what is sold annually in Hungary. The group is also active in power, crude oil and oil products and liquefied natural gas (LNG) trading and wholesale, serving more than 5,000 clients with a staff of over 400. Its revenues surged in recent years, exceeding €4.4 billion in 2015 and reached nearly €5 billion last year (2016 results have not yet been published pending approval by the board), with more than 80% of total revenues coming from natural gas operations. Profit figures are not readily available as the company, just like its competitors, stops short of publishing them. What it did disclose, however, is that the group has been profitable ever since its inception, while, as a clue, it also revealed that margins are in the low one digits in retail and wholesale trading, which generates most of the revenue.
MET Group’s assets are partly made up of long-term rental agreements on pipelines and storage capacity and partly by the Dunamenti Power Plant. Future plans include acquisition of further energy assets, including power plants, and expanding the company’s portfolio to include renewables-based power plants.
MET has been present in Switzerland since 2010, the foundation year of MET International AG (METI), the group’s main wholesale trading unit that coordinates, among other operations, risk management activities for each subsidiary. MET Petroleum AG, the group’s commodity trading arm focusing on the oil industry was established in 2012, the same year that saw the birth of MET Holding AG. The latter is the parent company of all MET subsidiaries providing funding to group members. It is also in charge of business development and acquisitions. MET Gas and Energy Marketing AG, which is in charge of the company’s Southern and Eastern Europe expansion and sells gas and electricity in that region, is based in Switzerland. MET Power AG, which owns the group’s energy assets, is also headquartered there.
The group’s commodity trading operations are managed from two locations: MET maintains a smaller “trading floor” in London and a major one in Zug, where most of its natural gas, oil and oil derivatives, foreign exchange and carbon certificate trading takes place. A “trading floor” itself is similar to an office where sales staff of a major investment bank works, with news and exchange rates flickering on the screens of brokers and traders, typically in their 20s and 30s, who liaise with their clients, business partners, banks over the phone, etc. This business typically involves one-digit margins and big volumes, the latter evidenced in the case of MET by its 5th place ranking based on its 12.5% market share on the Central European natural gas trading point VTP Austria, while MET has also built up substantial positions on Italy’s PSV (11.1%), the Dutch TTF (3.8%) and Germany’s NCG (2.4%) hub.
Commodity trading is becoming a more and more complex task every year partly because of newly opening natural gas import routes into Europe, and a market that has, in essence, become global with the advent of LNG. Furthermore, clients often use different, substitutable commodities for the same ends, heating up a refinery using oil rather than gas, for instance, but complexity is also growing due to increasingly elaborate expectations by clients, who are looking for structured products and services. Only a few years ago most clients had fixed rate, long-term agreements, but today it is more common for clients to opt for services under varying terms and conditions in multiple countries at the same time, sometimes under contracts linked to a diverse range of products such as the price of aluminium or refinery margins. Moreover, price is not the single primary aspect for clients as they also seek to buy amounts aligned with their anticipated needs at an optimal price, which means MET has to be able to shift between fixed and variable prices. In line with the complexities of these services, the best traders of the floor earn outstanding salaries, pocketing 10%–20% of the profit they bring in, in some extreme cases making more than the company’s top executives.
The group’s main offices in Switzerland provide a workplace for 54 employees from 20 different countries. A total of eight Hungarian nationals currently work at MET International, while MET Holding employs six.
The Hungary-born business has grown to become a Swiss-based group of companies. Tax benefits have played a large role in opting for Switzerland, and particularly Zug for the company’s headquarters, as Switzerland’s federalist tax regime allows all 26 cantons to have their own tax laws. Municipal governments, of which there are close to 2,800 across the country, can impose their own local taxes. Some municipal governments have low corporate and personal income taxes, with Zug, the site of MET’s main offices, being one of them. Furthermore, holding companies such as MET Holding can operate under special rules that grant exemption from corporate taxes at the cantonal level and pay the federal corporate tax rate of 8.5%, with an effective tax rate that is even lower at 7.8%. (However, major changes could come after last weekend’s Swiss referendum.) Another incentive is that Switzerland has explicitly low personal income tax rates. Zug, by the way, is also home to other large commodity trading firms such as Klesch, Bashneft and Glencore.
However, apart from the obvious tax benefits, several other factors played an important role in MET’s decision to set up its headquarters in Switzerland. According to the company’s executives, it is markedly easier for a Swiss-based company to obtain large-scale funding, and a Swiss based company is also be taken more seriously inside the industry. This point is backed up by the market share figures of the Swiss commodity trading industry which holds
Whoever matters in the industry does have a presence in Switzerland, from market players focusing on certain sub-markets (Vitol, Trammo, ADM) to Glencore, the heavyweight of the industry.
Another case for Switzerland is its predictable and stable regulatory environment, exchange regulations and the availability and quality of financial services. It is also a world leader in high-tech technology and telecommunications infrastructure. Switzerland has also built up a unique service infrastructure, tailor-made for the requirements of commodity traders, made up of banks, insurance companies, consultancies and IT companies that offer services to a total of 550 commodity trading companies providing close to 4% of Swiss GDP and employing over 36,000 people in Switzerland alone.
In early February MET group has increased the size of its revolving credit facilities to €560 million, and for the first time, it also signed an unsecured 364-day revolving credit facility under the syndicated credit facility, with extension options to increase its credit facilities to €760 million. MET aims to use its credit facilities for general corporate purposes, but parts of it may also be utilized for acquisitions. The lenders include Credit Suisse, ING and Citibank Europe, and OTP, which provides funding to MET Group in a number of countries. Responding to a question, Chief Financial Officer Paul László said MET might be publicly listed at some point, but it is much more likely that it will raise capital from private equity investors.