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Meet the commodity traders
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Meet the commodity traders

January 16, 2024
With the commodity trading sector still grappling with the effects of the Ukraine crisis, growing war risks in the Middle East and the market shifts brought about by the Covid-19 pandemic, GTR speaks to four energy and metals traders to discover how they are continuing to adapt their supply chain management and financing strategies.

Source: Global Trade Review

 

The traders

  • Simon Huber, group treasurer and global head of structured commodity finance, Bluequest Resources
  • György Vargha, CEO, MET International
  • Nita Chakravarty, group financial controller, Rescom Holdings
  • Mohamed Bassatne, CEO, BB Energy Group

 

GTR: Can you briefly share your company’s journey into commodity trading, and how your focus has evolved over the years? What would you consider to be one of your biggest successes?

Chakravarty: Rescom Group is headquartered in Zug, Switzerland, and has been trading industrial minerals and metals for 50 years. While barite remains our flagship commodity, we have expanded our focus to also include coking coal – used to make iron and steel – and alumina. We source directly from the mines and sell goods in a few main geographies, largely India, but also the Middle East. We deliver minerals, metals and commodities to industrial companies active in oil drilling, construction, steel, energy, manufacturing and infrastructure.

Over the past six or seven years, our strategy has evolved beyond being a pure trader to owning equity in assets, such as mines, while seeking to secure long-term contracts with buyers. The trading market has become so transparent: all customers know the suppliers’ price, and the suppliers know what the end customers paid, so traders are having to find new ways to add value and generate profits. One of our biggest successes has been this change in the strategy, driven by our CEO, Madhu Koneru.

Huber: Bluequest Resources is a global commodity trading house founded over 15 years ago by a group of ex-Glencore executives. Our focus has always been aluminium and other refined metals. However, we have since diversified into concentrates, ores and other commodities. Increasingly, we are targeting iron ore, manganese, as well as critical metals and minerals linked to the energy transition.

In the past few years, the company has diversified to be broader from a product perspective, moving beyond a focus on refined metals or London Metal Exchange (LME)-grade materials and targeting more specialised products, like scrap metals. By expanding our downstream supply chain capabilities, the company is positioning itself closer to manufacturing customers involved in construction, automotive, packaging and even aerospace. We started out in Europe but have rapidly moved into new geographies and developed relationships with global sourcing partners and clients. Our headquarters are in Baar but we have offices around the globe, including the US, China and Brazil, as well as smaller offices in Peru, Chile and the Middle East.

Bassatne: BB Energy began marketing oil products and importing bitumen in Lebanon in 1963. Back then, it was the first independent oil trading company in the Middle East. Over the past 60 years, we have expanded our footprint to become a global trading firm with 500 employees and 12 international offices. BB Energy has activities within trading, operations, chartering, logistics, storage, refining, and financing, trading in excess of 41 million metric tonnes annually of crude oil, petroleum products and gas.

Vargha: MET was founded in 2007 as a gas wholesaler and soon became a regional player in the Central and Eastern European markets. After moving headquarters to Switzerland, MET expanded its presence to include major European gas hubs, entered the power markets, and began operating a liquefied natural gas (LNG) import business. We have transformed ourselves into a European energy supplier, opened gas and power subsidiaries across Europe and are expanding into Asia. In October, MET Group opened an office in Singapore to support its LNG trading business.

Our biggest success as a company is that we weathered the storm in 2022. This was a very complex situation from a market risk, margining risk, credit risk and operational risk point of view. The stakes became 20 times higher in every single process. We are happy that we came out stronger as a result.

 

GTR: How has recent geopolitical instability impacted your trading strategies and risk management approach?

Huber: There have been two major challenges in recent years: price volatility for both metals and energy, and disruptions to the physical supply chains. We are now having to evaluate growing sanctions risks in the wake of the Ukraine war and other escalating conflicts. We did not have a lot of exposure in Russia and have navigated the crisis quite well, and in fact, have generated business from new customers who were dependent on Russian material prior to the invasion.

Bluequest has sourcing capabilities in Australia, South America, South Africa and Europe, and we have received a lot of requests from new clients. In the wake of the conflict, know your customer (KYC) processes have become increasingly important and our processes more sophisticated. We have standardised our rules and assigned more people to analyse our transactions so as to ensure there are no red flags in the whole chain.

Chakravarty: Rescom has not been directly impacted by the Ukraine crisis as we do not source from Europe, nor do we sell there. We procure most of our commodities from West Africa, Japan or Indonesia, and sell into India or the Middle East. The company does not trade the types of goods significantly affected by the war, namely soft commodities, gas or oil. About 70% of our buyers are in India, which is our core market, and we sell barite into Saudi Arabia and the UAE. Rescom purchases and trades alumina, the main raw material for producing aluminium. But again, there has been no real impact as we purchase from Indian suppliers.

Bassatne: In recent years, the systematic and global shocks of the Covid-19 pandemic and the Russia-Ukraine war have increased price volatility and dislocated energy supply chains. We are now once again facing increased volatility in energy markets due to the conflict in the Middle East. These shocks have fundamentally reshaped both the energy landscape and commodity markets, which are incredibly sensitive to geopolitics. Energy security has once again moved to the top of political agendas across the world. The implications of the conflict in the Middle East are currently unknown but, if the conflict continues to escalate, the global economy could be facing a dual-energy shock from two ongoing wars, putting pressure on supply chains and driving changes in demand.

We have taken steps to future-proof our business in recent years. For instance, in 2021, we appointed a new group CFO to initiate the rollout of a clear governance mandate, as well as two non-executive board members. In 2023, we reviewed and strengthened all our policies, including implementing additional risk and credit mitigation policies and enhancing our internal control processes.

Vargha: During volatile times, one has to make sure that positions are managed in a prudent way, not only financially but also physically. We need to make sure that we know exactly what we are doing with respect to our asset positions and from a financial hedging perspective. From a digital perspective we are working on tightening our commercial system to make sure that every decision is supported properly and as a result is concluded spot on, and that we are able to continuously look at our whole portfolio in a coherent way. MET is also working to increase dialogue across our entire operations front-to-back – between sales and trading, asset management and origination and across different countries and commodities in our portfolio.

 

GTR: In what ways has the global supply chain disruption affected your operations, and what steps have you taken to mitigate these challenges?

Huber: It is incredibly important to always have a diverse range of suppliers and business partners when times are good, so when the market becomes difficult, you have a plan A, B and C.

The pandemic and the Ukraine crisis have only reinforced the need for a flexible strategy, and the need for a diversified portfolio in all aspects of your business. In one year, sourcing from Europe or the Middle East is very favourable; in another, Canada, Australia or South Africa might be better options.

Price volatility has been another hot topic: what happens if prices spike, or our financing lines dry up? Might our brokers run into difficulties, could banks exit the market, or could we experience performance risks within our physical contracts? We run through possible scenarios on a daily, or a weekly basis, to prepare ourselves for such risks and so know in advance how we would like to respond.

A lot of our customers are looking to source more sustainable metals and we are well positioned as the majority of our portfolio can be considered as green aluminium, largely produced from hydro power. But this trend is certainly growing. It’s becoming increasingly vital to have a very strong footprint in this area as certain industries – the European automotive sector, for instance – mainly purchase green aluminium.

Chakravarty: Like other commodities traders, Rescom Holdings has been affected by two main supply chain disruptions in the past few years. During the Covid-19 pandemic, there was significant volatility in the freight market and it was difficult to get ships. Rescom is a bulk commodity trader, so the freight market volatility did cause a lot of disruption. It was very difficult to have a firm cost and freight pricing. Thankfully, that situation has now stabilised.

There have also been financing difficulties as a result of the Covid-19 pandemic and the war. Many commodity traders have suffered huge losses and, as result, risk pricing went up. In turn, the cost of capital grew and this led to increased borrowing costs. The amount we are paying to lenders has continued to increase post-Covid because of the increase in secured overnight financing rate prices and inflation, both of which have dramatically affected our bottom line. Gross profits are not being hit, but our net profit is being dented by the cost of finance, which is one of the major side effects of the war, inflation and Covid-19. In response, we’ve tried to induce more letter of credit-based transactions, because that does bring down the cost of financing. Bank-to-bank risk ensures the discounting charges are much lower than on an open account basis. That’s number one. Number two, our approach with our banks is to try and negotiate a reduced cost while maximising efficiencies in our operations.

Vargha: Should European energy demand return to growth, then geopolitical risks – which are affecting the supply side – may drive sizeable price volatility. This is a big question mark for Europe over this coming decade. There is a base load supply missing from the system currently and Europe is mostly reliant on short-term sourcing, which means the continent is more exposed to gas price volatility. Europe accounts for between 20% and 35% of the global LNG industry’s demand, so the continent is acutely prone to price volatility.

Long-term LNG contracts mainly reflect either Brent indexation, which is a little bit less volatile than natural gas has been over the last couple of years, or Henry Hub indexation, which represents a cost-plus pricing model, given the fact that the American shale gas industry works with substantially shorter lead times. In this context, we either import Brent volatility in the long term, or we import the cost-plus structure from the Henry Hub. Both have substantially better price stability compared to what we used in previous years.

Bassatne: The Russia-Ukraine war transformed energy supply routes and trade flows as European countries searched for alternatives to Russian energy supplies. From what we can see, the new dynamics are here to stay for the foreseeable future. In response to global supply chain disruption, we have responded swiftly to supply signals and facilitated the efficient delivery of energy to our customers.

 

GTR: What are your main sources of finance as a commodity trader and how have these changed since the Covid-19 pandemic and/or the Ukraine crisis?

Huber: Our main sources are trade finance banks – typically European lenders, both large and small, and we have very good relationships with the Swiss cantonal banks. There are also some local banks in Asia, the US and South America that we use for business in these regions, for mainly domestic trades. Our bank financing is usually extended on a transactional basis. There are other structures like borrowing bases or revolving credit facilities (RCFs), but there is only limited availability for us as a mid-sized player.

When seeking to finance projects, or to secure more complex pre-export financing, we tend to use credit or private equity funds and occasionally trade finance funds, when we need financing on the more challenging commodity flows, or locations where banks are less comfortable. Repo providers also have an important role and give our firm greater storage volumes and tenors under a lean set-up and attractive financing conditions.

Chakravarty: Rescom’s main financing sources are the Middle East banks, Geneva and London-based trade finance funds, and our own suppliers and customers. International banks are becoming increasingly selective and difficult to deal with. The hope is the banking market will become more accessible next year, but from what we can see, lenders are shifting towards retail companies and larger corporates. International banks are becoming less and less open to financing structured commodity traders – such as Rescom – because they were exposed to some bad apples in the industry and suffered losses.

Vargha: Financing sources did not change with the pandemic or the Ukrainian crisis. However, times of higher volatility require very flexible working capital solutions and additional liquidity buffers to support the business. Beyond a sound equity position, MET Group has wide access to large international banks and liquidity. From plain vanilla RCFs to structured bilateral and syndicated solutions, MET is equipped to deal with very volatile markets. We are also closely working with some institutions to implement more innovative financing solutions around margining and storage positions.

Bassatne: Our main sources of finance are bilateral lines, RCFs and borrowing base credit facilities. In recent years, we have been able to grow our financing lines to over US$5bn. The liquidity of the banks has significantly improved since the Russia-Ukraine war, after many trading companies exited Russian business. However, the fees have also increased as financial institutions and banks have imposed new geopolitical risk premiums.

In Q4 2023, BB Energy announced the renewal and expansion of its secured borrowing base credit facilities in the Americas and launched its inaugural borrowing base facility in Asia. This deal attracted a diverse group of 18 banks with a broad geographical split. The US facility was launched at US$500mn and subsequently increased to US$600mn following a significant over-subscription. In Asia, we launched our inaugural US$210mn borrowing base, which is the first digital facility for the group outside the US. This secured facility covers import finance as well as funding of inventory, receivables and hedging positions under the wholly owned subsidiary, BB Energy Asia. It is also underpinned by cutting-edge digital trade platforms through our partnerships with Komgo and SGTraDex.

 

GTR: How are you adapting your trading practices to align with the growing emphasis on sustainability and environmental responsibility within the commodities industry?

Huber: The ESG topic is becoming incredibly important for the metals industry: banks have a strong emphasis on this trend and, on the consumer side, there is growing demand for information on the origin of the material and its carbon footprint. What is the region, and what are the ESG credentials of the metal being produced? Moreover, what is the situation on the ground in these supplier markets? As a company, we have invested a lot of time and resources to develop a well-documented process to answer all these questions. Due diligence is often stricter and more extensive for projects in places like Africa or South America, where you have to assess all ESG aspects in detail and work together with specialised local mining consultancies.

It is difficult to gauge what impact the EU’s carbon border adjustment mechanism (CBAM) will have on our business, because it’s not yet fully implemented and still in a testing phase. Having said this, I do not expect CBAM and the additional environmental reporting requirements to be too taxing for our company. The information is coming directly from the smelters we source from, and as such, the burden is not on Bluequest to calculate and provide the additional data. Moreover, we have third-party expertise to handle these processes for us. From that perspective, the impact will probably be limited.

Now, there is a question as to whether there will be an impact on global metals trade flows. Will CBAM disadvantage Europe, for example? That’s a big question, how will the global trade sector react? I could envisage a situation where a larger proportion of green aluminium will come to Europe, as there will be more demand for a low-carbon footprint for companies targeting net zero.

Chakravarty: Rescom has responded to a growing emphasis on ESG and moved to trade coking coal – used to make iron and steel – as opposed to thermal coal. We also consider alumina as a very important aspect of our business. It is categorised as a tier-one green product and is used to manufacture aluminium, arguably the most important component in making electric vehicles, as well as solar panels. Coking coal has a role in the energy transition and is the only way to manufacture steel currently. We have talked to many banks, including those based in Europe, who have largely left coking coal off their ESG exclusion lists.

Thermal coal remains part of our trading portfolio, but at the same time, we are keen on investments and we are looking at opportunities to invest in renewable projects if the price is right and the returns attractive. We are evaluating a hydro plant project in India, for instance. Several large Indian conglomerates are making investments in the project and we’ve been invited to participate. But like I say, the pricing must be competitive when the energy is sold into the grid and we have to make sure these investments make financial sense. As part of the Paris Agreement, India has committed to reach net-zero emissions by 2070, so we do have time.

Bassatne: A decade ago, we began investing in and trading cleaner transition fuels, such as liquified petroleum gas and LNG, and in the time since have taken further steps to boost clean energy activities. In 2020, the company created a renewable energy division, BB Energy RED, which has since grown its portfolio to include more than 15 assets across solar energy, battery storage, EV charging infrastructure, climate technologies and emission-reduction initiatives in both Europe and sub-Saharan Africa.

We have expanded our carbon trading desk, and in recent years, built a pipeline of 20 million tonnes of carbon credits across the voluntary market through investments in emission projects and trading activities.

In 2021, the company made a commitment to invest 25% of its annual net profits into clean energy. In 2023, we made great progress and committed over 30% of the group’s average net profit towards investments in the energy transition. Over the past 12 months, we have also introduced a new ESG framework and have been working closely with CarbonChain to establish a carbon footprint measuring system, covering the group’s scope 1, 2 and 3 emissions.

Vargha: We invest in green assets such as wind and solar, as well as flexibility assets designed to integrate weather-dependent power generation into the electricity grids. As part of our commercial strategy, we are taking a keen focus on our power business and are seeking to grow our renewable portfolio. However, merchant risk in renewables is one of the key bottlenecks in this business segment, alongside grid connection and the current high interest rate environment.