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Commodity traders are bidding adieu to the good old days. The industry is racing to diversify its sources of funding and shed non-core assets. It's like Goldman Sachs's decision to go public in 1999 – a change in the business model.
Louis Dreyfus is typical. The family-owned French commodity dealer tapped the public debt markets for the first time in its 160-year history last month, raising $350-million (U.S.) to help fund new acquisitions. On Oct. 4, Dreyfus sold its energy trading arm. It will use the proceeds to help with its $70-billion spending plan over the next five years, according to the Financial Times. Dreyfus is not selling equity . But peers Glencore and Noble have done so – and Glencore seeks to cement its position as a miner as well as a trader by a full takeover of Xstrata.
The traders' move away from the old model of employee-partners and opportunistic business decisions reflects three changes in the business environment.
Most important, scale has become more important. The biggest firms with the best access to underlying commodities and the most extensive networks of buyers and sellers have the advantage in a world of rapidly globalizing trade flows. Acquisitions are the easiest way to build scale, and they require ready cash or tradable shares.
Second, financial conditions have become tighter. European banks are pulling back to lick their wounds after the financial crisis. Finally, the need for capital constrains partners' exit plans. Some members of the Dreyfus family hold put options that could require the company to cash out their holdings. But the managers would rather gather than disburse funds.
Competition is intense and markets are getting more efficient all the time. Traders that lack scale are likely to have a particularly hard time, accelerating the once secretive industry's embrace of public markets.