For sale: One multibillion-dollar agricultural trader. Slightly used. All reasonable offers considered.
Okay, that's not exactly how Ivan Glasenberg, chief executive officer of embattled Glencore PLC, put things during his conference call with investors on Thursday. But it does capture the flavour of some of his remarks.
Like every other miner, Glencore is taking it on the chin as the great global commodity collapse continues to send prices spiralling lower. Shares in the Anglo-Swiss company are down 68 per cent this year.
But what may come as a shock is that the company is also suffering from a downturn in commodity trading – the stable core business that was supposed to buffer it against the wild ups and downs of the mining cycle. Glencore began life two decades ago as a trader and still derives nearly a quarter of its profits from trading products ranging from oil to coal to wheat.
It's not just Glencore that is suffering from trading trauma. Archer-Daniels-Midland Co., the huge U.S. trader of agricultural commodities, has seen its stock price shrivel by 31 per cent this year, while Bunge Ltd., which also trades farm products, has suffered a 30-per-cent decline in share price.
In Asia, Olam International Ltd., which trades "soft" commoditiessuch as cocoa, cotton and cashews, has lost 12 per cent of its value, while shares in Noble Group Ltd., which focuses on energy, power and gas products, are down by 66 per cent.
Many other traders, such as Trafigura, Vitol, Cargill and Louis Dreyfus, are private, but some of them are feeling the heat too. Louis Dreyfus said its net profit in the first half of this year fell by half to $130-million (U.S.).
What's behind the malaise in trading profits? Despite what many people think, falling earnings for traders do not simply reflect lower prices for raw materials.
"Commodity traders are not speculators, as they do not attempt to anticipate and take advantage of directions in commodity prices," according to a recent report from Paul Gait, senior analyst at Sanford Bernstein & Co.
Instead of betting on which way prices will go, traders typically try to capitalize on pricing disparities.
They might buy commodities in areas where they are cheap and transport them to areas where they are more expensive. Or they may purchase goods when they are inexpensive and store them until they can fetch a better price. Or they can make money by producing custom blends of products, such as coal or oil, tailored to meet the exact needs of clients.
None of these strategies depends on high prices. Indeed, as Mr. Gait points out, a buoyant market can actually hurt traders because lofty prices require them to invest more capital in their inventories.
He says traders do best when trading volumes are high and so is volatility – the greater the mismatches in the market, the more a nimble trader can benefit from pricing disparities.
No wonder then that so many traders are hurting right now. The glut in many commodity sectors has dampened volatility, replacing peaks and valleys with a steady downward grind. That reduces the scope for commodity traders to nip in and take advantage of fleeting discrepancies.
"The absence of major market disruptions and a steady growth led suppliers and customers to require less risk-management expertise from agri-commodity traders," Claude Ehlinger, deputy chief executive officer of Dreyfus, said in September after reporting the company's fall in profits.
At Glencore, the need to reduce the company's massive debt means that patience is wearing thin. It has been trying to sell a 30-per-cent stake in its own agricultural trading business, much of which it acquired with its 2013 purchase of Viterra Inc., the Canadian grain handler, for $6.1-billion.
There has been lots of interest, Glencore says, but so far no buyer appears willing to pay its price. So the company is now contemplating spinning off the business through a public offering.
Given the clouds hanging over commodity traders, only brave investors need apply.
Ian McGugan