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War Brings an Uncomfortable Boon to Commodity Traders

It’s an embarrassing but unavoidable truth: the war in Ukraine is proving to be pretty good for the business of the world’s major commodity traders.

Glencore Plc expects full-year trading profits to exceed its target range again after a stellar performance in the first quarter, while crops giant Bunge Ltd. raised its earnings estimate for the year by more than 20% after reporting its own exceptional results.

Since Russia’s invasion of Ukraine in February, commodity markets have been in disarray. This drove up prices and cut off supply, creating a difficult environment for commodity consumers, but ideal conditions for trading houses. Commodity traders, who transport the world’s resources, were able to take advantage of the volatility, arbitrating shipments through the network of sanctions and supply disruptions to keep materials flowing.

“What we’ve always found is that in times of high volatility, high prices and high volumes, that’s when we have the opportunity to make the most money,” the CFO said. of Bunge, John Neppl, in a conference call after the company’s publication. booming results in the first quarter.

Of course, this activity is not without risks. Soaring volatility has put the balance sheets of commodity traders under pressure, with massive daily price movements triggering billions of dollars in margin calls across the industry.

Windfall earnings also come with heightened scrutiny from policymakers and central banks, concerned about sector liquidity and a perceived lack of market oversight.

“Yes, traders are agile, they find solutions and absorb risks that the whole world does not want to take,” said Jean-Francois Lambert, industrial consultant at Lambert Commodities. “So when the market is very volatile, they make huge margins, that’s a reality.”

If companies weren’t doing their job of transporting goods from place to place, nations would have a much harder time finding needed resources, from diesel to food, he said.

Grain shortage

Together, Russia and Ukraine are among the world’s leading exporters of wheat, corn and sunflower oil. Planting disruptions in Ukraine and Russian grain payment difficulties helped push prices to multi-year highs.

Prior to the war, Ukrainian ports along the Black Sea were gateways for much of the region’s grain to be loaded onto ships bound for Asia, North Africa and the Middle East. East. Now they are part of the war, blocked and bombarded.

As importing nations like Egypt, Algeria and China jostle for food, traders with positions outside the Black Sea like Viterra and the so-called ABCD Group of Major Crop Merchants – Archer -Daniels-Midland Co., Bunge, Cargill Inc. and Louis Dreyfus — were able to offer buyers grain from alternative sources like France, the United States and Brazil.

As crude oil prices remained high, this drove up cooking products such as palm oil and soybean oil, which benefited traders’ crush margins.

ADM has not yet raised its earnings estimate for the year, although some analysts have already done so. He said this week he expects 2022 results to top those of last year, without going into specifics.

Combined with a crop shortage in South America, the disruptions in the war-torn region “will lead to continued strain in global grain markets over the coming years,” ADM CEO Juan Luciano said during of a conference call on Tuesday.

whipped energy

In the world of energy, independent traders such as Vitol Holding BV, Trafigura Group, Gunvor Group Ltd. and Mercuria Energy Group Ltd. are all tightly held and do not release quarterly results.

Still, the signs point to a strong performance. For example, the diesel shortages that have recently driven up prices around the world were well flagged by some members of the group.

Some of the largest business units are nested within the broader sector of energy majors, which means greater disclosure of performance. TotalEnergies SE saw profits triple in the first quarter as oil prices and refining margins jumped, while rival Shell Plc signaled that results from its gas trading segment “should be higher” than in the fourth trimester.

“The rebound in energy prices seen since the second half of 2021 has been amplified following Russia’s military aggression against Ukraine,” TotalEnergies CEO Patrick Pouyanne said Thursday, adding in a later statement on results that margins could still improve.

Dislocation of metals

Meanwhile, Glencore, the world’s biggest commodities trader, said on Thursday its marketing division will record profits “comfortably” above the top of its guidance range of $2.2 billion to $3.2 billion. billion dollars this year.

The company is active in the field of energy but also in that of agricultural products thanks to its participation in Viterra. But it’s in metals trading that he really dominates, holding positions anchored by an array of mining and smelting assets.

Jefferies analyst Christopher LaFemina reiterated in a note on Thursday his buy rating for Glencore, calling it a “top pick” for British mining companies. “Commodity market upheavals and supply shocks have created extraordinary arbitrage opportunities for Glencore’s marketing activities,” he said.

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