Trading houses go cool on commodity prices. And trading house executives believe the latest decline in prices has some way to run.

April 18, 2013 6:18 pm

Trading houses go cool on commodity prices

By FT Reporters

For the head of one of the world’s biggest commodity trading houses, Ernest Hemingway nailed the state of agriculture markets with his description of Switzerland: “a small, steep country, much more up and down than sideways.” Alberto Weisser, chief executive of Bunge, told the FT’s Global Commodities Summit in Lausanne this week this was particularly true of the last five or six years. The prices of many basic foodstuffs have gyrated sharply. Indeed, right now almost all commodity markets, including agriculture, are headed swiftly down the mountain slopes. And trading house executives believe the latest decline in prices has some way to run.

Unlike miners, say, or oil producers, physical traders such as Bunge, Cargill and Vitol make most of their money exploiting price differences. Correctly calling the direction of markets, and the relative values of commodities, is critical to their business.

The Dow Jones-UBS index, a basket of commodity futures followed by $74bn of investor money, has declined 4.9 per cent in the past year. Some components of the index have suffered dramatic recent falls, with Brent crude oil tumbling below $100 a barrel for the first time since July and gold down 16 per cent from a week ago.

The sudden declines have caught out some investors. Those who bought into commodities as a hedge against inflation or bet on growth are starting to question whether the long-term “supercycle” led by emerging market demand is flattening.

Torbjörn Törnqvist, chief executive of Gunvor, the oil trading house, points to a rebound in crude production from US “tight oil” formations, saying this could be replicated on other continents. “What we see today, in my opinion, is a softening of price” as the oil industry catches up with demand.

Oil markets were spooked this week after China reported that annual growth slowedto 7.7 per cent, suggesting that demand for industrial materials could weaken.

Financialisation of commodities decried

Traders in physical commodities markets are frustrated with investors who use commodities as an asset class and high-speed computer traders.

Torbjörn Törnqvist of oil house Gunvor says when he started his career “you did your maths – supply, demand, stock levels – and you could predict what would happen with the price in the future. Today that’s not possible. Why? One of the major factors is the financialisation of commodities.”

Anthony Ward of Armajaro, founder of soft commodities trading house Armajaro, says of high-frequency traders: “I don’t think it’s helping in the smaller markets.”

But Marco Dunand, co-founder and chief executive of Mercuria, the Swiss-based trading house, played down the significance of the data: “China is slowing down a bit, but I think they are on a growing path and that is not going to stop.”

US natural gas futures, unlike most other commodities, have more than doubled in the past year to top $4 per million British thermal units after a cold winter and a shift to gas from coal and other energy sources.

At that level, US gas futures are still cheap relative to the rest of the world: in Europe gas is trading at double that price, while in Japan gas in its liquefied, imported state costs as much $15. “I don’t see that changing anytime soon,” says Yusuf Alireza, chief executive of Hong Kong-based Noble Group.

With world prices so disparate, trading houses are positioning themselves to export liquefied natural gas should the US government open up the export market.

“We are going to convert this cheap natural gas into LNG in the United States and ship it to Japan,” says Bob Takai, general manager for the energy division at Sumitomo, one of Japan’s five large international trading houses.

Industrial metals have cooled. Copper prices have been falling as the world’s miners boost supplies at the fastest rate in a decade. Aluminium has suffered from a huge glut of smelters.

Roland Junck, chief executive of Nyrstar, the world’s largest producer of zinc metal, says the industry will have to adjust to life after the commodity supercycle. “The party is winding down or is already over,” he says.

Yet, even as China slows, the US energy boom may be shifting metals demand westwards.

Mark Kristoff, chief executive of metals trader Traxys, says: “The American market is extremely robust. Capacity utilisation is trending towards 80 per cent. . . Energy pricing is underpinning an industrial renaissance in the US and we think that will continue.”

Meanwhile, the prices of corn, soyabeans, cotton and wheat have all fallen from their record highs in the past few years, prompting analysts to ask if rising food consumption is being more than offset by new farmland and improved farming techniques. Grain stocks in the bin, though, remain precariously low in many places.

“We have a tightness and I don’t see the long-term price going down,” says Serge Schoen, chief executive at Louis Dreyfus Commodities, one of the biggest agricultural trading houses.

Recent record prices, though, have spurred planting in the US, South America and Russia. “Demand is growing constantly. All we have to do is make sure that supply keeps pace,” says Mr Weisser.

As Greg Page, Cargill’s chief executive, puts it, price is “the best fertiliser”.