Trafigura CFO warns of pressure from the commodity industry

A senior executive of one of the world’s largest trading houses has warned that the crisis in global energy markets will force some small commodity traders out of business and trigger a wave of consolidation in the sector.

Christoph Salmon, Trafigura’s chief financial officer, said the increase in capital needed to keep goods flowing around the world since Russia’s invasion of Ukraine would take smaller business houses out of the market.

Salmon told FT Commodities Global: “When we go through these crises – and let’s not forget that we are two and a half years out of the Covid situation – there will be another batch of commodity sector consolidation.” Summit in Lausanne on Wednesday.

The comments come amid broader concerns about the liquidity crunch gripping commodity finance. Europe’s largest traders have appealed to banks and governments to provide “emergency” help to prevent a monetary crunch as high fluctuations in commodity prices raise the cost of trading.

The global commodity trading sector is dominated by large groups such as Trafigura, Vitol and Gunvor, but Salmon said many small traders face many problems from increased capital requirements to a lack of access to credit.

“Barriers to entry into our sector as supply chain managers are increasing,” he said.

Traders at the Financial Times conference expressed concerns that challenging conditions such as banks demanding huge initial margins – cash to hedge futures – had contributed to the collapse in the healthy functioning of commodity markets, especially gas and nickel.

Concerns over hydrocarbon supplies from Russia, the world’s second-largest gas producer and third-largest oil producer, have rattled markets. Europe has not yet imposed sanctions on Russian energy exports, but banks, shipping companies, insurance companies and refineries are “self-sanctioning” and avoid touching oil from the country.

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On Tuesday, the heads of the world’s largest commodity trading groups warned the conference of an impending diesel shortage that would hit Europe hard.

Salmon said the disruption to basic commodity financing would feed consumers.

“We are already in a vicious circle in the futures market. I want to stress the impact that it will have on the physical market.” “We are communicating more and more with governments in order to inform governments of the possibility of market disruptions, which means that some products are out of stock in certain regions.”

European gas prices jumped to more than 300 euros per megawatt-hour this month before slipping back below 100 euros, while Brent crude, the international oil standard, has risen 20 percent since the invasion of Ukraine to $118 a barrel.

Traders expect there to be higher levels of working capital tied to more barrels at sea because Russian oil has to travel more to Asian customers and alternative supplies to Europe must also spend more time in transit.

Salmon’s note about the viability of small traders comes amid uncertainty over the future of Gazprom’s UK trading arm, which Boris Johnson’s government stands ready to put into “special management”, a de facto nationalization. The unit is vital to providing cheap power to many British industrial companies.

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