Glencore Xstrata, Vitol and Trafigura face the prospect of increased competition and lower margins, as national companies from the Middle East, the former Soviet Union and south east Asia enter the commodity trading market. Graham Sharp, one of the founders of Trafigura and an adviser at industry consultancy Oliver Wyman, has predicted that between five and 10 "significant" competitors will emerge over the next five years, as national companies try to squeeze higher returns from assets and protect access to end markets.
"We predict commodity producers will need to embrace the same sophisticated trading and optimisation practices developed by independent commodity traders to remain competitive," said Mr Sharp in his report for Oliver Wyman. As a result, commodity producers would become less likely to sell large shares of their production in long-term contracts, he added, and would look to forge new markets in commodities that were less actively traded – such as minerals, metals and liquefied natural gas. This forecast of greater involvement by commodity producers comes as independent trading houses continue to expand from their traditional "middleman business" of buying and selling raw materials to investing in physical production, refining and logistics. The Oliver Wyman report predicts the move into commodity trading will be spearheaded by national oil companies – many of which will follow the lead of the State Oil Company of Azerbaijan and set up in-house trading arms. At the same time, the trading of metals and mining – dominated by Glencore Xstrata and Trafigura – will be reshaped as miners expand trading capabilities to grab greater returns. While most oil and agricultural products are actively traded, producers continue to sell most of their coal, LNG, metals and minerals through long-term contracts. The report estimated that less than 20 per cent of the world’s minerals were traded on open markets. "We estimate that [the commodities trading] market could grow to $54bn [from $38bn today] as national oil companies and integrated commodity producers become more active in trading." But as competition increases, margins will fall. "The 30 per cent margins that traders typically earn from trading LNG and the 5 per cent margins they earn from metals and minerals could become closer to 0.5 per cent to 1 per cent that a trader earns trading a ton of oil," the report said. Many energy companies recognise the importance of trading. BP, Royal Dutch Shell and Total have trading arms. Saudi Aramco, the state oil company, has launched a trading arm focused on refined products. But many are wary of investing in volatile trading activities that require a lot of capital. Industry executives point out margins in commodity trading are wafer thin and forays by producers have stalled.