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Trafigura sees higher volatility in oil market next year

The group's profit margins this year were squeezed by oversupply and reduced oil market volatility

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The company sees potential supply deficits in various commodities in the short to medium term. This is due to years of under-investment in new mines and oil projects, and production cuts in China.

Singapore

OVERSUPPLY and relatively low volatility in the oil market reduced margins and arbitrage trading opportunities for Trafigura Group this year.

Still, the group, one of the top three independent oil traders in the world, is expecting greater volatility in the oil and metals markets next year, and a supply deficit to emerge in oil in 2019.

Privately-held Trafigura releases its financial results in an annual report at the end of each year, a practice it started in 2013 in a bid to raise understanding of an often-opaque sector.

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The group's net profit fell 9 per cent to US$887 million for the year ended Sept 30. This was in spite of its revenue jumping by 39 per cent to US$136.4 billion on increased volumes and higher commodity prices.

As a result, gross profit margin slipped from 2.3 per cent in 2016 to 1.6 per cent this year.

Reflecting a robust global economy that drove strong demand growth for commodities, both its oil and petroleum as well as metals and minerals trading divisions handled increased volumes. The group's total traded volumes jumped 23 per cent to 325.9 million tonnes this year.

In particular, volumes of crude oil and oil products traded into and out of India over the year doubled as the group invested into one of India's largest oil refineries. Trafigura in October last year bought a 24 per cent stake in Essar Oil as part of a US$13 billion deal led by Russian state-owned oil company Rosneft to acquire 98 per cent of the company.

Asia now contributes 43 per cent of Trafigura's revenue, up from 38 per cent last year, said a company spokeswoman.

But while metals and minerals turned in its best performance in years, with improvement seen in its products across the board, profit in oil and petroleum products was lower due to reduced market volatility, said the firm.

Its chief executive officer, Jeremy Weir said in a statement: "In commodity markets that are more competitive and transparent than ever, these results demonstrate the benefits of our scale, our resilient and diversified business model, as well as our ability to generate profit consistently throughout the economic cycle."

For 2018, the group is expecting increasing demand and tightening supply - and the potential for greater price volatility - to underpin growth.

The outlook for global economic growth, and therefore for commodity demand, remains strong, noted Mr Weir in the annual report.

At the same time, there will be potential supply deficits in various commodities in the short to medium term. This is due to years of significant under-investment in new mines and oil production projects, and also because of policy-driven production cuts in China.

A supply deficit is likely to emerge in 2019 for oil, as production capacity fails to keep pace with rising demand, he added.

And in a sign that the group is becoming concerned over the impact of technological disruption and efforts to combat climate change, Trafigura has established an in-house strategic research group to consider the broad implications of these developments for its business.

For one thing, the expected growth of electric vehicles has "considerable implications" for the metals market, boosting demand for copper, nickel and cobalt, said Mr Weir.

In energy, as the world seeks to reduce its reliance on fossil fuels, this will create "significant opportunities" for Trafigura. For instance, it could develop "flexible supply models" for power utilities enabling them to switch between coal, gas and renewables, he added.

Going forward, Trafigura expects to keep its capital expenditure budget around the US$391 million it incurred this year. The figure was about half of what it had spent in 2016, as it started on a consolidation phase after an "intensive cycle" of investment into industrial and logistical assets.

But the group will continue to invest in assets that offer opportunity, and with third-party investors where appropriate, said its chief financial officer, Christophe Salmon.

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