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State commodity traders proliferate to take on Glencore, Cargill

Monday, June 1, 2015 - 08:13
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When Azerbaijan's Socar Trading SA took over the storied commodity trader Phibro LLC this year, it put a stamp on a new trend: the emergence of giant state enterprises to buy and sell natural resources.

[LONDON] When Azerbaijan's Socar Trading SA took over the storied commodity trader Phibro LLC this year, it put a stamp on a new trend: the emergence of giant state enterprises to buy and sell natural resources.

Azerbaijan is not alone: Saudi Arabia, China, Oman, Thailand and Russia are also building or expanding government- owned firms to procure and market commodities directly, bypassing the traditional oil and grain traders such as Glencore Plc, Cargill Inc., Vitol Group BV and Trafigura Beheer BV.

"Countries want to secure the offtake of their production or they want to secure supplies," Socar Trading Chief Executive Officer Arzu Azimov said in an interview. "There is a trend of national companies building trading arms."

The new cadre of state trading houses has deep pockets and lofty ambitions. They have built their capabilities through acquisitions and rapid organic growth, often poaching executives from US and European competitors to do it. And over time, they could damage the business model of the current dominant groups.

"The growth of the state-owned traders is making it harder for the established houses," said Andrew Montague-Fuller, director of energy consultants Molten Group.

Socar purchased the remnants of Phibro in March. The US firm, which once owned investment bank Salomon Brothers Inc. and dominated commodity markets for most of the past century, had been scaling back for a decade.

Commodity houses serve as the middlemen of global trade, controlling the flow of fuels, grains and metals between groups such as Exxon Mobil Corp. and FedEx Corp. or coffee farmers in Africa and Nestle SA.

Executives from non-state traders have given a guarded welcome to the new entities.

"State-owned trading houses are a new source of competition and will undoubtedly change the market dynamics, but will also create opportunities and will be clients for trading firms," said Pierre Lorinet, chief financial officer of Trafigura. That's because the new houses don't yet have the capacity to handle all aspects of trading.

Yet the threat from large new rivals is obvious, with the state firms eating into the commodity flows of the traditional traders and enjoying privileged access to the natural resources of the countries that own them.

"The rise of the state-owned traders is an inevitable negative for the traditional trading houses: it increases competition," said Alex Griffiths, head of natural resources at Fitch Ratings Ltd.

Still, the state firms face the acid test of whether their parent companies, often under tight political control, have the stomach to accept trading losses - common in commodities - as well as the nimbleness to act quickly on opportunities.

When a massive earthquake and tsunami hit Fukushima in 2011, the established trading companies reacted in a flash. Anticipating higher demand for fuel oil in Japan, they redirected tankers from as far away as Chile.

"The main problem is that state-owned companies and risk- taking do not go together that well," said Graham Sharp, an adviser to consultants Oliver Wyman & Co. and co-founder of Trafigura. "Culturally it is a difficult fit."

The rise of the state traders recalls the coming-of-age of the national oil companies in the 2000s, when groups from Petroleo Brasileiro SA of Brazil to Russia's OAO Rosneft came to play a major role in the resources industry. The rationale is also similar: keep control of commodities within the state.

The growth of the government-owned trader is epitomised by Chinaoil, jointly held by China National Petroleum Corp. and Sinochem Corp.

One of the first of the new breed, Chinaoil expanded from humble origins in 1993 in Beijing to such trading centres as New York and Singapore, increasing its trading volumes by 15 per cent a year. A decade ago, it handled about 1 million barrels a day. Last year, that rose to 2.6 million - as much as Trafigura, the third-largest independent oil trader. Today, Chinaoil is one of the biggest traders of Middle Eastern crude.

Chinaoil isn't alone. Over the past two decades, China Petroleum & Chemical Corp., or Sinopec, has built its Unipec arm into a trading behemoth with US$170 billion in annual revenue - more than Cargill - and trading volumes of 4.2 million barrels a day last year.

In grains, China's Cofco Corp last year spent US$3.5 billion on stakes in Nidera BV and Noble Agri Ltd. and subsequently poached an executive from Archer-Daniels-Midland Co. to spearhead its trading efforts. David MacLennan, CEO of Cargill, has called Cofco's plans "transformational."

In Russia, state-owned OAO Gazprom has created a gas and power trading arm that more than tripled profit in 2013 from 2008. Gazprom Marketing & Trading began 16 years ago with two traders in London's sleepy suburb of Richmond; today it employs hundreds in the U.K., Houston, Singapore and elsewhere.

In Saudi Arabia, state oil giant Saudi Aramco opened Aramco Trading three years ago to buy and sell refined products.

This year, Saudi Agricultural & Livestock Investment Co acquired a grain-trading business in Canada, one of the largest exporters of wheat and barley. While the purchase helped SALIC secure food supplies for the desert kingdom, it also reduced the grain volumes available for non-state trading houses.

The trend is spreading swiftly through the Middle East and Asia, with Oman and Thailand establishing state trading operations and other countries preparing to do the same.

With that evolution the trading industry, which has enriched many individuals such as Glencore billionaire CEO Ivan Glasenberg, is witnessing a dramatic change. For the state-owned traders, profitability is not all. As Mr Azimov of Socar puts it, national interest comes first.

"We always protect the interest of our countries."

BLOOMBERG

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