By Tatyana Shumsky and Sarah Kent
Move over, Wall Street.
A handful of giant commodity traders such as Netherlands-based
Trafigura Beheer BV and Vitol Group are increasingly taking a
central role in global commodity markets.
These once-obscure firms aren't just betting on prices or
arranging product shipments. They are taking on oil companies,
miners and major Wall Street banks by sinking billions of dollars
into refineries, power plants, ports and other assets.
The four biggest traders--Vitol, Glencore PLC, Cargill Inc. and
Trafigura--each boast annual revenue of more than $100 billion,
putting them in the ranks of household names such as Apple Inc. and
Chevron Corp.
An analysis of company data by The Wall Street Journal found
that revenue at these four trading houses nearly doubled in the
past five years to $816.4 billion. Over the same period,
commodity-trading revenue at the top four U.S. banks involved in
the sector dropped 56%, to $3.8 billion, a decline driven by slower
trading and a retreat from some businesses amid tougher
regulation.
"Commodity traders have become more visible and harder to
ignore," said Craig Pirrong, a professor of finance with the
University of Houston.
This year alone, Cargill, an agricultural trading company
founded in 1865, struck a deal with Brazil's Copersucar SA to form
the world's largest sugar-trading venture. Mercuria Energy Group
Ltd., an energy-focused trader that didn't exist 10 years ago,
agreed to buy J.P. Morgan Chase & Co.'s physical-commodities
business for $3.5 billion.
Agricultural trader Archer Daniels Midland Co. processes enough
corn each day to make 99 million boxes of cornflakes.
Metals-and-mining titan Glencore in June used its pull to arrange a
$1.3 billion loan to the Republic of Chad to help its government
acquire Chevron's oil assets in the African country.
Investors are taking notice. In its first set of public results,
Trafigura last year posted record annual profits of $2.18 billion
and outlined a growth plan aimed at taking advantage of the U.S.
oil boom. A Vitol oil-storage affiliate called VTTI Energy Partners
LP last month filed to raise $420 million by listing on the New
York Stock Exchange.
Through a string of acquisitions and investments, the trading
firms have come to hold commanding positions in markets for key raw
materials ranging from sugar to copper to oil.
"They're always willing to do business at a price," said Dario
Scaffardi, executive vice president and general manager at Italian
refinery Saras SpA.
After the Fukushima disaster closed nuclear power plants in
Japan in 2011, natural-gas prices surged as the country's demand
for the fuel soared. Geneva-based energy trader Gunvor Group sent
23 liquefied-natural-gas cargoes to Japan, more than five times the
number it sent in 2010.
Last year, Glencore and Vitol lent Russian state-owned oil
company OAO Rosneft $10 billion in return for five years of oil
deliveries.
The rise of big commodity traders also has caught the attention
of market watchdogs. Britain's Financial Conduct Authority in
February said commodity traders represent a "known unknown,"
operating largely outside the remit of regulators.
The FCA is seeking closer dialogue with the trading
companies.
"These firms are playing an increasingly critical role in the
functioning of an ever more complex global market," the FCA said in
a February report.
At the same time, the firms must contend with intense
competition and razor-thin profit margins across the sector.
Agricultural trading company Louis Dreyfus Commodities BV said
profits slumped 27% to $640 million last year after its wheat
business was hit by a severe drought. Vitol Chief Executive Ian
Taylor described market conditions in 2013 as "very challenging"
and "extremely competitive."
Some see a problem with the commodity traders' growing reach.
Last year, Australia blocked a $3 billion bid by ADM to buy grain
handler GrainCorp Ltd., saying that the deal would compromise
national interests. U.S. regulators are scrutinizing bottlenecks in
aluminum warehouses owned by Glencore and Trafigura, among others.
Louis Dreyfus, one of the world's largest cotton merchandisers, is
being sued in the U.S. on charges of manipulating the cotton market
in 2011.
Critics also note that Glencore was founded by billionaire oil
trader Marc Rich, who was a fugitive wanted for years in the U.S.
for tax evasion. Gunvor co-founder Gennady Timchenko was placed on
a list of sanctioned individuals by the U.S. Treasury in March; the
company promptly announced he had already sold his stake to CEO
Torbjorn Tornqvist.
"They are traders, they are producers, they are distributors,"
said Diego Valiante, head of capital markets research at the Centre
for European Policy Studies. "The problem is, does this create a
conflict?"
Even so, many say opportunities for growth aren't hard to see.
Across Kenya the familiar red and yellow Royal Dutch Shell logo
hangs over 123 service stations, a reliable source of fuel for the
country's growing population of middle-class car owners.
But while they retain the logo, Shell has sold down its interest
in the business to a joint venture in which Vitol, the energy
trader better known for cutting behind-the-scenes deals in isolated
and war-torn regions, holds a 40% share. One consumer said he never
would have known who was running the stations if a reporter hadn't
told him.
"I usually make a bee-line for the Shell station," said Jeremy
Wyatt, a 43-year-old sustainable business-development manager based
in Nairobi. "The staff hasn't changed, the service hasn't
changed."
Christian Berthelsen contributed to this article.
Write to Tatyana Shumsky at tatyana.shumsky@wsj.com and Sarah
Kent at sarah.kent@wsj.com
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