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Business

Commodities firms boosting their trading presence

Glencore is engaged in the production and export of coal in Colombia.   © Courtesy of Glencore

TOKYO -- As major U.S. and European financial groups gradually withdraw from commodities markets or cut back on their commodities operations, energy and other resources trading companies are filling the vacuum, boosting their presence globally.

     In addition to buying the commodities units of financial institutions, resources trading companies are aggressively acquiring stakes in oil fields and other assets.

     The growing presence of resources trading firms is likely to result in their increased influence over global commodities prices.

     Oil and other resources trading firms have played the role of a bridge between producing countries and resource-needed companies since the 1970s. Many of them are unlisted -- with shares owned by their respective management teams -- and are willing to take risks.

     Many resources trading firms have grown by procuring resources at cheap prices and selling them at high prices. They have also expanded operations in resource-rich but politically unstable countries.

     The world's top five oil and other commodities trading companies, including Switzerland-based Glencore and Vitol and the Netherlands-based Trafigura, saw their combined sales topping $880 billion in 2013, a 60% jump from three years earlier.

     The main source of their earnings is spot trading of commodities such as energy and non-ferrous metals.

Japanese LNG market

Resources trading companies are locked in increasingly fierce competition in Japan, the world's largest consumer of liquefied natural gas.

     Glencore launched the LNG trading business last year and has since negotiated sales contracts with Japanese electric power companies, while Trafigura also entered the LNG trading business this year, hiring personnel in Tokyo.

     According to the International Energy Agency, the volume of global LNG trade is expected to balloon by 40% by 2019 from the current level. This means that the spot market for LNG, the main battlefield for trading houses, will also expand.

     "The presence of foreign trading houses (in the LNG spot market) will increase," said a trader at a Japanese trading house.

Recent big acquisition

In March, news of a big acquisition symbolizing the rise of resources trading companies rattled the commodities markets. Switzerland-based Mercuria Energy agreed to purchase U.S. financial giant JPMorgan Chase's commodities unit for $3.5 billion.

     Mercuria is a start-up founded by two oil traders in 2004. It has grown rapidly by acquiring oil assets in Nigeria and elsewhere. It will now take over JPMorgan's oil storage facilities and establish business footholds in North America amid the ongoing shale gas revolution there.

Intensifying competition

But commodities trading companies are under growing pressure to do more amid increasingly tough competition among them.

     It has become more difficult for them to procure cheap resources on their own and earn high profits due to increased transparency in the trading and pricing of oil and other commodities.

     The number of new entrants into the world of commodities trading is also rising sharply. The number of commodities trading firms based in Switzerland alone has roughly doubled in the past five years to 400.

     If commodities trading companies ramp up their investment in the upstream sector, seeking a new source of earnings, their fund-raising capabilities will be a key factor that determines their success or failure.

     Some commodities trading companies are already approaching government-affiliated funds in Asia and elsewhere for cheaper money. Cutthroat competition for survival has already started among commodities trading firms.

(Nikkei)

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