Commodity middlemen move out of the shadows

Major trading houses are attracting greater scrutiny as they move away from their traditional role and invest along commodity value chains.  


In Ghana, few things say ‘welcome’ to foreign executives like a personal meeting at Aburi’s Peduase Lodge, the former summer retreat of independence icon Kwame Nkrumah, now plush accommodation for the nation’s distinguished guests.

In late January, the lodge was the backdrop for the announcement of the country’s largest foreign direct investment since independence – a $7bn oil and gas offshore deal featuring Italy’s ENI and Swiss-based commodity trader Vitol.

The deal was remarkable not only for its scale, but for the very public role taken by Vitol, one of a number of traditionally secretive commodity trading firms that are beginning to move out of their niche in trading to carve out more prominent roles in African production, refining and distribution.

From Glencore funding a $1bn oil loan for the government of Chad to Mercuria making a play for Nigerian oil through its stake in Seplat, commodity traders are expanding their bids for new markets across the continent. As they move along the commodity value chains, their relationships with governments and their reputation for opacity are likely to come under the spotlight.

For many years, trading firms have played a major role as “middlemen” in the African oil market – purchasing vast quantities of oil from national companies and selling the product to clients.

According to the National Resources Governance Institute, an independent organisation, which recently compiled a report on the sector, Swiss trading firms bought a quarter of the total volume of oil in 1,500 recorded sales from 2011 to 2013, totaling 500m barrels of oil worth around $55bn.

They were the largest buyers of oil from major producers Cameroon, Chad, Equatorial Guinea, Gabon and Nigeria.

However, that traditional role has been eroded by the rise of new players in the market, leading to a rethink among firms.

Gary Still, an executive director with London-based Africa resources consultancy CITAC, says that increased competition in the sector is leading to firms reassessing their options and seeking out new opportunities.

“The original traders have found it much more difficult to make the margins they used to in an area that was long seen as fairly opaque,” Still says.

“The arrival of the newer guys on the block, the Mercurias, Gunvors et cetera, has meant that margins have been squeezed. So I think in the end you are probably better off creating your own demand for products.”

This demand for new markets has led to a push for investment in African infrastructure projects and ‘downstream’ operations – a term which encompasses the refining, distribution and marketing of resources.

According to a white paper published by Trafigura, The Economics of Commodity Trading Firms, the markets tend to be relatively small, have poorly developed infrastructure and require additional investment in the absence of strong local capital markets.

The paper points to Trafigura’s Puma Energy subsidiary, which owns and operates fuel storage and marketing businesses, and Vivo, Vitol’s fuel distribution and marketing joint venture with Helios Investment Partners and Shell, as examples of firms who have taken advantage of these opportunities.

Professor Craig Pirrong, author of the report and director of the Global Energy Management Institute at the University of Houston’s Bauer College of Business, says that firms are attracted to alternative markets by the need to secure closer access to commodities.  

“These companies always need access to flow, so this is in many respects complementary to their middleman role… a lot of asset ownership tends to be focused in emerging markets and I think that some of that is due to ownership offering better protection for getting flows than contrary to their middleman role,” he says.

Glencore has invested in coal assets in South Africa, copper extraction in the Democratic Republic of Congo and oil and gas assets in Chad. Vitol snapped up Shell’s downstream businesses in multiple African countries, while Trafigura bought BP’s downstream assets in several markets through Puma Energy.

Accelerating these trends is the retreat of international oil majors. Under pressure to invest in assets with stronger returns, majors have been shedding their African downstream holdings, providing an opening for trading firms with the knowledge and expertise to help solve Africa’s infrastructure bottlenecks.

“[Traders have] less overheads, they are more reactive to markets, have a deep understanding of risk and how you manage it, and they saw an opportunity of how you can bring the skills of a trading company to enhance business,” CITAC’s executive director David Bleasdale says.

Commodity traders’ strengths have included operating profitably in risky environments, exploiting tight margins and building strong local relationships; less so their public relations and transparency.

Trafigura’s name remains muddied by its alleged association with a 2006 toxic waste dumping scandal in Côte d’Ivoire, which prompted a public health crisis in Abidjan. In 2010 a Dutch court found the firm guilty of exporting toxic waste and fined it €1m ($1.1m).

Since that defining scandal, the industry’s day-to-day practices have come under increased scrutiny.

In a major report on the oil sales market, the NRGI concluded that public oversight was largely absent, in what the organisation said was “one of the least scrutinised aspects of oil sector governance.”

Alexandra Gillies, head of governance at the NRGI, says that concerns about the sector go beyond a lack of trading disclosure.

“One of the challenges is that these countries are engaging with African governments in really complicated and diverse ways,” she says. “It’s not just as traders and upstream licence holders, there’s a number of cases where trading companies have provided financing for the government, which is a whole other set of transactions that needs to be transparent.”

While the European Union has beefed up its scrutiny of commodity traders, Switzerland has traditionally retained an aversion to intrusive rules which could diminish its status as the industry’s historic hub.

The presence of commodity trading firms is said to account for 3.5% of Switzerland’s GDP. However, there are signs that both the Swiss government and trading firms are becoming more open to the idea of greater transparency.

In mid-2014, it was reported that Switzerland was considering rules that would compel trading companies to disclose payments to foreign governments. Perhaps sensing the direction of travel, Trafigura moved ahead of the pack and became the first commodity trading firm to join the Extractive Industries Transparency Initiative in November, with chief executive Jeremy Weir pledging to disclose the firm’s payments to governments and national oil companies.

Gary Still and David Bleasdale of CITAC say that the industry’s main players are aware of the reputational standards that need to be upheld when operating in Africa and other markets.

“A lot of the people there are ex-major oil company, they understand that as a company like a Vitol or a Trafigura becomes a huge player in the energy market that the spotlight is on them as well.

So they have to play by the same rules as everyone else” Still says.

“[These firms are] working very hard on safety, environmental issues, and risk management. They behave like major oil companies – they have to. They have the same exposure, the same risk,” added Bleasdale.

Ultimately, much depends on the ways in which African governments meet the challenge of conducting due diligence, establishing competitive tender processes and ensuring that suitable companies are selected for asset ownership. But grounds for optimism exist. NRGI’s Gillies says that transparency initiatives tend to be more advanced in the upstream sector, where a lot of advances were initially made by campaigners in forcing the disclosure of company data.

The countries best placed to profit from an engagement with trading firms could be those that have built stronger institutions from their time dealing with major oil companies. “The trading part of it wasn’t really on the radar of the global transparency effort for a long time. For the upstream participation, that’s kind of where the calls for more transparency started,” she says.

“In a way, the upstream stuff isn’t easier [to investigate] because some of the countries where they are operating are super-opaque. But the conversation is further along around upstream payments than it is around trading.”

Eddie Rich, deputy head and regional director for Africa and the Middle East at the EITI, said that persuading industry players to join up was a challenge, but that he hoped that Trafigura’s move would inspire other firms.

“I think they’re trying to send a signal to the trading community, the trading industry as a whole, to say that this is the way things are going,” he says.

“We hope that this is the beginning of a trend which suggests that both sides of the ledger should be transparent – what governments have received and what companies have paid for what is, after all, a public resource.”

David Thomas

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