Commodity Management BlogInnovative Ideas and Thought Leadership for Volatile Commodity Marketplace
As the annual International Petroleum (IP) Week gets underway for the second day, the city is buzzing with busy bees. Commodity management teams specializing in energy and beyond are striding through London trying to meet their heavy schedules from breakfast meetings to cocktail parties and other events in between exchanging ideas, experiences and views. As these conversations flow they carry with them an obvious focus of having a beneficial impact on the bottom line and sustaining healthy relationships, but there is always enough room for sidebar conversation about news.
One topic that has prevailed this year is the recent media attention to the registration of oil traders such as Rosneft, Russia’s largest oil producer, and Bashneft, another large refiner and oil producer, joining recent arrival of TNK-BP and placing Switzerland ahead of UK in its share of global volume of physical energy traded. In some conversations this topic has likely upgraded into an experience that counterparts have shared as a benefit to the bottom lines of both companies and traders, whereas some conversations steered towards which quaint alpine town in Switzerland can host a future event of such magnitude and the effect its surrounding slopes can project.
As the seemingly well read Financial Times article published on Feb 7th named ‘Swiss receive inflow of Russian Oil traders’ cited, the Geneva Trading and Shipping Association claims the Swiss city handles about 75 percent of Russia’s oil exports. With Russia moving ahead as the largest oil producer and these new registrations, Geneva, according to oil executives, has now overtaken London for the 1st European position as an oil trading hub. As the article also states, this is a story in the making with early birds such as Gunvor, Lukoil, Trafigura, Mercuria, Vitol SA, Sempra, Koch, and Socar playing their part. Upon a closer look, Switzerland it seems has built up a vault of such impressive headlines as far as managing commodities is concerned.
Geneva also boasts being the number one world trading hub for physical trade of grains and oil seeds, with 1/3 of the global volume traded in these commodities and 75% of European and CIS volumes thanks to majors like Cargill, Bunge, and Louis Dreyfus. For sugar, again Geneva shares the first place in Europe with London with each hub managing 1/3 of the global sugar trade. The city of Zug plays the historical hub for Coffee and it enables Switzerland to claim 1/2 of the global volume being traded out of its boundaries.
Along with commodity trading Switzerland is also host to a group of large Consumer Product companies such as Nestle, Kraft and Unilever. As commodities bear their burdens of volatility these companies are getting more sophisticated in hedging their commodity exposure and adding more fuel to the Swiss based physical market activity. While the consumer products companies have traditionally hedged their exposure to soft commodities such as grains, oil seeds, sugar, coffee etc., current hedging strategies for these companies sketch a larger share in energy markets than expected. Energy based hedges are becoming more prevalent as consumer product conglomerates look at their exposure in areas such as ingredients, packaging materials, energy consumption and so forth while adding further substance to correlations the market can accommodate.
To further support, trade financing has remained a specialized skill of Swiss based banks. It is estimated that over 40% of total CIS trade exports are financed through Swiss or foreign banks established in Geneva. With presence of the most common banks active in the industry (BNP Paribas, Credit Agricole, ING, Credit Suisse, Banque de commerce et de placements…) running the larger part of their global trade finance activity in Geneva, Swiss local state banks such as BCG, BCV are also likely to increase activity in trade financing as the new entrants present the need. With these banks in place and with their specialized focus on trade financing Geneva does well in positioning itself as highly adaptive center for setup of traders.
As markets grow there is a natural calling for the participants to be more sophisticated in finding the right opportunities. When it comes to execution and success many trading organizations face challenges around controls and visibility in time to manage risks. While these challenges usually come in varying degrees they are highly dependent on the ability to have trade controls and risk management protocols that help manage risk around every part of their transaction. Performance benchmarking needs to dive deeper than market influenced risk and as much into the operational capabilities and its related risks as a way of securing margins. Reliance on information access and turning it into timely decision making intelligence becomes even more critical. Common purveyors of these indicators and intelligence are people and/or software solutions.
As per the FT article mentioned above, there are declared intentions among the new entrants into the Geneva market to restructure and re-define their existing trading organizations. With the inertia of barrels these entrants bring along into the physical market their demand from the talent pool to implement such controls is enormous and will I am sure be filled over time, but the time critical need for adaptation will carry its due course. The need to adapt solutions that have embedded best practices will be key to get operational quickly so decisions can leverage real-time information and also to enable streamlined staffing which will be a bare necessity rather than strategy.
Looking one year back and how many Swiss based clients have implemented our own Commodity Management solutions around market risk, credit risk and operational risk requirements only, I get the sense the need to adapt is being catered to surely if not slowly. We should remember the Swiss have made their mark in history with being even innovative with adaptation as seen through the success of pen knives and triangular chocolate. But are they geared up to achieve the same on ‘mark to market’?