Little noticed and little scrutinized, commodity traders have become essential cogs in the modern economy. the commodity traders’ control over the flow of the world’s strategic resources has also made them powerful political actors. To grasp the interplay of money and power in the modern world, to see how oil and metals flow out of resource-rich countries and cash flows into the pockets of tycoons and kleptocrats, you need to understand the commodity traders. They usually say they are apolitical, motivated by profit rather than the pursuit of power. But there is little doubt that, as Vitol’s deals with Libya’s rebels show, they have shaped history. They are the last swashbucklers of global capitalism: willing to do business where other companies don’t dare set foot, thriving through a mixture of ruthlessness and personal charm.
A large share of the world’s traded resources is handled by just a few companies, many of them owned by just a few people. The five largest oil trading houses handle 24 million barrels a day of crude and refined products, such as gasoline and jet fuel, equivalent to almost a quarter of the world’s petroleum demand. The seven leading agricultural traders handle just under half of the world’s grains and oilseeds. Glencore, the largest metals trader, accounts for a third of the world’s supply of cobalt, a crucial raw material for electric vehicles. Today, Glencore is the largest metals trader, a top-three oil trader, and the world’s largest wheat trader. In agriculture, Cargill is king. The US company, the world’s largest trader of grains, carries itself with the quiet self-assurance of the generations of Midwest wealth on which it was built
For the most part, the commodity traders are privately owned companies, with less obligation to disclose information about their activities than their publicly listed counterparts. Many have traditionally viewed their superior access to information as a competitive edge – and so have gone to great lengths to avoid giving out any information about themselves.
The focus of this book is the companies and individuals whose business is buying and selling physical commodities. It is they who control the flow of natural resources around the world; it is in their hands that an almost unique type of political and economic power is concentrated.
It’s not just on gender diversity that the commodity traders fall down: their upper echelons are not only overwhelmingly male but also overwhelmingly white.
The basic business of the commodity traders is disarmingly simple: buy natural resources in one place and time, and sell them at another – hopefully making a profit in the process. Their role exists because the supply and demand of commodities often don’t match. The commodity traders are arbitragers par excellence, trying to exploit a series of differences in prices. By exploiting these price differences, they help to make markets more efficient, directing resources to their highest-value uses in response to price signals. They are, in the words of one academic, the visible manifestation of Adam Smith’s invisible hand
Commodity traders' tale offers an insight into how the modern world works – a world where the market is king, where international enterprises seem able to shrug off almost all attempts at regulation, and where titans of global finance hold more power than some elected politicians.
At the center of this book’s story are four developments that molded the global economy in the commodity traders’ favor.
The first was the opening up of markets that had previously been tightly controlled – above all, oil. The dominance of the large oil companies, known as the ‘Seven Sisters’, was loosened by the wave of nationalizations that swept the countries of the Middle East in the 1970s.
The second was the collapse of the Soviet Union in 1991, which, at a stroke, redrew a global network of economic relationships and political allegiances.
The third was the spectacular economic growth of China in the first decade of this century. As the Chinese economy industrialized, it created enormous new demand for commodities.
The fourth was the financialization of the global economy and the growth of the banking sector, beginning in the 1980s. suddenly the modern traders could use borrowed money and bank guarantees, enabling them to trade in much larger quantities and to marshal much larger sums of money.
One of the reasons the activities of the commodity traders have escaped oversight for so long is that they operate in the most opaque corners of the international financial system. The commodities they transport are often to be found on the high seas, beyond the scope of any national regulator; they typically trade through shell companies in offshore jurisdictions; and the traders have based themselves in places like Switzerland or Singapore, which are famed for their light-touch regulation.
The three men (Theodor Weisser (of Mabanaft[energey(oil)), Ludwig Jesselson (of Philipp Brothers[metal]), & John H. MacMillan Jr (of Cargill[food]) were the founding fathers of the modern commodity trading industry.
For centuries, bands of merchant-adventurers had been traveling around the world seeking valuable resources to sell back at home – the most successful of them, the East India Company, governed the Indian subcontinent for several decades.
By the 1950s, the oil market was controlled by seven large companies. They came to be known as the ‘Seven Sisters’ – the forerunners of the companies that are today ExxonMobil, Royal Dutch Shell, Chevron, and BP. Many of them were the descendants of Standard Oil, created in the wake of its break-up
Oil also brought the traders closer to power. Governments had often looked at metals, minerals, and agricultural commodities as strategically sensitive resources. But oil was different: the money was bigger, and the governments of oil-producing countries were almost entirely dependent on petrodollars. The traders became friends with oil-rich leaders in the Middle East, Africa, and Latin America, while Western governments, desperate for cheap oil, turned to them to secure supplies.
When the Seven Sisters had lost control of the oil price in 1973, the ability to determine prices had passed to OPEC. But that position continued to rely on the old, oligopolistic system of the Seven Sisters, where prices, once announced, would be respected. With the rise of the traders, the power to set prices now shifted firmly and irrevocably into the hands of the free market:
The market no longer belonged to the oligopolistic Seven Sisters, with their almost colonial oil deals in the Middle East, Africa, and Latin America. In their stead appeared traders like Marc Rich, hungry for risk and unburdened by history or, in some cases, ethics. Through their trading, they had facilitated one of the great geopolitical and economic revolutions of the modern era: the seizure of their natural resources by oil-rich nations, the rise of the petrodollar as a crucial element of international finance, and the rise of the petrostate as a force in global politics.
The collapse of the gold standard meant the value of the dollar, too, was the preserve of the market. Everywhere, the grip of Western governments and institutions on the world economy was loosening, and a new era of more ruthless capitalism was born.
The traders weren’t making money through a brilliant understanding of the market. They were simply willing to put aside any ethical principles to make more money. When challenged on their dealings with South Africa, the traders would reply that everything they were doing was legal. In the world of embargoes and political favors of the 1980s, the traders learned to be masters of disguise and deception.
PAPER BARRELS
Anyone who buys a futures contract and holds it until its expiry date will receive a parcel of commodities; on the other hand, someone who sells a futures contract must, at expiry, deliver the commodities. Once the oil futures market came into being, traders could use futures contracts to buy or sell their oil many months in advance. But the usage of the new instruments was much broader than that. Most people didn’t hold them until expiry – instead, they bought and sold futures much as they would buy and sell the barrels of oil themselves. The futures allowed traders (and anyone else) to bet on the direction of the market without having to touch a physical barrel of oil. Hence the talk about ‘paper barrels’.
The collapse of the Soviet Union had redrawn the world map, replacing a crumbling empire with new nations and creating a new set of billionaire oligarchs whose money would flow around the world over the coming decades. The personalized nature of power in Russian politics and business-suited the commodity traders perfectly. ‘Everybody tried to choose a partner. Who’s going to work? Who will bring money? Who will give financial strength?’ explains Vishnevskiy, the former head of Glencore in Moscow. ‘The situation was win-win for all sides who survived hose willing to throw themselves and their money into the ‘wild east’ of the former Soviet Union were rewarded with enormous profits. And it was not just in the Russian metals industry that the traders thrived. The fall of the Soviet Union redrew the economic landscape for dozens of nations that had been operating under Moscow’s patronage, from Latin America to East Asia. Everywhere, there was a role for the commodity traders.
The number of commodities that a country consumes is, for the most part, a function of two factors: the number of people in the country, and their income. The relationship with commodity demand isn’t a straight line, however.
As long as a country remains relatively poor, with annual per capita income below about $4,000, people spend most of their income on the basics they need to survive: food, clothes, and housing. What’s more, the governments of poor countries don’t have the money to make major investments in commodity-intensive public infrastructures, such as power plants and railways. Even if a very poor country grows rapidly, it doesn’t translate into much extra demand for commodities.
The same is true for a very rich country. Once a nation’s income rises above roughly $18,000–$20,000 per capita, households spend any extra income on services that require relatively small amounts of commodities: better education and health, recreation, and entertainment. Governments of such wealthy countries have usually already built the bulk of the public infrastructure they need.
China was the most important country to enter the commodity sweet spot, but not the only one. Across the world, many countries outside the industrialized nations of North America, Europe, and Japan were reaching a level of economic development that required far more natural resources than before. The synchronized, resource-intensive growth created what economists call a commodity ‘supercycle’: an extended period during which the price of raw materials is well above its long-run trend, lasting beyond a normal business cycle, and often extending for decades.
The first modern commodity supercycle, for example, was triggered by the industrial revolution in the nineteenth century in Europe and America;
the second, by the global rearmament before the Second World War;
the third, by the economic boom of the Pax Americana and the reconstruction of Europe and Japan in the late 1950s and early 1960s.
The fourth began around the turn of the millennium, as China and other emerging economies entered the commodity sweet spot. It fundamentally altered the structure of the global commodity markets. Between 1998 and 2018, the seven largest emerging markets (the BRIC group of Brazil, Russia, India, and China, plus Indonesia, Mexico, and Turkey) accounted for 92% of the increase in the world’s metals consumption, 67% of the increase in energy consumption, and 39% of the increase in food consumption
Speculation had always been a central element of commodity trading, although over the years many commodity traders have denied that their business involves placing bets on the future direction of prices. Of all the commodity trading houses, however, it is the agricultural traders whose business model has traditionally relied the most on speculation. That may be unsurprising: the agricultural traders had decades of trading in the Chicago futures markets, which had been founded in the nineteenth century before there was even such a thing as an oil futures market.
But it was also a function of the different structures of the agricultural commodity markets. In oil or metals, there are a few key suppliers – government agencies of oil-rich countries and large oil and mining companies. That means that, for oil and metals traders, winning large and favorable contracts with those organizations is one of the keys to success. But it also means that being a trader, in and of itself, doesn’t confer such a large informational advantage. Agricultural commodity traders, on the other hand, buy from thousands of individual farmers. That makes the traders’ jobs harder, but it also provides an opportunity: dealing with so many farmers gives the largest traders valuable information. Long before the concept of ‘big data’ became popular, the agricultural traders were putting it to work, aggregating information from thousands of farmers to get real-time insight into the state of the markets.
Across the commodity trading industry, it was a time of spectacularly lucrative trades. In the decade to 2011, the world’s largest oil, metal, and agricultural trading houses – Vitol, Glencore, and Cargill, respectively – enjoyed a combined net income of $76.3 billion. That was an astonishing amount of money. It was ten times the profits the traders were generating in the 1990s. It was more than either Apple or Coca-Cola made over the same period. And it would have been enough money to buy entire titans of corporate America, such as Boeing or Goldman Sachs. And it had accrued to just a small handful of people. Cargill was still owned by the Cargill and MacMillan families, which between them now had fourteen billionaires – more than any other family in the world outside of royalty. Glencore, Vitol, and Trafigura were still owned by their staff, meaning the commodity trading bonanza made a few top executives fantastically rich.
The food crises of 2008 and 2010 were a demonstration of the influence of commodity traders. A policy pushed for by a trading house had helped cause chaos on world markets. That, in turn, helped make commodity traders more central than ever in feeding the world – which allowed them to make the biggest profits they’d ever seen. The whole affair marked the culmination of the commodity supercycle, a process that had elevated the traders to a position of great strategic significance, and had delivered them spectacular riches.
Information was becoming faster, cheaper, and more widely available, eroding the edge that had, in previous decades, allowed the traders to steal a march on the rest of the market. An increasingly transparent world made it even harder for less scrupulous commodity traders to make money through corruption or bribery. And the miners and oil majors who were their principal suppliers had gone through a phase of consolidation, leaving a few large players who had little need of the traders to help them handle logistics. The old-fashioned business model of the commodity trader, buying in one place and selling in another at a profit, was becoming all but impossible to sustain. Most of the commodity traders followed the path pioneered by Glencore and Cargill of investing in assets, using their profits to build their own supply chains, including mines, oil tankers, warehouses, flour mills, and more.
As others followed his example on an ever-larger scale, the trading houses became not just middlemen, buying and selling oil, metals, and grains around the world, but little empires of infrastructure critical to the flow of global trade, much of it in emerging markets.
Investing in assets may have made good business sense, but it was expensive, requiring long-term capital. Now, these companies were also looking for ways of raising longer-term financing. One option was to sell shares, and many raised money from public markets in the form of bonds. This new capital gave the commodity traders the firepower to do bigger deals and make big-ticket investments. But it also forced them to reveal much more information about themselves than they ever had before, bringing an unwelcome glare of publicity to an industry that had long operated in the shadows.
All over the world, commodity traders’ cash was changing the course of history. And as they realized that the commodity traders had become enormously important actors in global finance and politics, Western politicians and regulators also began to realize that they had terrifyingly little oversight of what the commodity traders were doing. Even as the traders had accumulated unprecedented financial power, their activity remained almost entirely unregulated. But there was one aspect of their business where the commodity traders were potentially vulnerable to aggressive regulation. They were reliant on a relatively narrow group of banks to provide them with huge sums in credit. And, more than anything, they relied on being able to access those sums in US dollars.
For years, many commodity traders had looked at sanctions and embargoes as an opportunity rather than a threat. Countries under embargo had fewer choices about whom to trade with, and so the profits for those who found ways to do business with them were proportionately higher. That’s what had allowed Marc Rich and John Deuss to make astronomical profits from subverting the oil embargo against apartheid South Africa in the 1980s.
It was possible because the embargoes were poorly enforced. If they were put in place by only a few countries, then it was easy enough for the traders to open up a subsidiary in a country that hadn’t imposed sanctions, and deal through that subsidiary. Much of the traders’ activity took place in international waters, and so went ungoverned by any one nation’s laws. And the traders’ businesses similarly operated in the most opaque corners of the international financial system, where they might use a Cayman Islands shell company one day and a Maltese shell company the next; and where ships could sail under the flag of any number of nations, from Panama to Liberia or the Marshall Island.
This book has told the story of how the commodity traders rose, almost unnoticed, to the pinnacle of global power. With little fanfare, the commodity traders helped to free the global oil market from the grip of the Seven Sisters, re-carved the economic landscape of Russia and the rest of the former Soviet Union, and empowered resource-rich governments from Congo to Iraq.
The traders have several far deeper and more structural problems.
The first is the democratization of information. As the speed and availability of information increased exponentially with the spread of the internet, the traders’ advantage was slowly whittled away. The democratization of information means that it has become more difficult to make money from simply moving commodities around the world.
A second challenge to the traders’ profitability comes from the reversal of one of the trends that have benefited them most over the past three-quarters of a century: the liberalization of global trade. From the world’s first modern free trade treaty, the General Agreement on Tariffs and Trade in 1947, to China’s accession to the WTO in 2001, the trend after the Second World War was for open borders, frictionless trade, and globalization.
A third challenge for the traders strikes at the core of their business: climate change. Much of the industry’s profits come from trading fossil fuels, such as oil, gas, and coal. If Big Oil and Big Coal are responsible for polluting the planet, the traders are their enablers, shipping their products to global markets. As the world increasingly turns against oil and coal consumption, the traders’ business will suffer.
Finally, the traders have become victims of their own success. The industry’s tentative move out of the shadows, epitomized by the Glencore IPO, has laid out the traders’ enormous profits for all to see. It has not just been US policymakers and law enforcement officials that have been dismayed by some of the details of the traders’ activity. It’s also the traders’ clients – the producers and consumers of natural resources – who have begun to wake up to the profits the traders have been making, in some cases at their expense.
Despite the pressure on their business, the traders remain profitable. The industry probably does face a reckoning at some point in the coming years, the oil market bonanza of 2020 notwithstanding. But as long as markets are less than perfectly efficient, there will still be money to be made – even without walking the knife-edge between legal and illegal – by exploiting inefficiencies and moving commodities around the world in response to price signals from the markets.
And the traders’ role as a clearinghouse for the world’s essential goods still endows them with an almost unique sort of economic and political power. It was as recently as 2017 that the traders’ money helped pay for Kurdistan’s independence push. It was the same year that Ivan Glasenberg was awarded a medal by Vladimir Putin for his services to the Russian state. And the oil companies and petrostates that emerge intact from the trials of 2020 will in no small part have the traders to thank for their survival.
The world is changing, but its natural resources still need to be bought and sold. And commodities are still a sure-fire path to money and power. The traders may well remain powerful actors in world affairs for years to come. But after decades in the shadows, their influence can surely no longer be ignored.
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