March 2020 was a grim moment for most people. The coronavirus pandemic had spread beyond China’s borders and was rampaging through Iran, Italy, Spain, the UK and the US.
But for Glencore, the world’s largest commodity trading company, it was the opportunity of a lifetime.
Glencore’s oil traders, who operate from an office a few steps from Berkeley Square in London’s Mayfair, had recognised the deadly seriousness of the new virus earlier than most. Now, as planes were grounded and office workers told to stay at home, they sprang into action.
Because of the lockdowns, oil demand was collapsing at the fastest rate in modern history. Within a few weeks the price of oil would do the unthinkable and briefly drop below zero. Glencore whose position in the FTSE 100 means it is a constituent of most Britons’ pension funds — stepped in, buying oil that nobody else wanted and storing it on a flotilla of enormous tankers, some of them larger than the Eiffel Tower.
A few months later, with oil demand recovering, Glencore unwound the trade, delivering oil to buyers in China, South Korea and India. In some cases it had doubled its money. By the end of the year, it had registered trading profits of more than $3 billion — the best ever year for its oil traders.
When the Soviet Union collapsed, it was the commodity traders who stepped in
Glencore wasn’t alone. Tech giants like Amazon and work-from-home up starters like Peloton may be the most obvious corporate winners from the way coronavirus has redrawn the world economy. But it’s the commodity traders who, with little fanfare, have had one the most successful pandemics.
Little known outside their industry, commodity traders play an essential role in the modern economy. They buy and sell the raw materials that underpin our modern existence — oil to fuel our cars and planes, cobalt for our smartphones and rice for our cupboards — moving commodities to where they are needed and smoothing out mismatches in supply and demand. They are, in the words of Craig Pirrong, an academic who studies them, ‘the visible manifestation of Adam Smith’s ‘invisible hand’’.
And while they perform an essential role, their number is small. Five companies handle a quarter of the world’s oil; seven grain traders supply half of its food; and just two trading houses dominate the metals markets. In addition to Glencore, the top traders include Vitol, the world’s number one oil trader, whose top executives have been major Conservative party donors; Trafigura, most famous for its role in the dumping of toxic waste in Ivory Coast in 2006; Minnesota-based Cargill, the largest private company in the US, whose family of owners contains the most billionaires of any family in the world; and 170-year-old grain trader Louis Dreyfus, whose 23-year-old scion Kyril just bought Sunderland football club.
The coronavirus pandemic is far from the first time that commodity traders have thrived in difficult times. It was in the oil crises of the 1970s that the traders made their first serious money, when the infamous Marc Rich — who would later spend two decades as a fugitive from US justice, prosecuted by one Rudy Giuliani — minted $1 billion at a time when fewer than ten other companies in America were making that sort of money.
And when the Soviet Union collapsed, it was the commodity traders who stepped in to replace the central planning department in Moscow. They hired jets for $20 an hour, loaded them up with cases of cigarettes and Johnnie Walker whisky (the only currency they could use to buy fuel at remote airports in struggling Siberian towns) and set about advancing the cash needed to pay salaries and stave off total economic collapse. In exchange, they got access to Russia’s natural resource bounty at knock-down prices.
Their mastery over the world’s essential goods has handed the commodity traders an influential role in the modern world — and one that reaches beyond financial markets. Those traders who stepped in to smooth the transition from state-run Soviet economics to free-for-all capitalism also seeded a number of today’s oligarchs.
More recently, oil trader Vitol — with the blessing of then prime minister David Cameron — interceded in Libya’s 2011 civil war by lending the rebels $1 billion in fuel, a deal that almost certainly changed the course of the conflict.
Yet the commodity traders are not household names. Few people have heard of them, and fewer still understand their role in supplying the world’s most essential goods. What regulation there is of the traders is scanty at best: the commodities they trade change hands on the high seas, beyond the reach of any national regulator; and those financial regulators that do oversee commodity markets — the Commodity Futures Trading Commission in the US and the Financial Conduct Authority in the UK, for example — focus almost exclusively on the markets for financial derivatives, largely ignoring the trade in physical commodities.
It’s not hard to make the case that commodity traders could do with more scrutiny. Not only are they large, profitable and influential, but their industry also has a rich history of skullduggery. Marc Rich admitted to paying bribes in his heyday (the US government charges against him were for evading taxes and buying oil from Iran in defiance of sanctions, not corruption). Another Glencore trader, one of the company’s most senior executives until 2002, told us how he used to fly into Heathrow with £500,000 in cash in his suitcase. Vitol has admitted to paying bribes to secure business in Latin America as recently as last year. Glencore is being investigated by the US Justice Department, the UK Serious Fraud Office and the Swiss attorney general.
Rooting out possible bribery and corruption isn’t the only reason to keep a closer eye on commodity traders. Commodity trader Sanjeev Gupta (who hasn’t been accused of any wrongdoing) has been nicknamed the ‘saviour of steel’ after buying up struggling plants everywhere from Romania to Rotherham. Now his main financier, Greensill Capital (where David Cameron was once an adviser) has collapsed into insolvency, and thousands of steelworkers’ jobs are potentially on the line.
What’s more, the boom time for the commodity traders looks unlikely to have ended with the pandemic. Commodity prices are famously cyclical: low prices mean less investment in production, sowing the seeds for the next era of high prices. And so it has proved for the oil market: after last year’s precipitous plunge, oil prices have recovered almost as dramatically, buoyed by the recovery in the world economy and lower production everywhere from the US shale patch to the countries of the OPEC cartel.
Earlier this month, prices rose above $70 a barrel for the first time in more than a year. Copper has soared above $9,000 a tonne for the first time in a decade. Food prices are rising; some economists fret that higher commodity prices could lead to higher inflation that may derail the economic recovery.
The commodity traders look set to come out as winners either way. They made outsized profits when prices tumbled. Now they are profiting again as prices rise. It’s high time that we all start paying a little more attention to them.
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