The commodity industry made a record gross profit of more than $115bn from trading activities last year, as volatile energy prices resulting from the war in Ukraine drove wide swings in the market.
The biggest gainers are independent trading houses – such as Trafigura, Vitol and Glencore – which have fixed balance sheets in the market, according to a new study from Oliver Wyman.
“This year is a perfect storm in all commodities, from the perspective of trading opportunities,” said Ernst Frankl, a partner in the consultancy and one of the authors of the report. “Volatility is the lifeblood traders need to trade.”
The European energy crisis triggered by the war in Ukraine, as well as the imposition of sanctions on certain Russian commodities, has led to major changes in global trade flows, resulting in longer travel times as well as price volatility across commodity classes.
Gross profit trading in the sector – which includes banks, hedge funds, independent traders and asset-backed traders such as energy majors – rose to $115bn, up 60 per cent from the previous year and almost three times higher than pre-pandemic levels, according to the study. .
Financial players such as hedge funds also benefited greatly, earning an estimated $12bn from trading activity in 2022 compared to less than $3bn the previous year.
The earnings bonanza among energy companies last year has caused political concern in Brussels and in Washington, where US President Joe Biden accused them of “war profiteering” and threatened to impose a wind tax on oil companies.
While commodity traders have so far shied away from similar proposals, the rising profits are in the spotlight at powerful trading houses that move raw materials around the world.
London-listed Glencore reported net income of $17.3bn for 2022, more than three years ago. Singapore-headquartered Trafigura reported net income of $7 billion for the fiscal year ending in September – more than the combined profit of the previous four years.
However, the war was not the only factor contributing to the record numbers. Commodity demand will also increase in 2022, as economic activity picks up again after pandemic restrictions are eased and the global economy picks up, said Adam Perkins, partner at Oliver Wyman.
“We are seeing under-investment and underproduction among commodities anyway,” said Perkins. “We will see volatility rise [in 2022] in all circumstances.”
Among the different commodity classes, it is the trade of gas, power and carbon that provides the biggest boost – with industry income from the three segments increasing by 90 percent in 2022 compared to the previous year.
The report estimates a trading company’s gross profit margin – which represents the difference between the selling price and the buying price, minus directly attributable costs such as transportation and financing. Gross margin is the primary metric that traders use to assess their own performance.