French-German TV network ARTE did a documentary on commodities during the rapid expansion of this global trade from the mid 2000’s to nowadays. I’ve watched it a couple of times, each time I see different angles.
“Traders -Le marché secret des matieres premieres” is a real commodity journey from Lac Léman to Lasalle Street and across London, Paris, Le Havre, New York, Brazil, Hong Kong and Africa…
I give full credit for their “risk vs speculation” tone chosen.
However, I beg to disagree with broker from Aurel BGC (1:01:56) about paper volume volume causing price volatility.
Paper/physical ratio is irrelevant. Liquidity should never be seen as problem for price discovery in a market. It is only when liquidity dries-up in a market that you have a problem. Try for example to trade oil like the 70’s when bid-ask spreads were more than 5$ a barrel and get back to us with price volatility. [for a real life example see Futures vs Physical Market at the bottom of the page.]
The tone was fair, it is a little unfortunate that some large companies haven’t seize this opportunity to defend the industry because this will only add to the conventional wisdom about traders and mistrust about the markets.
More research could have been done to give a more accurate portrait of the industry. For instance, Glencore isn’t secretive or opaque, shares are traded on the equities market. Financial Statement Analysis is possible.
Glencore Annual Report Analysis:
2012 commodity related to contracts. More than 2 billions worth a future. It relates to margin unrealized value of the contracts.
Sales and Gross margin:
1.79% gross margins for +$200 billions sales. Despite having gigantic sales numbers, Glencore has poor gross. Businesses having very small gross margins are in a very competitive environment.
This business model tends to not perform very well when capital costs and interest rates rise…
Money is also a commodity.
The documentary touches commodity trade finance 0:41:30. If traders’ role is to provide liquidity to refiners, producers they must get massive cash infusions each day to support their activity, money that can’t be self-generated with profits because of thin margins. Banks are definitely happy to have a Glencore in their loan portfolio because credit margins are always working. Banks play a key role because without cash ,traders activities can be seriously compromised as evidenced on 0:43:48
In Canada, Calgary is the trading HUB for O&G commodities. Canadian banks supply commodities (dollar credit lines) to producers, traders. Banks have realized that they can trade the information generated from this lending activity: IB, Derivatives, Swaps.
The sun doesn’t shine forever: Giants take giants hits too.
Banks also decide who will survive, who will not survive: André & Cie, a swiss firm once numbered among the top 6 world grain companies was forced to declare bankruptcy in 2001.
Character traits of the entrepreneur.
The traders shown share the character traits of the entrepreneur: a high capacity to innovate, to anticipate and to balance risks. Coffee/cocoa and cotton basis and liquidity risks seems to be particularly large. The excerpts showing traders discussing with clients are funny. 0:14:50
Teams supporting traders are completely forgotten. This could have given a broader portrait of the work done inside the firms. (market analysts, risk managers, traffic specialists, trainees shadowing traders, quantitative analysts, HR, IT…).
It is interesting to see what other people think about other people during this documentary. I’m now curious to read what people have to say about this documentary.
© 2014 –The Trade, Shipping and Finance Wizard
Natural Gas Price discovery on 2014-01-22 : Futures vs Physical Market
Where is volatility ?