Traders – Secrets and Commodities Part 3: A Masterpiece on the economics of the commodity firms

The Economics of Commodity Trading firms demystified the commodity trading business.

This paper is sponsored by Trafigura and is authored by Professor Craig Pirrong. The text is thick, (a 2-3 hours minimum reading),

source: Trafigura

Quote 1: The shale gas boom in the United States, and the resulting decline in natural gas prices, has substantially reduced the demand for coal for electricity generation in the United States. This freed substantial quantities of coal for export, but there is inadequate infrastructure to accommodate an increase in export flows. Trafigura determined that the Burnside Terminal is ideally placed to alleviate this bottleneck“.

Quote 2: “A primary advantage of private ownership is the superior alignment
of incentives between managers and equity owners. Managers who own small (or no) stake
in an enterprise have an incentive to act in ways that benefit themselves, but are harmful to
equity holders. For instance, they may consume excessive perquisites, invest in low-returning
prestige or empire-building projects, or run ill-advised risks: the managers enjoy the benefits
of these activities, but the outside investors bear the costs.”

I wonder who he meant, any suggestions readers ?

Pirrong is professor at University of Houston and has worked for the CME and Trafigura, If I’m not mistaken, he is also blogging as the Streetwiseprofessor. -:)

© 2014 The Trade, Shipping and Finance Wizard

Appetizers:

“Traders – Secrets and Commodities Part 1

Traders – Secrets and Commodities Part 2

 

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