Traders or Commodity Finance Banks Part VIII-The pivotal role of the commodity traders as financiers

The commodity finance market history shows a pattern of (often) hasty entries then departures by banks and alternative financiers.

The American banks were the first to specialize in operations on commodities, hedging trader’s positions, lending and sometimes trading the commodity itself…

J. Pierpont Morgan was a commodity trader.

A local sea captain was stucked with a ship of coffee and no buyers. An immediate action was required or the coffee would spoil.

Using the firm’s money, Pierpont purchased the coffee and sold it to New Orleans Merchants. He pulled it off, managing to turn a little tiny profit in the process.

No need to argue that the U.S investments banks have always been irresistibly attracted by commodities. 

Salomon Brothers, probably the most succesful franchise of Wall Street’s history, has owned 50% of the international physical commodities trading firm Phibro.

Commodities hold a special place at Goldman Sachs. The division, which still operates as J. Aron, a coffee and metals trader that Goldman bought in 1981.

Towards the end of the 70’s French banks had  their “commodities departments”.

On the other side of the Atlantic, Credit Suisse has owned 50% of the capital of Cargill Switzerland, the world trade unit but it’s not before the 80s that Swiss banks became prominent institutions in the commodity trade finance.

When the Banque de France established untenable currency controls, Société Generale, Crédit Lyonnais and Crédit Agricole and their trading clients move this activity to Geneva. It shows that bankers are only good as their “relational assets”.

From that moment and onward the Swiss took over the place of their American counterparts but in 2014,  BNP Paribas (Suisse) agreed to plead guilty and to Pay $8.9 Billion for Illegally Processing Financial Transactions for Countries Subject to U.S. Economic Sanctions.

More money has been lost by BNP in the Iraqi food-for-oil trade scheme than what the franchise has ever made in Commodity Trade Finance.


Conceptually, traders arbitrage price differences until markets have equal basis adjusted for shipping costs Jacques (2015). Traders move commodities in time and space with the supply and demand.

In fact, they do not only profit from market inefficiencies in price differences-what commodity traders really do economically is arbitraging the capex and opex of others.

example: Claude Dauphin of Trafigura urged the Americans (his clients) to not re-open the “too small” NJ/Philadelphia refineries at “a loss” after 2010 since the U.S Atlantic Coast was the outlet for their European Gasoline.

When they trade a physical commodity, they neutralize the commodity price delta, find a satisfactory counterparty for the banks who cover the payment risk from the time encompassing the loading, transportation, delivery and payment of the commodity.

This rate (R) at which a trader moves a “commodity in time and space” equals the rate (r*) at which banks finance the commodity trade plus m, a margin covering the risk for the transaction (borrower risk and country risk).

One of the concepts postulated in “Jacques, S. and Simondet, A. (2016) is that traders also arbitrage (R).

When R is ≤ r*+m, the trader doesn’t trade or alternatively may lend at r* to another counterparty.

When commodity traders elect to lend their credit to another counterparty, they are no longer just trading the commodity prices they are purely arbitraging the WACC of others.

More recently, regulatory changes and market dynamics have also prompted trading companies to re-evaluate their financing arrangements and -on more frequent occasion- acting in that capacity themselves: they bank.

Mercuria Energy Trading Inc banks with Societé Génerale New York Branch but occasionally re-lend to producers and give access to its capital (lend its credit) to selected counterparties in the energy derivatives.

But is it new  ? At its peak in the 80’s, Phibro made loans  through its Phibrobank A.G.

The Economist Intelligence Unit produced an illustrated view of the ever-evolving commodity finance landscape.

Jacques, S and Simondet, A. (2016)“Traders or Commodity Finance Banks”  has been to our knowledge the 1st paper exemplifying the pivotal role of the commodity traders as financiers.

In the paper we explained the regulatory changes and market dynamics.



“Around 2011, the world’s largest commodity traders saw a distinct anomaly, this time it was in finance. By depositing metal or another commodity as a collateral and getting money as low as Libor +95bps, they realized that they could also straddle loans for other traders/producers,neutralizing the price delta and purely engaging an arbitrage between interest rates like a bank thus creating a profit center between Trade Finance and Credit Finance”.

“In fact, at one large trading house, the finance spread became so attractive that the commodity loans origination arbitrage opportunities became the greatest profit center over the margins on the purchases and sales of physical commodities”.

“The finance incentive underpins the willingness of merchants to bid a premium for producers’ commodities”.

 © 2017 Commodity Merchant Trading and Shipping Advisory Services

Commodity Trading and Finance

Commodity Merchant Trading and Shipping Advisory Services

Commodity Trading




5 thoughts on “Traders or Commodity Finance Banks Part VIII-The pivotal role of the commodity traders as financiers

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