Commodity trading firms are the ultimate middlemen, linking the suppliers of raw materials – often countries that are hotbeds of corruption – with consumers in wealthy and emerging economies. They may earn wafer thin margins, but with large volumes they generate huge revenues. Their unique position means that they have become some of the most influential companies in the world. Yet few outside of the commodity trading world have heard their names (Trafigura, Vitol, Cargill…), far less have the remotest idea of the power that they wield.
Two Bloomberg (and ex-FT) journalists, Javier Blas and Jack Farchy have covered the sector for decades and set out to pull back the veil of secrecy that has covered the sector for so long. The World for Sale: Money, Power and the Traders Who Barter the Earth’s Resources is the authoritative account of the emergence of the commodity traders, the power that they have to shape economic and political history, and the challenges to their future that they have faced, and at least until now have overcome. As the book outlines, “They are, in the words of one academic, the visible manifestation of Adam Smith’s invisible hand.”
The book details the emergence of commodity traders in the decade after the end of the Second World War. With the global economy expanding at a rapid clip, demand for resources was growing fast. Everywhere you looked, new trading routes were opening up, the power of incumbent businesses was being broken up and new opportunities were presenting themselves.
Chaos, or at the very least uncertainty brought opportunity, and that really is the commodity trading firms bread and butter. The three opportunities that the book focuses on are the oil crisis of the 1970’s, the breakup of the Soviet Union and the emergence of China in the late 1990’s and into the 2000’s. Each opportunity required the skills of the commodity traders to exploit to the max.
But before that there was arguably one man, the original commodity trader who helped set the course for what the commodity trading world of today would look like, and in doing so inadvertently set off a chain of events that still reverberates to this day. That man was Theodore Weisser.
The end of the monopsony and the birth of OPEC
Between 1859 and 1911, there was really only one buyer of crude oil, Standard Oil Trust. Owned by Rockefeller, he had bought up nearly all of the refining capacity in America. He alone decided the price of oil. The monopoly was broken up in 1911 but the market continued to dominated by an oligopoly, which restricted trade to what it’s members controlled:
“By the 1950’s, the oil market was controlled by seven large companies. They came to be known as the ‘Seven Sisters’ – the forerunners of the companies that are today ExxonMobil, Royal Dutch Shell, Chevron and BP. Many of them were descendants of Standard Oil, created in the wake of its break-up. Crude oil was purchased at ‘posted prices’ set by refiners in each region, a practice that had been started by Rockefeller. International trading outside the oligopoly of these major companies was virtually non-existent.”
The rapid growth in oil production from the Soviet Union helped break the stranglehold of the Seven Sisters. By the end of the 1950’s the Soviet Union had displaced Venezuela as the second largest oil producer in the world. At the same time the country was opening up to the potential for more foreign trade in its resources. Theodore Weisser stepped up to the opportunity, striking deals with Moscow, “Weisser became the first independent trader to circumvent the oil major’s club and trade crude oil outside their network of control.”
The expansion of oil trade with the Soviet’s meant a loss of market dominance afforded to the Seven Sisters. Executives at what was to become ExxonMobil announced without consultation, a 7% reduction in their Middle East posted price:
“Resentful about the loss of income and furious that they hadn’t been consulted on the price cut, oil-producing nations started agitating for action…After four days of deliberation, they announced, on 14 September 1960, the birth of the Organization of the Petroleum Exporting Countries – or OPEC.”
The birth of OPEC marked the beginning of the end of the Seven Sisters as oil producing nations nationalised their oil producing assets. In turn they turned to the commodity traders to help ensure their crude found a market.
As the 60’s turned to the 70’s, tensions were escalating in the Middle East. After US President Nixon dropped the gold standard in 1971, oil producing nations were forced to raise their prices. Free of the control of the Seven Sisters they could do what they liked.
Exploiting sanctions meant political power
In the 1980’s at least one commodity trading firm was positioned to take advantage of sanctions imposed on South Africa. Agnostic about politics the objective was always to maximise profits. This meant that traders often had to deal with individuals from corrupt regimes, the murky underbelly that helps fuel the global economy. For years, many commodity traders had looked on sanctions and other government restrictions as an opportunity:
“Countries under embargo had fewer choices about whom to trade with, and so the profits for those who found ways to do business with them were proportionately higher.”
The maxim according to Marc Rich was walking on the edge of the knife, going as close to the edge of legality as possible. As the Blas and Farchy say, “If they didn’t break the letter of the law, they made a mockery of its spirit.”
Exploiting sanctions and embargoes was possible because they weren’t very well enforced, but it also relied on there being a lack of information for the authorities to connect the dots. Move sanctioned oil between tankers, switching off their digital location device, taking advantage of redundant pipeline capacity. They could get away with it in the past, but its much more difficult now.
Their network of contacts across commodity markets and geographical locations, from the corridors of power down to the conditions of the carefully tended farmland gave them much more than first dibs on the best deals. It provided them with an informational edge from which they could profit. Information really was the most valuable resource:
“The savviest traders used global networks of contacts to gain unparalleled insights into the state of the world economy. They invested not only in traders to staff their worldwide offices but also in communications systems to ensure that information could be rapidly shared across their companies…And the traders intelligence networks were enormously valuable, allowing them to make better informed bets on the market than their competitors.”
As Blas and Farchy outline the early strategy was one that other firms would subsequently adopt, “build as large a portfolio of contacts as possible, squeeze your network of contacts for information – and then exploit that information to trade profitably.”
As one of the traders interviewed for the book describes, even the CIA used to visit. ‘They used to visit us: “talk to us about the economy, talk to us about what you’re seeing…” They felt we were a source of information on countries.’
By the 2010’s though, the informational edge that had enabled the commodity trading firms was beginning to ebb. As information access was democratized having an edge meant relying on the appearance of huge shocks to the economy from which they could take advantage, “…an unpredictable business model that relies on a war, crop failure, mine strike or pandemic to save the day.”
Middlemen for money
Investment banks were in retreat in the wake of the global financial crisis. This presented a new opening for the commodity traders to fill, one where banks, burdened by stringent regulations could no longer fill.
As they have grown, they’ve also become important conduits of finance for global trade – a kind of shadow banking sector that is willing to pay oil producers up front for their crude, or supply copper to manufacturers on credit. As Jim Daley, a former head of oil trading at Marc Rich _ Co, puts it: ‘Oil is just a form of money.’
From helping Jamaica out of a funding crisis in the early 1980’s to funding an independence vote in Kurdistan in recent years, the commodity trading firms had the means to fund whole countries and try at least to bring others into being.
Other books delve much more deeply into the lives and exploits of individual commodity traders (The King of Oil: The Secret Lives of Marc Rich, by Daniel Ammann is my personal favourite), but no book does it better at describing their origin, how they have evolved and the wider political and economic context than The World For Sale. A highly recommended read.
Background: What are commodity trading firms and what do they do?
A small number of huge commodity trading firms dominate the production, transportation and trading of commodities. Virtually all commodities must undergo a variety of processes to transform them into things that we can actually consume. These transformations can be grouped into the following categories: space, time and form. Firms that are involved in commodity trading attempt to identify the most valuable of these transformations, undertake the transactions necessary to make these transformations and engage in the physical and operational actions necessary to carry them out.
The areas where commodities can be efficiently produced, such as fertile land or mineral deposits, are usually away from, and often far away from, where those who desire to consume them reside. This first transformation requires the transportation of commodities from where they are produced to the places they are consumed.
The timing of commodity production and consumption is often disjointed as well. This is most readily seen for agricultural commodities, which are often produced periodically (with a crop typically being harvested once a year) but consumed continuously throughout the year. These mismatches in the timing of production and consumption create a need to engage in temporal transformations, namely the storage of commodities. Stocks can be accumulated when supply is unusually high or demand is unusually low, and can then be drawn down upon when demand exceeds supply. Storage is a way of smoothing out the effects of these shocks on prices, consumption and production.
Finally, commodities must often undergo transformations in form in order to be suitable for final consumption or for use as an input in a process further down the value chain. For example, soybeans must be crushed to produce oil and meal that can be consumed, and crude oil must be refined into gasoline, diesel and other products.