Trafigura – a shining example of how to thrive in a depressed market, by Richard Pitts

It has been widely reported in the press this week that oil traders are thriving in this market just as crude oil prices have crashed to an almost 11 year low and many energy companies are divesting or announcing yet more capex reductions. It seems that it is not only the major oil traders such as Vitol, Gunvor, Mercuria and Castleton Commodities International who are benefitting. The refiners, storage companies and shipping firms are also profiting from the slump in crude prices. However, there has potentially been one stand-out company that has more than kept its head above water over the last year.

On Monday, Trafigura, (a leading independent commodity trading and logistics house, which trades roughly 3% of global oil), reported record earnings after increasing the volume of traded crude oil by 45% in 2015 (to 3m barrels per day). This has led to Trafigura’s net profits increasing by 6.5% to $1.1bn in the year to September and their profit margin jumping 69% to 2.7% with gross profit in the oil and petroleum unit increasing $1.7bn, the highest in the company’s 22 year history. This healthy profit allowed Trafigura to pay its 600 staff $775 million in bonuses through a share buy-back scheme which is the equivalent of more than $1 million per employee.

Traders are currently taking advantage of price volatility, lower financing costs and a contango market (locking in profits by buying and storing oil to deliver at higher prices in the future). BP and Shell have repeatedly cited trading in their downstream divisions as helping them withstand the losses incurred by their upstream E&P businesses.

“Volatility is very good for our business and I don’t think we have reached the bottom of the cycle yet” Christophe Salmon, Trafigura CFO was quoted as saying. “Our business is very much related to physical trading. So when you have volatility, it multiplies the sources of arbitrage on the physical trading markets, and the bigger your business the better. “

Trafigura has benefitted from the oil price falling from $100 a barrel in 2014 to less than $40 a barrel in 2015 as oversupply has diluted the market, by “aggressively expanding” its access to storage and its logistical assets (ie. trucks) to support its trading activity. They are now a leading player in the shipping market due to the unprecedented demand to transport crude and oil products, and they have now increased their tanker bookings by 20% year on year.

Trafigura has also benefitted through a series of pre-payment schemes and their oil division has benefitted from some oil-for-loans arrangements that have helped boost volumes and keep the balance sheet looking healthy. Under the 2013 deal with Trafigura, Rosneft agreed to supply up to 10.1m tonnes of crude and products over five years in exchange for a pre-payment of up to $1.5bn.

However, it is not all about the oil. Trafigura have also increased their LNG trading focus, with the first LNG cargoes due to arrive on Europe’s shores next year they have doubled their volumes this year from 1.7m tonnes in 2014 to 4.2m tonnes in 2015. This increased demand has also allowed them to expand their LNG trading teams across 3 continents over the last year.

Not only have Trafigura expanded their trading operations across oil, LNG and freight, they have also invested in a number of joint ventures that allow them greater access and control over the other elements of the supply chain. Listed below are some of their most relevant joint ventures and investments;

  • Puma Energy is a global oil and petroleum products midstream and downstream African distribution company, 50% owned by Trafigura.
  • DT Group is a joint venture between Trafigura and Cochan. It works with international and local partners in the logistics, trading and natural resources sectors in sub-Saharan Africa.
  • Impala Terminals is 100% owned by Trafigura and is a multimodal logistics provider focused on export-driven emerging markets.  It owns and operates ports, port terminals, warehouses and transport assets.
  • Galena Asset Management was formed to provide specialised alternative investment solutions to institutional investors. However, it was announced this week that the CEO of this business Duncan Letchford will be leaving and that they will be closing the metals fund and restructuring their hedge fund business. This follows Cargill’s decision in September to spin off its hedge fund unit Black River Asset management.

The willingness of Jeremy Weir, Trafigura CEO, and the board over the last few years to diversify and invest in these companies and JV’s at a time when the majority of energy companies are reducing their capex shows a rarely seen foresight in this market. Also, the recent developments at Galena Asset Management show that if something is not working, they are not afraid to re-evaluate and even secede where required. It is worth noting that Vitol have adapted a very similar model with their investment into Africa with Vivo Energy, terminals and storage with VTTI and refining with Varo Energy.

As a final point, Traifgura are a private company owned by private shareholders and Jeremy Weir has often re-iterated that they are not considering floating the business in the near future. It is no coincidence that the two recent examples of commodities companies negatively reported in the press were Glencore and Noble Group, the two largest physical commodities trading houses that are publicly listed. This public display of information wiped millions off their balance sheet over a very short period and will give the smaller more agile trading houses pause for thought before deciding to IPO.

Trafigura however have not been immune to the commodities market sell off and have recorded impairments of $407 million to the value of a number of its industrial and logistical assets. “We have demonstrated that our model is robust through the economic cycle,” said Chief Executive Jeremy Weir. “In commodity markets characterized by upheaval, oversupply and volatile trading conditions, Trafigura Group delivered a very strong commercial and financial performance.” Trafigura believe they will continue to profit from global imbalance in 2016 and it will be very interesting to see how its rivals’ results compare at the end of the first quarter 2016 when they report 2015 full results.

Trafigura’s performance is perhaps all the more remarkable following the death of aspirational founding partner and Chairman Claude Dauphin in September this year after an 18-month battle with lung cancer and it seems that the board are determined to continue his good work. Christophe Salmon recently stated that Trafigura’s business was very “price agnostic” and I think that summarises their business model perfectly. With oil prices at an all-time high or low, they can still turn a very strong return on investment which I believe is a very healthy lesson in today’s tumultuous market.


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