Several of the world’s largest energy trading firms are re-entering the metals market, a move that comes after previous setbacks in these notoriously challenging markets.
Vitol Group, Gunvor Group, and Mercuria Energy Group are among those expanding their presence in metals trading, leveraging the capital generated from record profits. This strategic shift coincides with a growing bullish sentiment among forecasters for metals like copper and aluminum, as production shortfalls begin to materialize.
Additionally, many commodities firms recognize the strong correlation between metals usage and the burgeoning power markets, further driving interest in this sector.
However, the entry of these energy giants into metals trading presents a formidable challenge, as the market has historically been dominated by Glencore Plc and Trafigura Group. This move could potentially threaten smaller-scale metals traders, which have struggled to remain profitable amid rising energy costs and disruptions in the supply chain, leading to reduced demand from manufacturers.
Kristofer Tremaine, CEO of Kimura Capital, a commodities sector lender, commented on the situation, noting, “For oil traders, the narrative of energy transition looms large, but they also possess the financial resources to make significant market plays. This should be concerning for many metal traders, as they stand to lose considerable market share.”
New Entrants Placing Significant Bets On Bulk Trading
The latest developments indicate that the new entrants are placing significant bets on bulk trading, a strategy well-aligned with their expertise in handling large volumes, reminiscent of the massive transportation networks they employ for moving millions of barrels of oil daily.
Gunvor, for instance, has made notable additions to its team, including derivatives trader Woody Zhang, Paolo Cabrejos from Traxys, and Michael Gerard from IXM, signaling a strategic expansion into concentrates trading alongside its existing focus on aluminum. Ivan Petev, Gunvor’s global head of base metals, emphasized the company’s commitment to maintaining a deep involvement in energy markets while recognizing the pivotal role of metals in the ongoing energy transition.
Similarly, Vitol is initially directing its attention towards aluminum, with incoming hires Benjamin Seaford and William Gayner from Mercuria. The company’s CEO, Russell Hardy, underscored the suitability of larger, commoditized metal markets for their operations, citing their expertise in handling large-scale commodity movements.
Vitol’s focus remains on established markets, with less consideration given to emerging battery metals like lithium and cobalt.
Mercuria, on the other hand, is reportedly eyeing the establishment of a large-scale base metals trading business, with talks of potentially bringing on board Kostas Bintas, a former co-head of metals at Trafigura known for his bullish stance on copper.
The ability of energy traders to deploy substantial capital could potentially reshape metals markets significantly, especially considering the combined profits of over $50 billion made by Vitol, Trafigura, Mercuria, and Gunvor in the past two years.
Furthermore, in metals trading, it’s common practice for traders to engage in pre-payment deals with mining and smelting companies for future production. Mercuria, already active in mine seeding, has reportedly engaged in discussions with Vedanta Resources regarding financing for the restart of its Konkola Copper Mines in Zambia. While Vedanta acknowledged talks with “partners” for short-term financing, they refrained from disclosing specific companies involved, and Mercuria declined to comment on the matter.
Past Mistakes
Still, Mercuria, Vitol and Gunvor are all returning to metals after previous mishaps that contributed to them winding down their trading books. Vitol had been an active player, particularly in tolling metal in the former Soviet Union during the 1990s, and it held investments in a zinc plant and aluminum products manufacturer in Russia.
But its Euromin unit reported “significant losses” in 1995, company records show, on the back of “political instability” and the receipt of a “significant tonnage of substandard aluminum sheet and poor handling of inventory.” Still, after a restructuring the company continued trade alumina until 2019.
Mercuria had a series of high profile difficulties in its metals book, including falling victim in 2014 to an infamous fraud involving multiple pledging of warehouse receipts at China’s Qingdao port. Later, it sued a Turkish supplier for delivering painted rocks instead of $36 million of copper, while a bullish bet on zinc concentrates was countered by a flood of material from new mines.
Gunvor closed a substantial base metals book — mainly focused on copper — in 2016 after a loss linked to the insolvency of Prateek Gupta’s Ushdev International Ltd. An internal memo obtained at the time cited “risk factors such as pricing and counterparty behavior” behind the decision to shutter the metals trading desk.
This year, metals markets have provided trading opportunities for many in the sector: regional premiums for aluminum are rising in Europe, while copper concentrate treatment charges have nosedived to record lows. New sanctions on Russian metals have also spurred volatility, as traders look to game new London Metal Exchange warehousing rules.
READ ALSO: SML Saga: IMANI Demands Full Transparency
