The poor performance in the commodity markets over the last few years is hitting the underlying structure for how commodity business is being done. Futures trading may be the most visible part of commodity markets for investors, but the real activity is often behind the scenes with the big trading houses. It is this cash and logistic market where the money is made and where price is often determined. Here is where structure change is significant. Banks are getting out of the commodity business and firms are being sold. The shifts in demand from developed to emerging markets is changing firm and market dynamics. The points of supply are also changing which will require needs for capital equipment and infrastructure development.
In the last few months, the structural changes have been significant. DB, UBS, and RBS is getting out of commodities. Morgan Stanley is getting out of the oil storage business and perhaps the cash business. Barclays is shrinking its business with the potential for a full exit. Goldman Sachs is selling its interest in metals warehouses. Mercuria is buying JP Morgan's physical business. Banks are getting out because there is a increase regulation, tighter capital constraints and lower profitability.
The ABCD (ADM, Bunge, Cargill, and Louis Dreyfus) companies are in a competitive battle with the NOW (Noble, Olam, and Wilmar) companies. Many have different corporate strategies but there is going competitive overlap. These companies are in competition with Glencore, Trafigura, Mercuria, and Vitol, the other major trading houses. Glencore is a publicly listed company with strong mining operations through Xstrata and also bought Viterra of Canada it get access to more wheat trading. ADM tried to buy GrainCorp of Australia, but was rejected by the government. Marubeni of Japan acquired Gavilon to build infrastructure in the US.
These larger trading house firms are increasing their grip on supply chains and they are active in the financing area. They both provide financing for resource companies and raising capital away from banks. These firms are also spending capital to move beyond just trading. They are also in the business of "form arbitrage", for example, changing oil into refined product, corn into ethanol. Commodity firms are also willing to take a greater role in logistical support through holding storage facilities and port operations.
Smaller firms are being bought by larger firms. Governments are getting involved in trading. Noble is selling its agribusiness division to the Chinese state-owned trading company, Cofco Corp. Cofco also bough Nidera, the Dutch trading firm. This will place a government trading company in competition with the classic ABCD's of agriculture markets.
The landscape will change but the real question is whether there will be more or less liquidity in the markets. Some will say this will be good for liquidity because these firms are more commodity focused. Others will take the other side of this argument. These firms are less likely to commit capital in areas that are not profitable. The jury is out for determining whether trade volume will increase. We just know that the players and motives will be different.
In the last few months, the structural changes have been significant. DB, UBS, and RBS is getting out of commodities. Morgan Stanley is getting out of the oil storage business and perhaps the cash business. Barclays is shrinking its business with the potential for a full exit. Goldman Sachs is selling its interest in metals warehouses. Mercuria is buying JP Morgan's physical business. Banks are getting out because there is a increase regulation, tighter capital constraints and lower profitability.
The ABCD (ADM, Bunge, Cargill, and Louis Dreyfus) companies are in a competitive battle with the NOW (Noble, Olam, and Wilmar) companies. Many have different corporate strategies but there is going competitive overlap. These companies are in competition with Glencore, Trafigura, Mercuria, and Vitol, the other major trading houses. Glencore is a publicly listed company with strong mining operations through Xstrata and also bought Viterra of Canada it get access to more wheat trading. ADM tried to buy GrainCorp of Australia, but was rejected by the government. Marubeni of Japan acquired Gavilon to build infrastructure in the US.
These larger trading house firms are increasing their grip on supply chains and they are active in the financing area. They both provide financing for resource companies and raising capital away from banks. These firms are also spending capital to move beyond just trading. They are also in the business of "form arbitrage", for example, changing oil into refined product, corn into ethanol. Commodity firms are also willing to take a greater role in logistical support through holding storage facilities and port operations.
Smaller firms are being bought by larger firms. Governments are getting involved in trading. Noble is selling its agribusiness division to the Chinese state-owned trading company, Cofco Corp. Cofco also bough Nidera, the Dutch trading firm. This will place a government trading company in competition with the classic ABCD's of agriculture markets.
The landscape will change but the real question is whether there will be more or less liquidity in the markets. Some will say this will be good for liquidity because these firms are more commodity focused. Others will take the other side of this argument. These firms are less likely to commit capital in areas that are not profitable. The jury is out for determining whether trade volume will increase. We just know that the players and motives will be different.
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