From Yahoo via Yahoo Canada, April 26:
The world of commodity traders has long been a secretive one. The merchants who buy and sell the world’s resources have a massive global reach but are mostly privately owned and tend to operate away from public and regulatory view.
Suddenly, it seems that everyone is talking -- and worrying -- about them.
The International Monetary Fund last week noted investors’ concern about traders’ access to credit and said it’s time for regulators to look more closely at commodity markets. The Dallas Federal Reserve recommended the companies take action to increase liquidity. And the Financial Stability Board flagged commodity-market strains -- including the huge margin calls that pressured traders in recent weeks -- as an issue that needs particular attention.
Spiking prices after Russia’s invasion of Ukraine meant a dramatic increase in funding requirements for the companies that move oil, metals and crops around the world. Traders use banks to finance their shipments and as counterparties to derivative hedging positions. There’s now mounting concern that further shocks in commodity markets could shake the wider financial system.
“Much in a way that 2008 shone a spotlight on a whole bunch of institutions nobody had paid much attention to, these unique circumstances that we’re in now have shifted focus onto a new section of financial markets,” said Steven Kelly, a research associate at the Yale Program on Financial Stability.
With the spotlight on commodity trading set to keep getting brighter, here’s a rundown of what to watch and why:
1. Who’s in focus?
The commodity trading industry is dominated by a group of mostly private companies. Glencore Plc -- one of few that is publicly listed -- is the largest trader and also a big miner. Vitol Group is the top independent oil merchant and Trafigura Group leads the group in copper.
Producers, like miners and drillers, also trade physical commodities to varying degrees, and -- like the trading houses -- use derivative positions to hedge against the risk of changing prices.
The surge in commodity prices in the aftermath of Russia’s invasion piled pressure on traders, and several quickly moved to arrange new or expanded credit lines from banks. Traders had already been reeling from volatility in the wake of the pandemic -- for example, ICE Clear Europe saw a margin breach of just over $1 billion in the final quarter of 2021
Since the invasion, a group of European energy traders asked the European Central Bank for emergency funding but got turned down.
2. Why’s everyone so worried?....
....MUCH MORE
