Time in the Market
               Not Timing the Market

COMMODITY TRADERS’ LENS: FAR-SEEING STRATEGIES

Doom and Gloom? Don’t Assume

As I surf the pages of LinkedIn, I read unnecessary headlines dramatizing the ‘significant loss’ the big four independent commodity traders have supposedly faced this year. Predictions of ‘doom’ for these traders are rampant. While digesting these narratives, I often find myself clicking on the profiles of those reposting these articles from major news outlets, seemingly eager to highlight their awareness of the trades’ alleged doomed fate.

But let me tell you something: don’t believe the narrative. Underestimating the intelligence within the Executive Committees of these organizations is a mistake. None of them are sitting around saying, “Wow, I didn’t see that downturn coming, what are we going to do?” The CEOs of the top five are fully aware of past markets, understand their current positioning, and, along with their teams, have a vision for the future. They use record profits from previous years to hedge against the challenges they face today.

Assets Absorb, Traders Transform

Good traders have assets to absorb losses or downturns in their P&L, but a trader without assets has a very short runway. So, while stories of doom are posted, reposted, and shared on LinkedIn, let me open up about the ‘Principles of the Operating Model,’ which many outside the commodity trade world are unaware of.

Model Principles, Not Simple Miracles

For the most profitable companies to succeed, there’s an operating model within the organization that is carefully crafted, maintained, and organized. I aim to outline a comprehensive approach to building an operating model that enhances efficiency and fosters continuous improvement and innovation.

Having built, organized, and operated within some of these organizations, I can attest that their business models are solid, the CEOs and executive teams are sharp, and what gives them their success and confidence is the Principles of their Operating Model. So, let’s dive in.

Embrace Reality and Deal with It

Principle: Understand and accept the reality of your situation, then work to improve it.

In commodity trading, we are always surprised when others are surprised by volatile and unpredictable market conditions. We wonder, “Why are you surprised, and why do you think we’re not prepared for it?” We can handle whatever is thrown at us because our operating model requires acknowledging these realities and adapting accordingly. This means regularly analyzing market trends, understanding geopolitical impacts, and preparing for unforeseen disruptions. By embracing these realities, companies can develop strategies to mitigate risks and seize opportunities. We can navigate because our balance sheet is strong. Look at one particular heavyweight headquartered in Singapore, aggressively building out their bunkering team. They foresaw the tariff hike the US would place on China and various geopolitical actions, leading to increased demand for bunkering. They are now cleaning up. Let’s not forget about a well-known NOC that just bought a bunkering firm.

Market Mastery Amid Uncertainty

In 2023, the sector generated over $100 billion , attracting new players like tech-focused traders and hedge funds. Success in this landscape hinges on managing illiquid risks and leveraging data-driven models.

While price volatility for many commodities decreased significantly, high interest rates have stifled investments in new capacities. Geopolitical events continue to disrupt global trade, with oil remaining the largest but increasingly challenged value pool. Power and gas trading have seen substantial growth, with LNG being crucial for European energy security.

Agricultural markets are influenced by geopolitical tensions and rising production costs, while metals and mining face increased competition and profitability issues. The interconnectedness of commodity markets is growing, offering cross-commodity trading opportunities.

Flexibility in long-term contracts is rising due to geopolitical events, with power playing a central role in the energy transition. Renewable energy projects demand significant raw materials, presenting an opportunity for traders to invest in clean power.

Long-term power purchase agreements are becoming more popular, allowing traders to lower risks for customers through structured products. As renewables grow, balancing the power system becomes crucial. Traders are uniquely positioned to support the energy transition by investing in and managing renewable energy projects, ensuring stability and profitability in a volatile market.

As I conclude, let’s dismiss the sensationalism surrounding the supposed downfall of the big commodity traders. The principles of their operating models, honed by years of experience and strategic foresight, ensure their resilience. These companies are not blindsided by market downturns; they anticipate and prepare for them. Their ability to navigate through volatility is a testament to their robust strategies and strong balance sheets.

Wake up

So, while doom and gloom may dominate the headlines, remember that the true strength of these traders lies in their sophisticated operating models and unyielding adaptability. This is why they continue to thrive, even when the market appears turbulent. The success of these traders is not a matter of luck but a result of meticulous planning, strategic foresight, and unwavering execution of their principles.

Commodity trading, therefore, remains a cornerstone in stabilizing global markets, driving innovation, and fostering resilience amidst uncertainty. This dynamic and complex field is not just about trading goods but about mastering the art of navigating through chaos with precision and confidence. Let’s appreciate the ingenuity and steadfastness that keep the wheels of global trade turning, even in the most uncertain times.

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