by Investec Switzerland. In the cutthroat world of commodities trading, there’s no bigger prize than Russia. The country of Vladimir Putin has it all: oil, natural gas, aluminum, nickel, wheat, coal and many other riches. The world’s biggest trading houses have jostled over it for decades. In recent years, Trafigura Group had pushed ahead of arch-rival Glencore Plc in Russian oil trading. Now, Glencore Chief Executive Officer Ivan Glasenberg is reclaiming that territory with an billion joint venture to buy a stake in Rosneft PJSC, the crown jewel of the Russian oil industry. Glencore gets access to millions of barrels of Russian crude, just as OPEC production cuts open the door to the first supply deficit in four years. Moreover, with the Kremlin firmly backing the purchase, the deal sends a signal that Glencore isn’t done in a country that’s one of the world’s largest commodities producers. Trafigura, led by CEO Jeremy Weir, has been pushed back to third place globally among independent crude traders. “Commodity trading has always been a fierce war between the major trading houses,” said Jean-Francois Lambert, an industry consultant and former commodity trade-finance banker at HSBC Holdings Plc. “Trafigura built its partnership with Rosneft beautifully in what could be perceived as an almost exclusive partnership. This is no longer the case.
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Investec considers the following as important: Business & Economy, Commodities Switzerland, Editor's Choice, Glencore Rosneft
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In the cutthroat world of commodities trading, there’s no bigger prize than Russia. The country of Vladimir Putin has it all: oil, natural gas, aluminum, nickel, wheat, coal and many other riches. The world’s biggest trading houses have jostled over it for decades.
In recent years, Trafigura Group had pushed ahead of arch-rival Glencore Plc in Russian oil trading. Now, Glencore Chief Executive Officer Ivan Glasenberg is reclaiming that territory with an $11 billion joint venture to buy a stake in Rosneft PJSC, the crown jewel of the Russian oil industry.
Glencore gets access to millions of barrels of Russian crude, just as OPEC production cuts open the door to the first supply deficit in four years. Moreover, with the Kremlin firmly backing the purchase, the deal sends a signal that Glencore isn’t done in a country that’s one of the world’s largest commodities producers. Trafigura, led by CEO Jeremy Weir, has been pushed back to third place globally among independent crude traders.
“Commodity trading has always been a fierce war between the major trading houses,” said Jean-Francois Lambert, an industry consultant and former commodity trade-finance banker at HSBC Holdings Plc. “Trafigura built its partnership with Rosneft beautifully in what could be perceived as an almost exclusive partnership. This is no longer the case. Ivan just won a major, if not decisive, battle over Jeremy.”
Trafigura, Glencore and commodity traders including Vitol Group and Cargill Inc. are fighting to secure long-term flows of oil, metals and other commodities as profit margins from trading are squeezed by increased competition and more transparent market information.
The transaction, in which Qatar’s sovereign wealth fund and Glencore together will purchase a 19.5 percent stake in Rosneft, would also give the Swiss trading house a five-year supply guarantee of an additional 220,000 Russian barrels a day. It adds to the supplies Glencore secured from Rosneft in a 2013 agreement to get about 188,000 barrels a day.
Jason Fairclough, a Bank of America Merrill Lynch analyst, said in a note to clients that Glencore could add $80 million of profit a year with the extra Rosneft barrels, a return of about 25 percent on its equity investment. “Lots of oil for little dollars,” he said.
© Alexandr Blinov | Dreamstime.com
In 2014, when the U.S. and the European Union slapped sanctions on Rosneft, along with its CEO and Vladimir Putin confidant Igor Sechin, Trafigura was quick to lend a helping hand. A series of sanction-compliant short-term prepaid financing deals was struck that provided Trafigura with millions of tons of coveted Russian crude and petroleum products, while giving Rosneft and Sechin desperately needed cash.
The new-found friendship was a boon for Singapore-based Trafigura and CEO Weir. Oil trading volumes surged 42 percent in its fiscal 2016 year to a record 4.3 million barrels a day, due in large part to the increased flows from state-controlled Rosneft.
Glencore, meanwhile, was facing difficulties. Plunging commodity prices and investor concern over the company’s debt saw the stock collapse in 2015. Glasenberg was forced to ask shareholders for more funds to reduce debt. That worked: The share price Wednesday rose above 300 pence for the first time since May 2015, closing at 302.65 pence in London.
The new supply agreement with Glencore will still put it behind Trafigura, which handles about 810,000 barrels from Rosneft a day, according to Craig Pirrong, a finance professor at the University of Houston who has written industry position papers and reports on behalf of Trafigura. The deal puts Glencore’s daily total from Rosneft at about 408,000 barrels, not including any results of Rosneft oil tenders. And Trafigura retains close links with Rosneft, including a three-way $13 billion deal to buy a large refinery in India.
A Trafigura spokeswoman in Geneva declined to comment on Glencore’s deal with Rosneft. A Glencore spokesman in Baar, Switzerland, declined to comment.
For Glencore, the Rosneft equity stake signals an intention to redouble its efforts in Russia. In the 1970s, when the company was called Marc Rich + Co., it traded aluminum and other metals out of the former Soviet Union. The relationship deepened in the 1990s and 2000s as Glasenberg expanded ties with oil and wheat trading.
In the years before Glencore went public in 2011 and was forced to drop some of its aura of secrecy, the only known picture of Glasenberg was one of him visiting a Russian smelter in Siberia, wearing an oversized thermal parka.
Russian Inroads
Despite Glencore’s historic dominance, Trafigura made its own inroads in Russia over the last decade, first building a close relationship with GMK Norilsk Nickel PJSC, the world’s largest producer of the metal used to make stainless steel. Later it tried to do the same at aluminum giant United Co. Rusal, in which Glencore had a stake. Glencore was instrumental in the three-way merger that created Rusal and owns 8.75 percent of the company. It also has a large trading contract with Rusal that comes up for renewal in 2018.
Trafigura’s Russian push may now face difficulties as Glasenberg has not only won a stake in Rosneft but also has been given tacit signals he’s the Western commodities man whom Putin trusts. Glencore said in a statement this week it expects the deal to give it “additional opportunities, through a strategic partnership for further cooperation, including infrastructure, logistics and global trading.”
“We like this deal,” Paul Gait, an analyst at Sanford C. Bernstein Ltd. in London, told clients. “It helps Glencore’s competitive position versus other traders such as Trafigura in the highly competitive sourcing of physical barrels for trading business.”
Peter Grauer, the chairman of Bloomberg LP, the parent of Bloomberg News, is a senior independent non-executive director at Glencore.
by Andy Hoffman and Javier Blas (Bloomberg)