Crops And Metals Are Becoming More Attractive To Energy Traders

Energy traders are expanding in metals and agriculture after making more money than ever in the last few years.

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With the bumper profits they have obtained from trading oil and gas, they are able to invest and diversify into other commodities as a result of the profits they have reaped from trading oil and gas. There have been a number of crop and metal traders hired by Gunvor Group, Hartree Partners LP, and Vitol Group over the past year. 

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While it is not the first time that major energy merchants have delved into such markets, there are several reasons that they are becoming more interested in them at the present time.

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It is no secret that the energy crisis and Russia's war in Ukraine fueled the volatility that traders crave and highlighted how one commodity can have an impact on another, such as high gas prices curbing metals output, and raising fertilizer costs. Moreover, metals such as copper and lithium are crucial to the energy transition away from fossil fuels, and a boom in renewable diesel production in the US is helping to boost crop demand, thereby helping to link the commodity markets. 

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“Diversifying into agricultural and metals trading is a sensible move,” said Manish Marwaha, a commodities consultant. “Margins and revenues have been resilient in recent years.”

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Some major energy traders are also considering moving into other commodities markets to recoup revenues lost after exiting the Russian oil business broadly. 

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There has been a significant shift in the focus of the top independent merchants from oil, gas, coal, and power trading to energy trading in the last few years. Rather than dealing in physical supplies to tap volatile prices, the focus is to trade metals and crop derivatives - rather than dealing in physical commodities. 

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Gunvor, which has a Geneva headquarters, recently hired Ian Oxley from Freepoint Commodities as it takes a closer look at the vast world of base metals as part of its energy-trading operations. It has also been reported that Gunvor has also appointed Brad James and Jonathan Smith from Citigroup Inc. to trade agricultural derivatives as part of a clutch of appointments that he has made, according to people familiar with the matter. 

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Since last year, Hartree has hired Dmitry Filatov, Marek Wright, and Richard Lee to trade agricultural derivatives. Vitol, an independent oil trader with hubs in Geneva and Houston, appointed Carl Desjardins to run its agricultural unit last year. 

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Both Gunvor and Hartree declined to comment on the matter.

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Vitol and Gunvor both winded down forays into agricultural and metal markets over six years ago following unsuccessful forays into these markets, and there have been previous moves into such commodities that failed as well. Since around 2015, Mercuria Energy Group Ltd. has built a book of mined concentrates, before focusing on select investments in battery metals in order to grow its business. 

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While energy traders have recently expanded into other commodities, they are still a tiny fraction of the market when compared to dominant players in the industry, such as Cargill Inc., which deals with crops, or Trafigura Group, which deals with metals.

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Roland Rechtsteiner, a partner at McKinsey & Co., says that small positions can provide insight into cross-commodity trades, such as the competition between the energy and food sectors for crops as the biofuels market expands.

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He explained that the counterparties you are dealing with are basically the same. "Volatility is the key factor in determining profitability in the sector - which is driven by the underlying mega-trend of the energy transition, which impacts all asset classes equally."