By Andrea Hotter / June 12, 2018 / www.metalbulletin.com /
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Producing and then trading metal used to be the purview of just a few, with the supply chain more typically separated into silos and companies making occasional forays into different areas.
But as the line between producer and trader has become increasingly blurred, the differentiator between companies is becoming the services they provide.
As Christophe Allain, group portfolio director for non-ferrous metals at French cable producer Nexans said at a recent Metal Bulletin copper seminar in New York: "It's not necessarily about being a producer or a trader but about the quality of service you provide."
This means services such as credit insurance, trade finance and logistics have joined market intelligence and trader savvy as the major criteria used by purchasers of metal to determine the firms from which they buy their material.
Glencore
Center stage in the producer-trader world has for the past several years been occupied by Zug, Switzerland-based Glencore, its status solidified by its merger with Xstrata in 2013.
Before it completed the Xstrata merger, Glencore was a hugely successful trading and marketing firm, with its efforts in this field integrally linked for historical reasons to the industrial activities of Xstrata.
Since that deal was completed, the merged entity has become a mining firm whose results are now dominated by earnings from its industrial assets.
But marketing is still critical, giving Glencore the benefit of trading intelligence - unique insight into commodity direction, corporate activity and peer behavior.
The same entrepreneurial approach that existed prior to the Xstrata merger has remained, with a lack of bureaucracy due to its ownership structure and relatively little rotation of senior personnel between divisions in order to ensure decades of experience at sourcing and integrating deals.
The company is also active in logistics, having acquired warehousing firm Pacorini, renamed Access World, in 2010.
Producers
Glencore isn't the first company to bridge the gap between producing metal and marketing it. There have been cycles of producers deciding to take a look at the trading or marketing business, in an attempt to understand, optimize and manage risk.
With the dust having settled after the global financial crisis and the balance sheets of the larger miners back in order, producers are once again stepping up efforts to use trading as a way to better market their products.
They're using their position in the supply chain to their advantage - often a producer has a bigger hedge than a trading firm and has access to key market insights that enhance their understanding of price movements.
Supply chain management and chain of custody issues mean that understanding the provenance of material has become essential, and this is something a producer is well placed to know.
As liquidity has decreased, producers have become far more sophisticated about marketing products directly to their customers, hurting the ability of merchants to make returns.
In a world in which global trade relationships can rapidly change due to tariffs and bans, managing exposure to rapidly plentiful changing risks is key.
But if it were easy, then everybody would be doing it.
Over the years, some producers have tried to replicate the Glencore model, with varying degrees of success. Emulating the financial flexibility of Glencore, with its plentiful free-cash flow and decades-long relationships, is quite complex.
Most miners attempting to build a name in trading have typically focused on boosting sales of their own units, rather than developing and maintaining extensive marketing, logistics, financing and risk management services.
Roberto Ecclefield, Codelco's new vice president, commercial, singles out logistics as the key area where a trading house can add value for copper producers, given the Chilean company's goal to be the supplier of choice.
"It's not for us to try to compete with merchants - we're not trying to defeat them, or use their model. We're trying to use the value and service they provide to make us more profitable and the supplier of choice," he told Metal Bulletin's copper seminar last week.
There are other challenges: It's difficult to convince stakeholders of mining companies that trading is a worthwhile value proposition. Trading is often much misunderstood, with the negative connotations of rogue traders firmly ascribed at worst, and the concept of high risk and potentially significant loss an off-putting concern at best.
Explaining and putting a value on its marketing business was an issue that Glencore ran into at the time of its initial public offering. It's a lot easier to argue the merits of a business unit such as freight and logistics to an investor than it is to ascribe value to a trading operation, even if a company has been doing it successfully for years.
Traders
There are a number of trade houses that also work with industrial assets in some shape or form.
Trafigura, Gerald, IXM (formerly Louis Dreyfus), Transamine and Traxys to name just a few are variously active in tolling or offtake agreements, have stakes in producing or future mines and operate successful concentrate blending operations.
These trade houses also work with producers, including Glencore, in joint ventures, making category lines even hazier.
Liquidity issues often force traders into more niche positions, optimizing a role within a category such as nonferrous metals or a specific metal product.
It nonetheless seems highly unlikely that even a multinational commodity house like Trafigura - which has a vast logistics business and significant global investments in infrastructure - could build an industrial asset base of Glencore's size without a merger similar to the one with Xstrata.
Might the future hold such a deal? It's possible, but it still wouldn't be an instant winner as things stand.
That's because Glencore's right to market Xstrata products predated the merger and meant that the companies were already deeply entwined.
Other trading houses have offtake and marketing agreements for specific companies and products, but there is no clearly identifiable relationship between a trader and another large producer similar to the one that existed between Glencore and Xstrata.
It took Xstrata a decade to build itself into a mega-miner, meaning the creation of a firm of the same scale as Glencore today would require M&A with one of the large diversified miners such as Rio Tinto, BHP, Anglo American or Vale.
Never say never, but such a deal doesn't appear to be in the cards.