Commodity traders 'key to managing risks' in volatile global economy

Professor Craig Pirrong of the University of Houston spoke at the launch of commodity trader Trafigura's trading and global supply chain guide.
Professor Craig Pirrong of the University of Houston spoke at the launch of commodity trader Trafigura's trading and global supply chain guide. PHOTO: REUTERS

Commodity traders play an even more important role in managing risks and logistics now, given the increased complexity and volatility of the global economy, according to a leading finance academic.

"Commodity traders reduce prices that consumers pay and increase the price producers receive by moving commodities from producers to consumers in an efficient way," said Professor Craig Pirrong of the University of Houston.

He added that they respond to supply and demand shocks by adjusting commodity flows.

He was speaking at the launch of commodity trader Trafigura's trading and global supply chain guide, which tries to explain the functions and processes of such firms and how they help organise the supply chains underpinning the world.

He noted a misconception about commodity trading is that it is primarily dependent on price. "The commodity trading business is a volume and margin business. There can be relationships between volumes, margins and prices, but the relationships are tenuous."

Low crude prices, for instance, while a bane for oil producers, are "not necessarily a bad thing" for commodity traders. "... if the price of oil is low because supply is high, that means... there's a lot more supply to be moving around, a lot more transactions, higher volumes of transactions, and that can actually be a very favourable environment."

Trafigura has been growing its oil trading business aggressively since prices collapsed in June 2014. The group in its June interim report said it traded more than four million barrels of oil and refined fuels a day in the six months to March, up from 2.7 million barrels a day in the same period a year earlier, while its oil book has doubled in size since the first half of 2012.

While volatility in oil prices has eased somewhat, which could spell less profitable arbitrage chances for traders, Trafigura chief economist Saad Rahim believes opportunities remain, as stability in the crude market creates "stable demand expectations".

A version of this article appeared in the print edition of The Straits Times on September 07, 2016, with the headline 'Commodity traders 'key to managing risks' in volatile global economy'. Print Edition | Subscribe