* Oil traders to seek grain storage, port capacity assets
* Glencore results suggest energy margins thinnest
* Long-term bullish outlook for agriculture remains intact
By Emma Farge and Sarah McFarlane
GENEVA/LONDON, June 17 Energy trading houses are
diversifying into food commodities and metals, which makes them
likely to invest in assets such as port capacity as they copy
their rival Glencore Xstrata to escape excessive
reliance on oil.
Oil giants Vitol and Mercuria have expanded in
agricultural commodity markets by recruiting traders in the past
18 months, while Gunvor and Mercuria have also hired metals
specialists and begun trading for the first time.
Traders and analysts say there is limited money to be made
solely as a middle man, leaving acquisitions of port and storage
assets as the most effective next step.
The four "ABCD" companies that dominate the global trade in
agricultural goods, Archer Daniels Midland Co, Bunge Ltd
, Cargill Inc and Louis Dreyfus Corp
all have extensive operations along the supply chain.
So do top metals players Glencore and Trafigura.
"Most of the traditional agricultural companies have got
assets, it's not crucial, but it's probably useful as it helps
you manage your supply better and therefore manage your
performance risk better," said Steve Jesse, head of agriculture
for Europe and Americas at Commonwealth Bank Australia.
ABN AMRO's global head of agricultural commodities, Suzanne
Larsson-Nivard, said she expected energy companies to acquire
assets including storage and port capacity, to ensure a
substantial position in agricultural markets.
A spokesperson at Vitol, which sourced around three quarters
of its more than $300 billion in revenues last year from oil,
said it was aiming to boost its turnover by diversifying.
"The market is highly competitive and margins extremely
thin. This modest move into mainstream ags leverages our core
strength in logistics, and contributes to an increase in overall
While revenues have been growing among the top five energy
traders, margins have been disappointing. By expanding their
operations they broaden their growth opportunities.
"There's a trend of energy and metals trade houses moving
into the agricultural markets," said Andrew Kerr, founder of
commodity recruitment firm Opportune City Resources.
"It's diversifying the book - they were already in the big
commodities such as oil and in order to see growth they are
looking to diversify."
Oil prices have stayed roughly steady for a couple of years
near the $100 a barrel levels where lynchpin OPEC
producer Saudi Arabia wants them.
Robert Piller, director of Aupres Consult and commodities
lecturer at the Geneva Business School, said this stability has
offered fewer opportunities to exploit price dislocations.
"Traders get frustrated by thin margins and are always
looking to increase them. It's a less volatile period for oil
prices and now they are huge companies trying to figure out how
to grow," he said, explaining the trend.
Other trade sources said that energy traders were motivated
by Glencore Xstrata's success story and had noted that it had
consistently had bigger margins outside of energy markets.
Glencore's $30 billion takeover of miner Xstrata was
clinched this year. Glencore has built on its trading business
through acquiring assets along the supply chain, notably via its
$6 billion purchase last year of Canadian grain merchant
Many large traders in the sector share a common history with
the Zug-based giant and have senior staff who trained under oil
trader Marc Rich, whose firm was later renamed Glencore.
"It's about using financial clout to gain exposure to new
markets combined with a little bit of 'be like the Jones'. They
want to replicate Glencore Xstrata," said an industry source,
familiar with oil traders' strategies.
Glencore's adjusted EBITDA (earnings before interest, tax,
depreciation and amortisation) margin by commodity sector over
the past three years shows that on average energy was the
weakest of the three - energy, metals and agriculture -
averaging just 0.6 percent.
In 2012, the same margin for energy was 0.4 percent compared
with 2 percent for agriculture and 3 percent for metals.
However, grains traders said that margins could also be thin
in their market, which was why agricultural asset investments
were likely to be an inevitable next step for the new entrants.
"Bunge, Cargill etcetera benefit from being all along the
supply chain so can make money from different parts depending
what is happening in a given year," said a European trader.
Crops are weather dependent and this uncertainty can boost
volatility, while rising demand from emerging economies has
fuelled a bullish long-term outlook for food markets.
"The increasing demand for agricultural products from China
continues as strong as ever - it's urbanisation and improving
wealth and living standards of the population which is driving
demand growth for certain commodities," said Commonwealth Bank
Besides investing in assets, industry sources said that
another way that energy traders could succeed in new markets was
by setting up barter deals between oil and other commodities.
This was a strategy used in the 1990s by Vitol shortly after
its entry into the sugar market. It supplied Cuba with oil
products in exchange for sugar exports, two sources familiar
with the matter said.
"Some big players could take advantage of their strong
position in certain markets to capture other commodities export
business flow there," said Philippe Steiner, vice president of
Commodity Trade Invest, a commodity trade finance specialist.