Iron ore
November exports of iron ore from Brazil grew 13 per cent to 23.2 million metric tonnes over October, according to latest data from Brazil’s National Union of the Industry of Extraction of Iron and Base Metals. However, the latest November statistics showed a decline of 9.2 per cent from a year ago shipments. REUTERS

In 2009, superstar commodities trader Andrew Hall thought the price of physical oil was too cheap. Other traders, however, agreed with him and pushed up the prices of oil futures contracts.

So Hall did the following: he bought one million barrels of physical oil, rented a tanker, and stored it. When oil prices rose, he sold the physical stash and made a fortune.

Hall’s example just scratches the surface of what the producer-trader complex (PTC) is capable of.

The PTC consists of large players who are both traders and producers of commodities. These firms hold obvious advantages over purely financial traders.

First, they can exploit mispricings much better than purely financial traders can because not all forms, locations, grades, and stages of commodities are tradable as financial futures.

In this regard, the PTC makes the global flow and supply of commodities more efficient and fairly priced.

Second, they have much better access to information, which is the lifeblood of trading. For example, if a trader owns a copper mine and shipping operations, he’ll obviously have more information about the supply conditions of copper than a purely financial trader.

Third, they can manipulate the market if they’re big enough. For example, they can buy copper futures and subsequently shut down their production, thereby causing prices to saor.

While firms in the PTC may deny such possibilities, there is evidence that it has happened in the past. The most infamous example was Enron Corp., which bought electricity transmission rights on the cheap, created artificial shortages, and then reaped enormous transmission revenues.

What is clear is that commodities firms in the PTC hold enormous advantages over purely financial traders. This business model, therefore, could be the future of the commodities industry, especially on the trading side.

Recently, the splash has been made by traders getting into the physical business (rather than producers getting into the trading business.)

However, powerful companies like Cargill and Louis Dreyfus, which started as producers, have operated as PTCs for decades.

Glencore, due to its sheer size and upcoming IPO, is currently the most prominent example of a trading-led PTC. Other players in the PTC include Olam International, Bunge, and Noble Group. The most infamous example a PTC is the defunct Enron.

The next big PTC to emerge, interestingly, may be a hedge fund led by John Arnold, an alumnus of Enron (who was not implicated in any of the wrongdoings of his former employer).

Arnold’s multi-billion-dollar hedge fund recently purchased an equity stake in a coal miner and invested in natural gas storage facilities, showing nascent signs of expanding into the physical space.

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