In the financial press, regular readers will read about the commodification of many industries. In the world of commodities, the rules of supply and demand are the important as well as understanding there will be a number of industries that use the commodity and they want to lock in their expenses, However, there is money typically called speculative which tries to forecast supply and demand and either buy calls or puts depending on their viewpoint. If the view is correct, prices will rise or fall or prices will fluctuate. The higher the fluctuation, the greater the possibility of profit. A book examined the traders who have made and lost great sums of money is called The World for Sale by Javier Blas and Jack Farchy, published by Oxford University Press, NY, 2021.

While commodity exchanges have a long history, trading minerals such as iron ore, nickel, cobalt and grain, think about the Chicago Mercantile Exchange (CME) and the London Metals Exchange (LME). Fortunes were made and lost on the exchanges, but it was not until the 1970’s that firms begin to dominate the metals exchange. On Metals, the Marc Rich + Co eventually became Glencore which is the largest metal trader, a top-3 oil trader and the world’s largest wheat trader. Trafigura is the world’s 2nd largest oil and metal trader. The other big name in oil trading is Vitol. In grains Cargill is king. It is the world’s largest trader of grains. The other companies in the ABCD are Archer Daniels Midland or ADM, Bunge, Cargill and Louis Dreyfus.

All of the above companies take delivery or own the product to sell to the companies who will use the product to manufacture something to sell to businesses and consumers. For example, Glencore owns iron ore mines which is sold to steel mills which is sold to automakers (Ford, GM, Chrysler) which is sold to consumers.

The history of the oil industry involves Standard Oil which at its height controlled over 95% of the oil market from drilling to petrol station. Eventually, the company was broken up by Congress and became the 7 sisters – Standard Oil of New Jersey (Exxon), Standard Oil of New Jersey (Mobil), Standard Oil of California (Chevron) Anglo- Iranian Oil (BP), Royal Dutch Shell (Shell), Texaco (Chevron) and Gulf Oil (Chevron). For decades after Standard Oil was broken up, the sisters controlled the price of oil and it was relatively low given the use of oil in the economy. It was not until OPEC decided to essentially nationalize their holdings and raise the price of oil that oil prices fluctuated. With the fluctuations means there are trading profits to be made. Prior to the fluctuations, oil companies made most of their money refinery the oil and selling it to users. Once the price of oil began to move up and down, trading of oil contracts became a very lucrative field, particularly for those companies willing to overlook sanctions.

For example at various times, Iran’s oil was sanctioned by the US to penalize the country as it was doing things that the US foreign policy did not like. Traders such as Marc Rich realized if they bought oil from Iran, put in on a tanker there were refineries in the world which did not care where the oil came from. The Iranian oil was bought at a discount and when the oil is sold to the refinery it is sold at a higher price. Do this often enough and profits in the millions were made. If oil prices were down, they could be loaded on to very large oil tankers and be at sea for 6 months until prices rose which translated into profits. The traders were based in Switzerland, and they rationalized the Swiss has not sanctioned the country in this case Iran so they were fine with the outcomes.

If you are a trader, the one element you need besides the smarts is credit. In the commodities trading, everyone buys on margin and just before the option runs out it is either sold or delivery is taken. Most traders do not want the product, they are hoping prices fluctuate just enough to either make money on their longs or shorts. A flat market is not a trader’s friend. A flat market can be good for the producer or the user of the commodity, but not traders. Trading commodities uses supply and demand. When demand is high, prices rise. To do well in commodities the trader has to have good relations with banks and brokerage companies who give credit to the company and every trading company will have good and bad years. One of the banks, involved in giving credit was BNP Paribas. In the case of Glencore, when the company went public, a dozen billionaires were the result and most of the trading team were muti-millionaires.

Linking to dividend paying stocks, often times an investor will buy a company with the intention of holding for a long period of time, and if the company does well, it was a good investment. The issue is the business model can and will change over the years, from doing everything to specialization or similar to automakers to contracting others for product and services. Sometimes it is better to do everything inhouse, sometimes in better to contract out, there are good reasons for doing either and both. As an investor, particularly as you hold the stock for a while, ask has the business model changed and do you like it as the company remains profitable?

There are more questions than answers, till the next time – to raising questions