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McKinsey Working Papers on Risk, Number 39
Commodity trading at a strategic crossroad
Jan Ascher
Paul Laszlo
Guillaume Quiviger
December 2012
© Copyright 2012 McKinsey & Company
2
Contents
Commodity trading at a strategic crossroad
Introduction and executive summary1
Changes in global commodity trading: Three trends
2
Imperatives for commodity traders
6
Conclusion8
McKinsey Working Papers on Risk presents McKinsey’s best current thinking on risk and risk management. The papers represent a broad range of views, both sector-specific and cross-cutting, and are intended to encourage discussion internally and externally. Working papers may be republished through other internal or external channels.
Please address correspondence to the managing editor, Rob McNish (rob_mcnish@mckinsey.com).
Commodity trading at a strategic crossroad Introduction and executive summary
The global commodity-trading business is a central component of our modern ability to lay off or take on risk. Against a background of rising and uncertain prices for many core commodities in food and industrial materials, the industry is on the verge of substantial change over the next two or three years. It is experiencing eroding margins as competitive intensity, price transparency, and the capital requirements of the business all increase, while access to inexpensive financing and market volatility decrease.
Imminent regulatory changes will lead to rising complexity costs and a further toughening of the financing environment, which look set to accelerate the industry’s transformation. The traditional composition of the landscape, featuring a small number of “professionals” and a large number of “customers,” is also about to change, with an increasing number of players acquiring trading skills. This will enhance liquidity but will also reduce arbitrage opportunities.
Commodity traders should act swiftly now, addressing four imperatives: First,
Commodity trading at a strategic crossroad
Jan Ascher
Paul Laszlo
Guillaume Quiviger
December 2012
© Copyright 2012 McKinsey & Company
2
Contents
Commodity trading at a strategic crossroad
Introduction and executive summary1
Changes in global commodity trading: Three trends
2
Imperatives for commodity traders
6
Conclusion8
McKinsey Working Papers on Risk presents McKinsey’s best current thinking on risk and risk management. The papers represent a broad range of views, both sector-specific and cross-cutting, and are intended to encourage discussion internally and externally. Working papers may be republished through other internal or external channels.
Please address correspondence to the managing editor, Rob McNish (rob_mcnish@mckinsey.com).
Commodity trading at a strategic crossroad Introduction and executive summary
The global commodity-trading business is a central component of our modern ability to lay off or take on risk. Against a background of rising and uncertain prices for many core commodities in food and industrial materials, the industry is on the verge of substantial change over the next two or three years. It is experiencing eroding margins as competitive intensity, price transparency, and the capital requirements of the business all increase, while access to inexpensive financing and market volatility decrease.
Imminent regulatory changes will lead to rising complexity costs and a further toughening of the financing environment, which look set to accelerate the industry’s transformation. The traditional composition of the landscape, featuring a small number of “professionals” and a large number of “customers,” is also about to change, with an increasing number of players acquiring trading skills. This will enhance liquidity but will also reduce arbitrage opportunities.
Commodity traders should act swiftly now, addressing four imperatives: First,