The recent release of Report on Economics of Commodity Trading Firms is a bold step from a well-respected Commodity Trading Firm (CTF) – Trafigura, in giving an insight and “demystifying” the secretive commodity trading industry. And it is indeed a very impressive read.
According to Reuters, “The firm approached Craig Pirrong, a well-known professor of finance and commodity markets commentator at the University of Houston, last July to commission an independent review of the commodity trading industry, with the goal of “demystifying” it. The resulting 63-page report, based on public filings and interviews with around 10 senior Trafigura traders and a number of C-level executives last September, reached a conclusion similar to several previous reports: relative to Wall Street banks, merchant trading companies’ size, function and balance sheets make them far less likely to be sources of systemic risk.”
The Report focusses on how Commodity Trading Firms are exposed to various risks – Price, Basis, Spread, Liquidity, Credit, etc. and how they manage those risks. Risks are interspersed across the value chain of any commodity business, and the report emphasizes the need for commodity trading firms to have Risk Management practices in place. Notably, following points are very unique to this report:
These along with several such data points and perspectives make this a must read for all Commodity Trading Firms. You can read the original report here: