Commodity traders source raw materials from producers, may perform a first transformation, transport those, may store them temporarily and finally deliver them to end-users. Unlike integrated majors, which own and manage, partially or fullly, upstream, transformation and marketing of transformed products, traders do not control the full delivery chain. Their revenue is the differential between price paid upstream and selling price downstream. To realize it, a large range of services are being provided. Diversifying resourcing pools and maintaining good relations with upstream producers or primary transformers are of utmost importance, for various reasons:
Producers are very heterogeneous in terms of geography, corporate size, financial strength and culture. Climatological accidents, geopolitical conflicts or insolvencies can seriously impact prices or jeopardize ongoing operations. Not to get trapped when situations turn sour, it is absolutely necessary to build a network of alternative procurement options.
Reducing acquisition cost
Securing supply by diversifying agreements, is not only to bridge accidents, but as well to benefit from local procurement conditions, arbitrage geographically distinct price evolutions and position yourself favourably in terms of logistics. To remain competitive it requires a good understanding of the needs of the local producer, a reliable infrastructure and flawless execution.
Producers are heterogeneous but productions even more. Crops depend on meteorological hazards, oil wells may become temporarily unavailable due to unforeseen maintenance, a mine cannot guarantee constant ore quality, etc. Customers however pay for well defined grades. To honour sales contracts, a trader must know where to source, how to upgrade (blending, transformation process), master logistics and understand well what it costs to meet customers specifications.
To secure a diversified and steady procurement flow, traders build tightly managed organizations. Sources are far and wide, operations complex and prone to surprises, risks important and finally profit margins relatively low. Several arrangements can be developed to stabilize sourcing flows.
Support to producers
Suppliers are often small operations. Transforming their production to a marketable product may require significant efforts. It may target the production itself (productivity, grading, economies of scale, safety, social and environmental standards), in countries with limited infrastructure its transport to export hubs or markets, and very often financial resources just to make it happen and improve competitiveness.
Trucks or rail to bring the outcome from the field or mine to a market place or export hub, transformation, storage, overseas shipping, allocation to the most rewarding market. All of it requires mastering multiple know-hows, not only to move the materials, but as well to handle legislation, insurance, market skills, politics and risk management. This benefits upstream producers by disclosing new markets to them.
Trading companies may have access to capital markets which is harder to obtain for smaller, local producers. Financing of primary extraction or production may happen through various agreements:
- Pre-payments are loans granted by the buyer to the producer, guaranteed on and paid back later with the physical production they enabled.
- Offtake agreements are long term purchase contracts, whereby the buyer agree in advance to acquire part of the output of the producer over several years.
- Through joint ventures trading companies may become shareholder or participate substantially in important pluri-annual development projects.
This is an evolution which is often observed, whereby a trading company not only fullfills a role as intermediary between initial producer and consumer, but becomes asset owner, either way, upstream and/or downstream.