New World, New Order

The world is changing at an incredibly fast pace, and participants in commodity trading markets are having to navigate these changes extremely quickly. Ranging from the large capital flows into commodities across the financial markets, through to re-assessing geo-political ties and financing capabilities, as well as how to attract and retain and pay high-performing commodity traders.

The inflow of capital into commodities

The inflow of capital into commodities has been widely publicized, as investors have looked to diversify macro and commodity basket trading books towards niche commodity books, whether that be across energy, metals or agricultural products. The market has experienced surging commodities prices as we have ridden a wave through the tail end of the pandemic to cater to the demand of the world returning back to day to day life as we once knew it. Rising inflation has accelerated commodities prices and the recent geopolitical conflict between Russian and Ukraine has only exacerbated that.

The war for talent

With more speculators trading across the commodities spectrum, the war for talent to attract and retain high performing commodity traders has become paramount. New entrants, such as hedge funds, who are offering very compelling compensation structures to attract commodity traders are making energy majors, independent trading firms and commodity trading merchants re-think how they pay their traders competitively to retain them. This has mainly come in the way of offering larger cash components in commodity traders’ annual bonus structures.

High performing commodity traders want to take advantage of the bullish sentiment in the market and maximize the opportunities that the volatility presents, where it is sensible to do so. Understandably, commodity traders therefore want the seats on the best paying platforms to be rewarded accordingly. Saying that, with the unprecedented high levels of volatility currently being experienced in the market, it could be so extreme that it leads to commodity traders taking risk off. Further to that, many commodity traders would argue now that current market conditions play towards those platforms that have access to physical flows and assets to trade around, as opposed to purely speculating through financial derivative instruments.

Commodity Financing

With daily news of margin calls, exchanges halting markets such as Nickel on LME most recently, wild commodity market swings, and capital cuts due to certain geopolitical ties, commodity traders are having to assess their moral compass more than ever. Previously, a commodity trader’s first thoughts might have been, “How much AUM do I get to trade?”, “What technological infrastructure does the platform have?”, “What annual percentage of book are they receiving, cash versus deferred compensation?” Now, they’re having to consider who is supplying the capital, the culture of the firm, longevity and sustainability.

Whilst commodity trading firms are having to agree new credit lines with banks and investors in these challenging market circumstances, one wonders how much focus will be diverted away from the energy transition, de-carbonization and carbon trading, or potentially more towards it. With prices at the pump soaring, demand for cheaper fuel sources such as electricity are going to be in demand, but it will be a matter of when, as a result of higher costs associated to the technology required to power electric projects and vehicles.

Conclusion

In conclusion, hedging interest is increasing as investments banks have a larger number of commodities clients who are looking to insulate themselves against volatile commodity price moves, even before the geopolitical conflict between Russia and Ukraine. This has in turn increased commodity trading client flow to banks and resulted in bumper trading profits.

Ultimately, commodity trading firms are going to have to be a lot more nimble and dynamic. They will need stronger risk assessments and due diligence needed when sourcing financing partners and vice versa. We expect the energy transition to continue to develop and further hiring of environmental trading and carbon trading professionals, but stricter margin limits and drawdowns will be put into effect on commodity traders.

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