Time to stop the commodities cuts

In the last 12 months, we have seen all the major long-standing commodities businesses reviewing their operations and, in light of the flat market and ultra-depressed cycle, frequently opting to reduce headcount. The lack of volatility in commodities led to the cuts, and in many cases it was primarily experienced traders who were shown the door in favour of less-experienced, and definitely younger and cheaper, talent.

While fixed overheads have certainly been reduced dramatically, hopes that the PnL would remain the same and that franchise names and heritage would support the businesses have tended to prove unfounded. Instead, the market has endured quite a shock, and even big names have been underperforming for a few quarters now due to a combination of inactivity and the impact of cuts.

In the last few months we have seen some of the powerhouses in commodities losing out to up-and-coming businesses who are pricing more aggressively and managing their credit lines more effectively. These firms are spotting the need to speculate to accumulate, while incumbents are starting to recognise they may have cut too many resources, particularly knowledgeable headcount, and done so a little too hastily.

It is not too late to reverse the situation, but those firms that have realised the error of their ways would be well advised to move quickly; first to cease the cuts, and then to hire to fill essential gaps in the talent pool. Margins are low in commodities right now, and it is hard to make money – that’s even more the case if you have let your most senior talent leave, and only belatedly realised that your brand is not going to be enough to carry you through.

Everyone is suffering, even the hedge funds. If an oil trader as renowned at Andy Hall has had to close a fund, it’s a sure sign that things are tough – he called it a day on his flagship Astenbeck Master Commodities Fund II in the summer after it lost almost 30% of its value this year thanks to lacklustre oil prices. Hall became famous during the global financial crisis for earning $100 million in a single year trading oil at Citibank.

Commodities businesses that come under the Fixed Income Clearing Corporation need closest attention, but we see a growing number of firms from across the industry starting to recognise the need to hire traders, and specifically those with a niche. While the commodities markets have not universally hit the bottom of the cycle yet, some areas have – in metals we have seen a bit of a resurgence in iron ore globally of late, particularly in Asia, for example.

Talent is still scarce, and those that want to remain players in the commodities space need to take decisive action to secure, attract and retain it. Now is a great time to pick up some really good people in the market, and to put in place the lynchpins of your team for 2018/19. From what I see in the market, it is time to stop cutting and start thinking about getting in shape; consider about how you’re rewarding your staff, and get them on board for better times ahead.