Clearly the single biggest development in the commodities industry in recent years has been the so called ‘financialization’ of commodities. In broad terms this refers to the impact of efforts to invest capital with the aim of generating returns through exposure to rises and falls in the prices of common raw materials.
This has lead to new players entering the market, the availability of new financial products and assumptions that the volatility of capital flows and potentially also the underlying price of raw materials has increased. As a result, these transactions are in some places referred to as speculation.
A secondary and more recent phenomenon has been the public attention that the industry is attracting. Whether from NGOs, the media or the general public, the industry the subject of a great deal of discussion and debate about its business model, its role in the global supply chain and whether the size and importance of the largest trading houses somehow present systemic risks that require regulatory action.
One significant change we have observed in recent years has been the rise and fall of banks’ participation in the commodities space. Facilitated by deregulation, the banking industry, notably the large investment banks, became very significant players in commodities markets. The combined impact of the 2008 financial crisis and stricter financial services regulation have prompted a significant exit from the commodities markets by these institutions.
At the same time we have observed traders evolve from middle men to more integrated energy or food businesses. The trading houses have acquired significant upstream (exploration/mining), mid-stream (storage) and downstream (distribution) assets, typically from the oil majors. This has fundamentally changed the business model and given these businesses new challenges to manage.
The industry’s importance to the global supply chain and to the Swiss economy has become clearer in recent years. A number of issues, such as energy and food security, environmental concerns and the so-called resource curse of developing countries have generated media and public attention surrounding the industry’s role in many of these significant global challenges.
In Switzerland the Federal Council has commissioned research and published two reports on the industry. These reports note the importance of both the industry and significant international developments in terms of ensuring that natural resources are managed well, that markets operate fairly and that global governance continues to strive to support these objectives.
The industry has made great strides in recent years and much more information about its activities is now available in the public domain. That translates into a greater understanding of the industry. Take the public listing of Glencore, for instance, or other information made public as the industry turns to capital markets to raise funds. The trade association GTSA is coordinating an industry initiative to look at additional transparency requirements and I would expect to see certain key industry players to take unilateral initiatives on this issue in the near future.
The biggest challenges to the sector remain the fundamentals of competition and providing value to their customers. As long as global demand for raw materials – driven by urbanization –remains strong, the future remains bright. Having already expanded upstream and downstream, the sector has taken on the risks of asset ownership and, to a certain extent, must carry the risks associated with the rise and fall of commodity prices on their own balance sheets.
Some dark clouds are forming on the horizon in Switzerland which could potentially impact the Swiss environment. These dark clouds include tax reforms, regulatory pressure or even challenges in terms of attracting the mobile international work force needed to run these global businesses. Indeed, merely the uncertainty surrounding these issues is already affecting some business decisions and favoring the development of international economic centers that present themselves as alternatives to Switzerland.
The success of the industry in recent years has, to a great extent, been driven by the entrepreneurial spirit that reigns inside the industry’s largest players. The key to the future will be how the global economy evolves to deal with the challenges of sustainability. Whether energy efficiency, food security or financial stability, the commodities industry will play a key role in addressing these fundamental issues.