London 04/02/2016 - Gunvor's retreat from base metals is a sign of the times for the industry, illustrating how tough market conditions have become even for companies with substantial credit lines and diversified portfolios, market participants said.
The Estonia-founded, Swiss-based trader revealed on Monday that it would be pulling back from base metals and making a number of redundancies, with several well-informed sources telling FastMarkets that traders staying on would be merely winding down trading positions.
"Profitability was decreasing and risk was increasing," company spokesperson Seth Pietras told FastMarkets at the time.
Founded as an oil and energy products merchant by oil trader Torbjörn Törnqvist and billionaire Gennady Timchenko in 2000, the company expanded heavily into base metals in 2014 with the hiring of Rene Van der Kam, adding personnel throughout 2014 and last year.
And this pullback, which coincides with media reports that the company is in the process of refinancing a $1.0627 billion credit revolving facility with a series of banks, shows how precarious the industry is even for top trading companies like Gunvor, sources said.
"It was almost the end of Noble last year, now it's Gunvor and we know Gerald, BTG and Glencore are not doing too well. It may simply be a case of adjusting business models but one thing is for sure - no one is immune or invincible anymore," a source at a trading house said.
Credit rating agencies have consistently downgraded commodities traders and miners over the past few months,
"It's really worrying if you look at the credit ratings, even someone like Glencore, these days you really need to make sure you deal with the counterparties 100 percent," a second trader said.
HIGH STAKES TO BREAK NEW MARKET
Gunvor was just one of a group of large commodities trading companies from non-metals backgrounds who, in the wake of the post-2009 commodities boom, sought to invest in physical base metal positions and take on the likes of Trafigura, Transamine, MRI and Glencore who already well established in the market.
"They have expanded in metals at the wrong time and over-invested when business was becoming harder and more competitive. Mercuria and BTG did the same so let’s watch this space," a third trader said.
The act of breaking into new markets is not only a tall ask but an expensive one, with traders like Gunvor needing to lay down a lot of capital in order to aggressively buy in book building, grab market share and sell competitively.
MARGINS THIN FOR BASE METAL TRADERS
On top of this, markets have turned sour of late; metals' prices collapsed last year amid market oversupply and an unexpectedly sharp growth slowdown in top consumer China.
In January this year, copper, aluminium, zinc and tin all fell to 2009 lows, with nickel at 2003 lows. Additionally physical premiums dropped, with duty paid aluminium in European warehouses down 63 percent over the course of 2015, while the forward curve for nearly all metal prices moved into backwardation, making stock holding a risky affair.
But despite calls to watch other trading houses, there have been success stories elsewhere; new market dynamics require different strategies than before and less reliance on large credit facilities, which may be why Gunvor chose the moment to wind down its books, market participants noted.
"The easy money isn't there anymore. Between 2000 and 2015 - the 15-year bull market - it was all about sourcing metal and access to capital while returns were guaranteed. Now it's all about trading. There's plenty of financing still available but returns on capital are not as straightforward as before," an industry source said.
The dip in prices in the wake of the financial crisis of 2008 did not last long, with markets recovering quickly and access to money becoming widely available due to central banks lowering interest rates.
But the last year has seen market conditions toughen. As Gunvor admitted in their statement, margins for those who trade base metals have diminished - a sentiment echoed by other traders.
"The new players are realising that if you want to be aggressive you can capture market share but the P&L won't be there; even for the more traditional players the margins are very thin," another trader said.
(Additional reporting by Perrine Faye)