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Commodity trading: a licence to print money

If living standards are to be the key issue at the next election – very likely when food and energy prices are rising fast and at the same time real wages have fallen 10% in the last 4 years – the political parties will be competing about ways to protect household budgets against excessive price increases whether by subsidies, pooling energy supplies, regulatory controls over prices, tax cuts or whatever.

What is unlikely to be tackled is the one thing that really matters and which we are told is beyond control because it’s in the hands of global markets – namely the dominance of the international physical commodities traders which deal in oil, gas, grain, sugar, soyabeans, cocoa, coffee, copper, coal, iron, zinc and other metals. Over the last decade the top 20 trading houses have posted profits of $250bn, more than the world’s top 5 carmakers combined.

Their profits, and their power, have climbed prodigiously. Vitol, which handles 6 million barrels a day of crude and oil products – enough to supply Germany, France and Italy together, had revenues last year of $303bn, almost the GDP of Denmark.

Glencore, which recently took over the miner Xstrata, achieved sales of $214bn. Trafigura, notorious for the polluted waste oil it dumped in the Ivory Coast, made $120bn. The combined revenues of the world’s top 10 commodity traders last year reached an eye-watering $1.2 trillions.

However with the colossal surge in profits has come a huge transparency gap. The industry is largely unregulated, and because of that lack of oversight the traders are widely suspected of distorting food and gasoline prices through speculation. They have the power in the market to fix global prices, and they use it.

The 5 leading energy trading houses together handledd more than 15 million barrels of oil a day last year, more than enough to satisfy the import needs of China, US and Japan combined. The agricultural traders ADM, Bunge, Cargill and Dreyfus handle about half of the world’s grain and soyabean trade flows. Glencore and Trafigura together control 60% of some global markets such as zinc. A German company trades the beans that go into every one in 7 of the world’s coffee cups. A Swiss-based trading house is the world’s biggest miller of coffee beans serving Nestle’ and Starbucks.

How is their power to be controlled, especially as the commodities super-cycle now gradually cools. Fears arise that, like the banks and insurance companies, they have become ‘too big to fail’. Like the biggest banks, they need to be broken up both to increase competition and to prevent their exploiting their market power by holding nations and their customers to ransom in a crisis.

That requires raising the bar of international regulation, whether through UN auspices like the WTO or through joint action by the leading world economies such as the G20. Otherwise the penalty for over-dependence on the global profiteers will sooner or later be food and energy riots on a scale we’ve never witnessed before.

One Comment

  1. john problem says:

    Quite right! They should be regulated. Just like the banks. What? That hasn’t happened yet? Oh.

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