The World for Sale

with Jack Farchy 03 February 2022 | Podcast
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The Financial Times called it one of the best books of 2021. "The World for Sale" is an eye-opening dive into one of the most secretive and powerful business sectors in the world: commodity trading.

Åsa Borssén:
“The modern world is built on commodities – from the oil that fuels our cars, to the metals that power our smartphones. We rarely stopped to consider where they came from. But we should.” Join me as we pull back the curtain on one of the most secretive business sectors there is: the world of commodity traders.

Åsa Borssén:
Welcome to Highgrade and The Natural Resources Podcast. The Financial Times called it one of the best books of 2021. The World for Sale is a fascinating story of geopolitics, power brokering, and corruption that will keep you are at the edge of your seats. This is a true story fit for thriller. I’m here with Jack Farchy, one of the authors of the book. Jack, thank you for joining us.

Jack Farchy:
Thank you.

Åsa Borssén:
Of all possible topics in the world of natural resources, why did you pick commodity trading?

Jack Farchy:
Well, we were both reporters covering the world of natural resources in the commodities markets. And we noticed that there were these companies and individuals – commodity traders – who seemed to be extremely important for commodity markets. Everyone was always talking about them as either the hidden hand that had moved this market and caused the price to go one way or another. Or when we travelled to big commodity-producing countries or consumers we discovered that the commodity traders were there and seem to know everything and have a very important role. And yet, we were both working at the Financial Times at that point, and almost none of our colleagues or editors had even the first idea about these companies. I think it’s fair to say most of them didn’t even know the names of the largest commodity traders. And then when we went to try and learn more about them and research, we found there was almost nothing written about them. There are a couple of books, but they were decades old. And there was really nothing that could teach you about who the commodity traders were and what they did. And so we decided to write it ourselves.

“The volumes traded by the four largest commodity trading houses are larger than the total exports of Japan.”

- Jack Farchy

Åsa Borssén:
The book has been very well received, but it’s not a book everyone in the street would buy – even though perhaps they should. How are the sales going?

Jack Farchy:
I think they’re going better certainly than we were expecting. And our publishers were expecting. I think we’ve had several reprints since the beginning. Yeah, I guess that’s all I can say about it. Yeah, it’s been, we’ve been pretty pleased with the feedback we’ve got both from people inside the commodity trading world who know it well, and also, people who might not know very much about it until they pick up our book, but who are interested in how the world works and how political decisions get made and how economies are formed.

Åsa Borssén:
We’re going to be talking about the book in depth here. We want to give our listeners a flavour of it by reading a few passages. Here’s the first one on transparency in the sector – or rather, the lack thereof.

Reader:
“For the most part, the commodity traders are privately owned companies, with less obligations to disclose information about their activities than their publicly listed counterparts. Many have traditionally viewed their superior access to information as a competitive edge – and so have gone to great lengths to avoid giving out any information about themselves. As Ian Taylor, who died in 2020, said as he sat down with us for an interview for this book: ‘We would prefer you not to write it.’”

Åsa Borssén:
As we could hear in this passage, it’s a sector that is secretive by design. Despite this, your book introduces an enormous amount of new information. Did you at any point face resistance from the sector?

Jack Farchy:
Yeah, I mean, we certainly faced some resistance. There were some people who didn’t want to talk to us. Some people who did talk to us eventually, but only after a lot of persuasion. And some people who still didn’t talk to us. There are certainly a number of people who we would have loved to have interviewed who did not want to talk to us. And it’s definitely the case that the commodity trading industry is a very secretive place. Most of the companies that we’re writing about are not public companies. They’ve guarded their information about how they do business and how they make their money, even how much money they make, very closely over their history, including in recent years. And so that was a challenge. But we’ve been covering the natural resources industry between us for probably 20 years. And so we have relationships with lots of people, and we managed to work our network and try and persuade as many people as we could to speak to us. And in addition, we got lucky, I think, with the way that times have changed in recent years, both for commodity trading and in general in terms of transparency. So, you know, Glencore IPO in 2011, it’s a public company now. So it publishes its financials for the public. And even those companies that don’t, several of them have sold bonds and so they’ve had to publish prospectuses. And you’ve had a lot of the bits of the world where commodity traders are based, or their top companies are registered, places like Luxembourg and the Netherlands and Malta and Cyprus, have become relatively more accessible in terms of the information that you can get as a member of the public and how easy it is to get that information in the last, I would say, five years or so. And so we were able to get quite a lot of information that we compiled what I think is, for the first time, the historical profits of the largest commodity traders. Which shows that I think they were making more money in the 2000s, in the decade to 2011, they made more money than Apple or Goldman Sachs between them.

Åsa Borssén:
Wow. But I think for a lot of people, it’s a bit unclear how the commodity traders actually make their money. For me, it’s useful to think about it like currency trading, where they make the difference between the seller’s price and the buyer’s price. Is this a useful comparison, Jack?

Jack Farchy:
The difference with commodity trading is commodities are physical things. So if you’re a commodity trader, it’s not simply a question of managing an arbitrage on a screen, you also need to handle a whole load of physical logistics and worry about whether your agricultural commodity, whether your cocoa is getting too wet, or your alumina has been sitting around for too long and is going to need to be processed again. There are all kinds of considerations…or hire a ship, which is not so easy in today’s market, or a spot on a ship. So there’s a whole lot of logistical considerations that don’t exist for currencies. And that also affects how commodity traders trade. So they’re finding arbitrage between different geographical locations, for example, buying a commodity in one place and selling it another. Or buying it and storing it, and then selling it when the price is higher. And also transforming it, taking a commodity in one form copper ore, for example, and putting it through a copper smelter, and then selling the copper metal. So those are the kind of core bread and butter business of a commodity trader that is a bit different, I think from trading currencies on the screen.

Åsa Borssén:
Do the commodity traders own the ships? Or are they working with shipping companies to make the trade happen?

Jack Farchy:
Both, I think, a lot of the time. I mean often commodity traders operate relatively asset like, capital like businesses. So the kind of the fantasy image of a commodity trader, which I think is definitely not entirely true these days, but it’s a few guys sitting in an office in Switzerland somewhere with a phone line. And that’s all you really need because you can rent the ships and you can borrow the money to trade with. So, certainly, they’re not necessarily owning huge flotillas of ships. But in some cases, traders have done that and have made a play on the direction of the shipping markets, for example, as well as the direction of a commodity market.

Åsa Borssén:
You say this is a fantasy image of a commodity trader. What’s a more accurate image these days then?

Jack Farchy:
Well, more and more commodity traders have invested in assets. You look at a company like Glencore, for example, which started out as Mark Rich + CO, started out very much as that stereotypical trading house. I think it was six guys left Mark Rich + CO in 1974 and set up on their own with a with a little black book of contacts and some good relationships and started trading. These days Glencore has invested in mines, in warehouses. It’s one of the world’s largest mining companies. So it’s a very different beast. And that’s true on a lesser scale for most of its competitors as well. You see lots of investments from commodity trading houses in logistics assets, so pipelines and ports and warehouses, things like that. So it’s definitely not the case, certainly for the biggest companies, that they’re still just a few people in a room with nothing more than a phone line in a contact book.

“We certainly faced some resistance. There were some people who didn't want to talk to us.”

- Jack Farchy

Åsa Borssén:
I want to explore the trading houses relationship to banks, and we’re going to start by listening to another passage from the book.

Reader:
“The phone call that almost killed Trafigura came on a summer’s day in 2014. […] BNP Paribas was telephoning to inform the Trafigura boss that the bank no longer wanted to do business with him. The French lender was pulling about $2 billion in credit lines from Trafigura. Their relationship, forged over decades of trading commodities in every corner of the planet, was over.”

Åsa Borssén:
So, the importance of bankers is clear. And it’s because traders often buy the commodities before they can sell them. You mentioned that Glencore, for example, now have other businesses, mines, etc. Is this diversification a step away from that dependency on the banks and towards being able to finance their own trading capacity?

Jack Farchy:
Yeah, certainly. I think it’s a shift away from trading, frankly. Partly, maybe because traders are very dependent on banks. And so if you have a situation where the bank suddenly doesn’t want to lend to traders, or they don’t want to lend to you, then you have a big problem. Glencore experienced that in 2008, in the financial crisis, when the credit crunch happened. It was a private company and suddenly people started worrying about it, banks worrying about everything and there was a genuine scare about whether Glencore would continue to get credit from its banks. It did, it survived, no problems. But that was a scary moment. And I think Glencore at that point realized that it needed to diversify its funding sources. And it’s also a reflection of a view about trading. Ivan Glasenberg, who has just retired as CEO of Glencore, who was the person who drove them into investing in mines, has been fairly explicit about his view that trading is getting more and more difficult. Trading relies on having better information, knowing what’s going on better than other people in the market and as information gets more and more available, and cheaper and cheaper, and faster and faster, that edge a physical commodity trader has becomes smaller. And so Glencore was investing in mines in part as a way of diversifying away from a business model that who knows how long it was going to be able to continue delivering big profits. Although, frankly, the last couple of years have shown us that it certainly can still deliver big profits.

Åsa Borssén:
Do we know how big the sector is? Do we have any numbers?

Jack Farchy:
Yeah, we do. We probably don’t have comprehensive numbers, because as I said before, many of these companies are private and, in some cases, fairly secretive about what they do. But I think we can give you some big picture numbers. We put together data on the volumes traded by the four largest commodity trading houses, and they’re larger than the total exports of Japan, for example.

***
Åsa Borssén:
I’m talking with Jack Farchy, one of the authors of The World for Sale, exposing the opaque dealings of commodity traders – the companies and individuals that control the international flow of natural resources. They make the world go round, but at a cost.

***

Åsa Borssén:
We’re gonna move on to the industry’s role in global politics and economics. Here is another read from the book.

Reader:
“In their commodity deals, the traders’ motivation is always coldly financial. If a trade is legal and profitable, most commodity traders don’t pause to consider whether the political ramifications are desirable. ‘We deal with the physical flow of oil up until a point where we feel it’s right or allowable,’ says Chris Bake of Vitrol. ‘I don’t think we sit back and pull out a cigar and say, let’s make some history here. I wish we had time to do that.’”

Åsa Borssén:
So, “the trader’s motivation is always coldly financial”. But can we say that this sector is good or bad?

Jack Farchy:
No, I think we tried quite hard in the book not to either characterize commodity traders as the world’s great evil or to hold them on a pedestal as these wonderful individuals and companies because nothing is ever black and white in the world. And it’s very clear that the world does need commodity traders. I’m not going to go to Colombia to go and pick up the coffee that I like to drink in the morning. There are lots of companies that use copper, or aluminium, or nickel and don’t have the logistics and the network of contacts to go and source them from miners around the world, or smelters. And so, the world definitely needs commodity traders. If we didn’t have commodity traders, global trade would be significantly less efficient. And probably there will be less of it. Much less of it, I suspect, if there were no commodity traders at all. On the other hand, you’re absolutely right, commodity traders have done, and we chart some of them in our book, have done some pretty on unlikable things over the course of the industry’s history. One of the one of the points that we make in the stories we tell is of apartheid South Africa, where there were a few commodity traders, among them Mark Rich, delivering oil to South Africa despite a UN embargo. And it was pretty clear – and indeed some of the top politicians of apartheid Africa said at the time – the regime would not have survived without that oil, and without that cooperation from commodity traders. So, in that sense, I think that almost certainly had a fairly negative effect on the history of South Africa. You probably would have had apartheid collapsing significantly earlier than it did. But I wouldn’t say that commodity traders are universally evil, or that they’re universally good and necessary. It’s certainly a function that is needed. And it’s also an industry that has a history of doing some bad things.

Åsa Borssén:
In 2011, something happened that changed the direction of the sector. Here’s what you’re write in the book.

George Rosenfeld:
“It was a shift that some in the industry would later come to regret, as the greater publicity of the public markets also meant greater awareness of the scale and significance of the commodity traders. The flotation of Glencore, in May 2011, marked the point when, for investors, journalists, and governments, the traders became too big to ignore.”

Åsa Borssén:
So, Glencore launched an IPO, went public and activities that had been taking place behind the curtains were suddenly in the open. How did that move change the industry, Jack?

Jack Farchy:
It made it a lot more high-profile, certainly. It was about the time that we were trying to write more about commodity traders. We were not the only journalists who were suddenly finding that people were interested. And suddenly it was possible to get information in a way that had not been true before. I think the main impact was really to raise the profile of the industry, both among the likes of us journalists, but also among the people who use commodity traders, the miners, the farmers. And on the other side of things, the manufacturing companies; the big food and drinks companies that buy and sell commodities to commodity traders. And suddenly, from this industry that had been very secretive, and no one had really known how much they were trading or how much money they were making, suddenly, it was all laid out in black and white. And you could see that Glencore was making billions and billions of dollars a year. That this, essentially a group of a few dozen partners in Glencore, or between them making as much as $5-6 billion in a year. And that made people wake up to how profitable the commodity trading industry was. And of course, to start asking the question, are they making the profits at our expense? And so that’s been a bit of a sea change, you started to see many more producers of commodities, like big oil producers, getting into trading in the last few years, some consumers as well. And certainly much more scrutiny on the profits the commodity traders are making, including I would say, from regulators, and how the commodity traders are doing business. And I think that’s all kind of goes back to that original moment when Glencore kind of brought the industry out of the shadows by doing an IPO.

Åsa Borssén:
Did they understand what they were doing at that time?

Jack Farchy:
I’m not sure they did entirely, no. I don’t think they had so much choice. We talked earlier about the kind of heart attack moment in 2008. And they realized that they needed to have different sources of funding and one source of funding is to have public equity. And that was very helpful in terms of financing the business and no longer being at the whim of banks. And also giving the partners of Glencore, who’d made so much money over the 2000s, a way to exit and to sell their shares. So I think it was a necessary step. And so maybe they didn’t spend too much time analysing what the consequence would be. But I’m not convinced that they fully understood all of the impacts that that would have in terms of raising the profile of the industry as a whole. And making people suddenly pay attention to how much money commodity traders were making, and exactly how they were making that money.

Åsa Borssén:
We’re gonna end this by looking into the future. Here’s a final passage from the book.

Reader:
“‘It’s not just the banks or regulators, says Muriel Schwab, the chief financial officer at Gunvor. ‘Society is putting more pressure towards sustainability, climate change and ethical ways of doing business.’ […] ‘Today, if you want to hire young talent…they don’t want to work for a dirty company that drops dirty oil in some places,’ she says. ‘I really think the younger generation will shape the industry, and the industry will have to change.’”

Åsa Borssén:
So, not even commodity traders are immune to the increasing social pressure. What do you say, Jack, what does commodity trading of the future look like?

Jack Farchy:
I think it’s a bit of an unknown. Commodity traders like to say that they only think a day or maybe a few weeks or months into the future. So they’re, by definition, very flexible and adaptable and agile. And they will change with the markets and as things happen. They certainly have been slow on diversity and that’s something that we’ve written about both in the book and at Bloomberg. I do think that’s beginning to change things a little bit. I mean, there is certainly pressure, more pressure on commodity traders to be more diverse and to hire more women, more non-white people, etc. I’m not sure… I mean, they still look very un-diverse, most of them at the most senior levels. Their boardrooms are dominated by European and American men. But I think there’s a change happening generationally, if nothing else, where they’re hiring younger generations who might think differently about issues like the environment and how companies should behave. So I think that is beginning to change at the margins, but I think there’s still a long way to go on that front.

Åsa Borssén:
This has been a fascinating conversation. One final question: when will we see the movie come out on Netflix?

Jack Farchy:
Sadly, I didn’t have an answer to that question. We would like if we would, we would be very interested to see a movie come out on Netflix, but so far, we don’t know.

Åsa Borssén:
Jack, thank you so much for joining Highgrade.

And to our listeners, thank you for tuning in.

For a century, commodity traders have pulled the invisible strings moving natural resources around the world. Their dealings have been kept in the shadows, but commodity trading is now being forced into the light. The World for Sale is an eye-opening dive into one of the most secretive and powerful business sectors in the world. Hats off then to the authors, Jack Farchy and Javier Blas.

This podcast was done with support from the German Federal Ministry for Economic Cooperation and Development through BGR. Make sure to subscribe to our channel on whichever podcast platform you’re using. Until next time, so long!