Commodity traders still made bank last year despite calmer markets

Commodity markets made nearly £100bn in revenue minus expenses last year, despite many of the sector’s leading companies suffering huge losses.

A report this week from consultancy firm McKinsey shows that commodity trading generated more than $100bn (£79bn) in earnings before taxes (EBIT) in 2023, equivalent to more than £118bn in gross margin.

This year-on-year increase came at the expense of increased volatility across commodity markets in general.

The figures reflect the earnings from commodities trading activities across the entire sector, including asset-based businesses such as BP and Shell, independent traders, banks and hedge funds.

They come in spite of the fact that major traders such as Vitol took financial hits against 2022 levels, with the Swiss firm last month confirming a nearly 20 per cent year-on-year revenue drop on the back of weaker oil prices.

McKinsey noted that price fluctuations in general decreased across sub-sector benchmarks in 2023, including a 30 per cent decrease for West Texas Intermediate (WTI) oil, a 58 per cent reduction in volatility for spot Dutch TTF natural gas and a 27 decrease in copper volatility.

The markets remained tight, however, due to harder-to-predict demand and supply changes, uncertain energy supply and high-interest rates weighing on project investments.

Driving the increase against 2022 levels was innovation within the trading sector, with tech-focused trading houses and hedge funds benefiting from more powerful analytical tools.

This was particularly evident in the performance of power and gas trading, which McKinsey estimated increased 47 per cent year-on-year and the firm predicts that this asset class stands to make significant gains through technology-focused trading.

Significant boons also came across other trading on commodity classes, in spite of the much-publicised struggles of some of the industry’s biggest players.

Mining is perhaps the most embattled of these currently, with London-listed majors like Glencore and Anglo-American posting near 50 per cent year-on-year profit drops for 2023 and forecasting major strategic pivots and production difficulties.

But McKinsey expects the mining sector to bounce back on the back of the drive for energy transition metals and more mining companies engaging in trading activities.

Profitability on oil trading was down nearly 20 per cent year-on-year versus 2022, but the report forecasts that alongside growing demand through 2030, the sub-sector will likely remain the largest contributor to sector-wide earnings.