Trafigura, one of the world’s biggest oil and metal traders, has announced its lowest annual profit in eight years and a reduced payout for top employees as it continues to battle tough market conditions and intense competition.
The results, published on Monday, highlight the pressure facing big commodity traders as they pile on volumes and sell assets to offset relentless margin pressure.
Trafigura’s gross profit margin fell to just 1.3 per cent in the year to September, down from 1.6 per cent in 2017 and 2.3 per cent in 2016.
Oil and petroleum product volumes rose to 275m tonnes from 256m tonnes the previous year, but profits from the unit dropped 10 per cent.
“The oil market presented a number of challenges, including intense competition, compressed margins, reduced arbitrage opportunities and a pricing structure in which spot prices persistently exceeded forward prices,” said chief executive Jeremy Weir.
Buying and storing oil and selling it for higher prices in the future market has stopped being profitable as oil markets have largely shifted from “contango” — a market structure where barrels for delivery far in the future price above those in the spot market — to “backwardation”.
Barrels in the spot market have started trading at a premium in the past two years as oil supplies have tightened, partly because of supply management by Opec and Russia, alongside relatively strong demand.
“The oil and petroleum products trading division had a difficult first half, but performance recovered by the end of the year”, said Mr Weir. On Friday, Opec and its allies agreed to cut production after increasing supply pushed prices down 30 per in the past two months.
The Singapore-based company, which has its 25th anniversary this year, reported net income of $873m, against $887m in 2017, boosted by a gain of $191m from the sale of infrastructure assets to a newly formed joint venture company.
Revenues, which are heavily influenced by commodity prices, were $181bn, up from $136.4bn. Total volume of commodities traded rose 14 per cent to 371m tonnes from 326m tonnes.
Trafigura reduced employee share buybacks to almost $528m, from $564m. However, that still equated to 60 per cent of net income. Trafigura uses buybacks to return capital to its management and 600 senior staff.
Its total debt rose to $32.2bn, up from $31.2bn, while its net financing costs more than doubled to $542m, “heavily influenced” by higher interbank lending rates in London.
Adjusted net debt — Trafigura’s favoured leverage metric, which strips out borrowings from its $4.3bn securitisation programmes — fell to $6bn from $7.9bn.
Christophe Salmon, Trafigura’s chief financial officer, warned that the industry faced more “headwinds” in the coming year, but said this could offer opportunities to the largest traders to win market share.
“Global interest rates are rising and, in consequence, a broad-based economic slowdown is likely,” Mr Salmon said. “We also believe the sector has entered a period of consolidation around the very largest players, with banks, for example, becoming more selective in allocating liquidity. Trafigura has been a beneficiary of this trend in the past year.”
By division, Trafigura’s oil trading unit reported a 10 per cent decline in gross profits to just over $1bn. At the same time, trading volumes increased 10 per cent to 5.8m barrels per day.
It was eclipsed by the company’s metals and minerals business, which had another strong year. It reported a 24 per cent increase in gross profits to $1.36bn, boosted by China’s environmental crackdown on the most polluting smelters and furnaces. Volumes rose 37 per cent to 96m tonnes.
Trafigura said it had taken a $72m impairment on its 25 per cent stake in Nyrstar, writing it down to $35m. Nyrstar is Belgian-listed zinc and lead smelting company that is struggling to service a large debt pile.
Get alerts on Trafigura when a new story is published