Courting Africa as energy trade shifts
Continent a buyer and seller in eyes of big commodities players
● Under the elegant lights of Claridge’s in London’s Mayfair, the fresh-faced boss of the $180bn (R2.65-trillion) commodities giant Trafigura took to the stage and addressed the dignitaries in humble, earnest tones. “We all need to do more, better, to satisfy Africa’s energy needs,” Jeremy Weir told the summit on business in Africa last month.
“We, the private sector, working together with governments and development institutions, can do better in addressing Africa’s energy paradox. We need to allow the continent to catch up in terms of development.”
Weir, who has run Trafigura since 2015, has good reason for wanting to please the guests, who included President Cyril Ramaphosa and Irene Muloni, Uganda’s energy minister. Africa holds vast reserves of the copper, cobalt and other metals that are in growing demand as the world’s energy system transforms — and is a key market.
Trafigura and its major commodity trading peers, such as Vitol, Mercuria and Glencore, have been feeding that system for decades, gathering vast riches and power as they trade and move billions of tons of oil, gas and other commodities around the world to fuel and build cars, homes and industries.
Their scale is vast: Trafigura, Vitol and Mercuria made combined sales of $533bn last year. Vitol trades more than 7.4-million barrels of oil a day — roughly equal to the oil exports of Saudi Arabia. The size has given major traders a degree of political and pricing influence that has seen them occasionally tagged the “club that runs the world”.
The goods that fuel and power the world are changing, however. Coal and oil, relatively easy to store and ship, will be sidelined as reserves dwindle and environmental concerns grow. In their place comes more gas, the wind and the sun, with demand for electricity generated by all three soaring.
Demand for harder-to-find copper, cobalt and lithium is also soaring to build mobile phones, electric cars and wind turbines.
New commodities mean new supply chains, margins, territories and alliances — colliding with a contraction in margins across the sector.
Can the commodities giants — known for their throwback, hard-driven culture of long hours and ruthless competition that has pushed some into corruption scandals — capture and run this new world?
“The trend with the emerging commodity classes is around understanding across these new supply chains, the physical flows and interactions,” said Alexander Francke, partner and head of European oil and gas at the Oliver Wyman consultancy, which is advised by Trafigura founder Graham Sharp. “Fundamentally, traders understand these supply chains very well, so they are well positioned to capture value there.”
Change they must, but how far, how fast and in which direction is uncertain for the traders as much as for coal, oil and gas producers. Even as nothing is fixed about how the global energy system will evolve, many of the trading houses have started to place bets. Last month, Trafigura opened a new division for trading power and investing in generating power from gas and renewables.
The company’s co-head of oil, Robert Gillion, is stepping down to focus on the division, which has emerged months after Trafigura hired the former Goldman Sachs
Traders are betting on how the global energy system will evolve
star dealmaker Brett Olsher to help it strategise on matters including adapting to the changing global energy mix.
Rival Vitol, meanwhile, which already has a major power trading division, has been investing in batteries for storing electricity to help balance large power grids. Such batteries are in growing demand along with the growth in renewable power, because the sun and wind are intermittent.
Experts say trading houses are getting more interested in this area. Together with the renewable energy investment company Low Carbon, Vitol is ploughing about $200m into European renewable energy projects. CEO Russel Hardy says the company has had time to think carefully about its approach, predicting that the global growth in oil demand will not start slowing for another 15 years at least.
“We are cognisant of the increasing move to alternative energy,” he said earlier this year. “And we are considering how our skill sets can best be deployed in these areas.”
The snowballing pace of public opinion and improving economics for renewable energy may hurry his thinking. Chaired by Ian Taylor, Vitol has also been moving into the potentially booming carbon credits business via its stake in industry specialist Kyoto Energy.
Rival Glencore, meanwhile, which has in the past dismissed markets in nonphysical commodities, has been placing a huge bet on the copper and cobalt mines that can help fuel the world’s electric cars. Venturing into the Democratic Republic of the Congo (DRC) — where it owns the Mutanda mine — has turned it into the world’s largest producer of cobalt, but has come at a cost.
Its activities there are under scrutiny by the US department of justice, while its Congo subsidiary Katanga, which is listed in Canada, has been in trouble with regulators over its relationship with businessman Dan Gertler, the subject of US sanctions, as well as over misleading financial statements.
In August, Glencore announced plans to mothball Mutanda at the end of the year, saying it was no longer economically viable, sending prices soaring 30%. Trafigura, in competition, is strengthening its position in the Congo, where it buys cobalt from Chemaf and is reportedly helping finance a new copper and cobalt facility.
“Shunning the DRC is not helping anyone,” said Trafigura boss Weir during his speech to the summit on Africa. It is also investing in solar power on the continent.
Despite the uncertainty, analysts say the big players’ scale and deep pockets could see them stay on top, while more bundling up to get scale is likely.
“There is obviously room for individual specialists who specifically understand the emerging supply chains — and it will be interesting to see them do that — so there could be new players,” said Francke.
“But if you look at the ones in the top tier today, they are best positioned to win going forward as well,” he said. London