Commodities are the lifeblood in the veins of the global economy and are of commensurate strategic importance. No wonder, then, that

WELCOME

increasingly scarce natural resources have become an ever-growing political issue in recent years.

01

WELCOME TO SWITZERLAND, THE COMMODITY CAROUSEL: ‘WARNING: RISK OF DIZZINESS!’

Geneva, Grand Hotel Kempinski, end of March 2011. While the world stares spellbound at the slow-motion reactor catastrophe at the Fukushima nuclear power plant, the commodity business meets for its annual rendezvous, the ‘Trading Forum’, on the shores of beautiful Lake Geneva. In his talk, oil trader and Mercuria co-owner Daniel Jaeggi responds to this burning issue and reflects on what a global nuclear phase-out might well yield for him and the others present. Although only five per cent of the world’s energy comes from nuclear power, that nevertheless corresponds to 610 million tonnes of oil annually, or 15 per cent of global output. I just leave you with that, Jaeggi closes with a smile.

Where others see only disaster, the commodity trader sees an ‘opportunity’, his chance for new, large and, above all, profitable business. Successful ‘opportunity hunters’ have transformed Switzerland into a centre for commodity traders and made it a world leader, and all in just a few decades. As one of the very few top traders who is actually Swiss, Jaeggi is also the exception that proves the rule. In almost all cases it has been non-Swiss – managers as well as companies – who have made this small, landlocked country into the largest global commodity hub.

Yet this amazing success story is based on something deep-rooted in the Swiss character, namely political opportunism. Consistently standing on the sidelines, looking away and claiming not to know, even refusing to join the UN until 2002, are all actions which have been defended under the cloak of ‘neutrality.’ These have brought Swiss-based companies a large number of questionable but all the more lucrative business opportunities. The rise of the commodity trading centres of Zug and Geneva was also facilitated by their exceedingly moderate tax regimes and a societal tendency towards a great deal of confidentiality and little regulation and control. In short, Switzerland as a commodity hub, although by no means planned, is much more than mere coincidence.

The commodity market in Switzerland is large – astronomically large. And it has grown explosively: between 1998 and 2010, net receipts in this sector increased fifteen-fold. According to the trade newspaper Handelszeitung, the twelve largest companies in Switzerland include five commodity businesses (according to research by Berne Declaration (BD), there are in fact seven). Despite its significance and hazardous nature, virtually nothing is known about this secretive business, which in 2008 contributed roughly as much to the country’s GDP as the traditional mechanical engineering sector. And in this regard, even the initial flotation of industry leader Glencore in May 2011, billed as a watershed moment for the entire commodities industry (Financial Times), will probably not change anything. This book is therefore a pioneer work and attempts to capture the swiftly-turning Swiss commodity carousel within a single book.

Commodities are the lifeblood of the global economy and are of commensurate strategic importance. No wonder, then, that increasingly scarce natural resources have become an ever-growing political issue in recent years. The key terms in this drama are oil price boom, food crisis, evictions, population displacement, security of supply, price speculation, CO2 emissions, land grabs and conflicts over the Arctic. Given such a diversity of topics already, there are some the next 400 pages do not cover. For example, the commodities that are consumed by industry and private individuals within Switzerland itself. In comparison with the transit trade – the business of the Swiss commodity sector – in which the goods never arrive in Switzerland at all, domestic consumption is entirely insignificant. It’s not about famous brands such as Nestlé, Shell or Starbucks, either. They are involved in commodity trading, but are primarily major customers of the real traders and are therefore not included. In addition, the controversial question of how a country today ensures politically that it obtains all the raw materials that its economy and people need is also not answered here.

The subject of this book is rather all Swiss companies, including the ‘corporate immigrants’ with their central operations in Switzerland, that are active in either commodity trading (Mercuria, for example), the extraction of raw materials (Xstrata, for example) or both (Glencore, for example). We have analysed all the main commodity groups: energy sources (especially crude oil and its derivatives), ores and metals, and agricultural products (‘soft commodities’). The world’s largest independent oil trader Vitol operates out of Geneva, Glencore in Zug is the dominant commodity colossus, with its main focus on ores and metals, and the four most important agricultural trading firms all have prominent trading offices in Switzerland.

Our focus is necessarily on such industry leaders. Due to limited space, the niche players, who are encountered mainly around Lake Geneva, but occasionally also in other cantons, are mentioned only in passing. To really bring light into the darkness of the ‘black box’ of commodity trading, we examine its wider contexts and general business practices across the companies. From its historical origins, and continuing via the complex tax tricks and speculative instruments to some specific places of action (and consequences), we show everything that is important for an understanding of this multi-layered commercial sector.

What has motivated us to undertake this research project is a fundamental contradiction. It might be a development-policy truism but this makes it no less pressing: resource-rich countries are and often remain very poor – not despite, but precisely because of their natural resources. A prime example of this ‘resource curse’ is the Congo, while Zambia is another and we report from both countries. Nevertheless, this book is not a chronicle of the global scandals of the Swiss commodity traders. Why not? Because our main interest is in the other side – our side – of this ‘accursed’ equation. Here, the same commodities are making some trading businesses and their owners rich beyond measure. The managers of Glencore roughly tripled their wealth at a stroke by bringing their company to the stock exchange in 2011. The widespread poverty of entire countries and the wealth of some top traders are directly linked. This book demonstrates how this is the case.

On the whole, the commodites business as practised in Switzerland today is dangerous for all countries in the southern hemisphere that are blessed with natural resources but at the same time suffer from weak or corrupt governments. This is particularly the case for those men, women and children who live in the dirt and dust of the mines and production facilities. Mining, crude-oil production and large-scale industrial farming harm the living conditions of millions of people by using land and polluting water supplies and the air.

But the trading companies’ business model, which frequently exploits grey areas, is also dangerous for Switzerland. Corruption, aggressive tax avoidance, speculation mania and human-rights violations pose enormous risks for reputations and, as in the case of bank secrecy, constitute the country’s next exposed flank (Tages-Anzeiger). Switzerland is not only a tax haven, but also lacks transparency and regulation – and it attracts commodity trading as a dunghill attracts flies. The commodity businesses between Lake Zug and Lake Geneva still enjoy free rein, but some countries such as Bolivia are defending themselves and demanding fairer commodity prices, the United States is imposing a duty of transparency on the commodity business, and the EU wants to reduce foodstuffs speculation. In other words, the world will not simply a spectator at this so-called ‘locational advantage’ swindle forever.

Improved accountability and control [of the commodity business] could potentially change living conditions, economies and political systems around the world, says the investors’ guru George Soros. While Eva Joly, the MEP and courageous campaigner against white-collar crime, is convinced that in 20 years’ time humanity will classify the current distribution of wealth in the commodity business in much the same way that we regard slavery today. We therefore share the motto of U.S. Federal Judge Louis Brandeis who acted against corruption and bank power 100 years ago and knew even then that sunlight is the best disinfectant. So if this book lets some sunlight into the Swiss commodity hub, it will have achieved its goal.

PS: Since the German edition of this book went to press, Glencore and Xstrata have announced their intention to merge. If this goes through, the ensuing company will be the fourth largest mining company and at the same time the most profitable commodity trading company in the world. Naturally, it will be headquartered in Zug.

BIG PICTURE

In the words of a Geneva-based oil trader: My job is to bring physical goods from a place where the people don’t need them to a place where they are needed. However, like many of his colleagues, he is confusing need with spending power.

02

THE NATURE AND IMPORTANCE OF COMMODITIES IN WORLD TRADE

We cannot function without raw materials. The natural resources of our planet are the material basis of our economies and societies: they fuel prosperity and growth. We are consuming more and more, and so our need for natural resources is ever increasing. More raw materials have been consumed since World War II than in the entire history of mankind.¹

These fuels of our civilisation often come from developing countries: 59 per cent of metals and ores (as much as 71 per cent of copper), 63 per cent of coal and 64 per cent of oil.² Increasingly, they come from politically unstable countries, as shown in

FIG. 1

. These are states which have no effective environmental or social legislation and are often shaped by war and conflict. The lives and health of the people who live around the mines, quarries and production facilities are thus exposed to great danger.

FIG. 1

ORIGINS OF RAW MATERIALS IN TERMS OF POLITICAL STABILITY

TYPES OF COMMODITIES AT A GLANCE: WHAT ARE THEY, WHAT ARE THEY FOR AND WHAT DO THEY COST?

So that they can be exchanged easily, heavily traded raw materials are standardised in size and quality, after which they are referred to as ‘commodities’. Commodities are usually divided into three categories. Energy commodities, ores and metals (also known as ‘mineral commodities’), and agricultural goods (‘soft commodities’). Energy commodities are a relatively simple category, comprising mainly crude oil and oil products, natural gas and coal. Mineral commodities are much more diverse, dominated by the metal commodities such as iron, non-ferrous metals such as zinc, and precious metals. Finally, there is the agricultural sector, including a wealth of foodstuffs such as grains, ingredients for drinks (e.g. coffee and cocoa), versatile materials such as sugar and oil, and fibres for textile production

TAB. 1

. In the trade the term ‘commodities’ is used rather loosely. On all the markets there are materials which, strictly speaking, are already intermediate products. As far as metals are concerned, aggregates (ores, e.g. bauxite) and the intermediate products obtained from them (alumina) and lastly the pure products (aluminium) are all traded as ‘commodities’. Besides iron, the metals which are especially important to industry (industrial metals) include many non-ferrous metals.

TAB. 2

. Since Switzerland does not play a major role in the trade in rare earths, which are central to the electronics industry, these are ignored here.

TAB. 1

THE UNIVERSE OF THE MOST IMPORTANT COMMODITIES

TAB. 2

MAJOR INDUSTRIAL METALS AND THEIR USE

Be it cotton or lead, all these very different commodities have one thing in common: since the turn of the century they have shot up in price. This fact alone explains why commodities are such a relevant and controversial issue today. Although prices dipped sharply in 2008 following the financial crisis, metals and agricultural goods have long since surpassed their previous highs

FIG. 2

.

COMMODITY TRADING: A LUCRATIVE NECESSITY

Whereas some parts of the earth are rich in mineral deposits, others are almost entirely dependent on imports. A good example illustrating just how much the distribution of raw materials and their consumption differ worldwide is oil. In 2010 every human being in the world consumed five barrels of oil on average

FIG. 3

. Whereas the Middle East can produce 43 barrels per person per year, thereby generating huge surpluses, in Asia merely one barrel per capita is extracted from the ground at present. Trading redresses this global imbalance.

It is this function that gives commodity trading its public identity. Daniel Jaeggi, Vice-President and Head of Global Trading of Geneva-based oil trader Mercuria, puts it this way: My job is to bring physical goods from a place where the people don’t need them to a place where they are needed.³ However, like many of his colleagues, he is confusing need with spending power. It can hardly be due to a lack of need that in Africa only one out of the (modest) four barrels of oil produced per capita is actually consumed there, and the rest have to be sold. By way of comparison: the average person in North America consumes all of the 14 barrels produced there and then imports eight more from other regions (among them Africa).

FIG. 2

PRICE FLUCTUATIONS BY COMMODITY GROUPS 2000–2011

FIG. 3

OIL PRODUCTION AND CONSUMPTION PER CAPITA

BY REGION IN 2010

Although some of the raw materials are consumed directly in their countries of origin, that a sizeable share invariably reaches the global market is beyond question. Today, this process is dominated by ‘commodity trading’, where commodities make up around a quarter of the total world trade volume

FIG. 4

.

Of even greater significance than the value of commodities in world trade terms is their importance in weight. Commodities are obviously much cheaper per tonne than finished products. Since 80 to 90 per cent of world trade is seaborne, the statistics for international maritime cargo transport afford interesting insights.⁴ About 70 per cent of the ships carry commodities. These carriers can include oil tankers and bulk vessels with metals, coal or wheat on board

FIG. 5

. In contrast, the variety of sea-going containers, which are mainly used to transport end products and symbolise global world trade, account for a mere 14 per cent of world trade in terms of weight. So when it comes to the transport of bulk materials, commodities trading actually accounts for roughly two-thirds of world trade.

‘Oil is king’: In terms of its value ‘black gold’ accounts for almost exactly half of all commodity exports. Taking oil, natural gas and coal together, the share of energy commodities in total commodity exports is just short of 60 per cent

FIG. 6

. The remainder are exports of mineral (20%) and agricultural commodities (20%).

FIG. 4

SHARE OF COMMODITY TRADING IN WORLD TRADE IN 2009

(MONETARY)

FIG. 5

SHARE OF COMMODITY TRADING IN WORLD TRADE IN 2009

(WEIGHT)

FIG. 6

COMMODITY MARKET BY SHARE

(MONETARY SHARE IN WORLD EXPORTS)

‘LITTLE BIG SWITZERLAND’ TOPS THE TABLE.

Given their global dominance it is hardly surprising that fossil fuels also monopolise the Swiss commodity trading hub.

TAB. 3

gives an overview of the main commodities traded and those Swiss-based companies that conduct the majority of this trade, and in turn are covered in this book.

TAB. 3

MARKETS OF THE MAJOR SWISS COMMODITY COMPANIES

Important commodity trading hubs are located in Asia, Europe and North America

FIG. 7

. The trading hub of Amsterdam has Europe’s largest port, Rotterdam, at its disposal, while Houston has huge oil refineries and storage facilities, Chicago and Hong Kong have important commodity exchanges. Switzerland, on the other hand, has nothing that would suggest this small, landlocked country was destined to become one of the main hubs of the commodity business, but this is what has happened. The Canton of Zug has traditionally been important but key players are also located in the Cantons of Zurich and Lucerne. Nevertheless, the most dynamic area at the moment is clearly Geneva, which leads the league of global commodity hubs.

FIG. 7

GLOBAL COMMODITY HUBS

According to GTSA, the industry organisation Geneva Trading and Shipping Association

CHAP. 11

, Geneva has not only replaced London as the most important oil trading city, but in grain and coffee trading the industry heavyweights are also now located on the shores of Lake Geneva

CHAP. 12

.

FIG. 8

illustrates the shares of trade transacted here.

To what extent these GTSA figures are for lobbying and location-marketing purposes or are based on sound data, is difficult to assess.

FIG. 8

MARKET SHARES OF THE GENEVA-BASED COMMODITY TRADERS

The other commodity arenas, especially Zug, are not even included here. Particularly in the case of metals and coal, they provide significant market shares for Swiss traders.

SMART MODEL: ‘TRANSIT TRADE’ WITHOUT ‘TRANSIT TRAFFIC’

One thing is certain: the commodity trading handled by Switzerland far outstrips Swiss domestic consumption. For example, if the recorded annual trade volume of oil were to remain within its borders, national consumption would be covered for the next 75 years. Even if all the lorries on the Gotthard route were only transporting oil, only five per cent of the oil traded here in Switzerland could be brought over the Alps. But the logistical limits are of no concern to the Swiss commodity traders as they practice a very specific business model, so-called transit trade (also known as ‘merchanting’). Contracts may be concluded, deliveries scheduled and ships chartered from Swiss offices, but the actual goods – except in the special case of gold

CHAP. 9

– never touch Swiss soil. From an African mine, for example, the raw materials are dispatched via land and sea routes directly into a Chinese smelter.

In this way, the flow of goods conveniently eludes the official statistics of the Swiss Federal Customs Administration – one reason for the notorious lack of transparency in the business. Nevertheless, data can be retrieved by another route because the Swiss National Bank (SNB) measures the transit trade as an export of services. Transit trade is defined as all transactions in which Swiss companies buy goods abroad and then sell them directly and unaltered to customers abroad (so crude oil that is refined before it is sold on is not recorded). For the most part (94 per cent in 2009) Swiss transit trade is commodity trade.⁶

The SNB’s data may not provide a complete and exact picture, but they do give a good approximation, which brings something astonishing to light. When illustrated in a graph, it is clear that Swiss transit trade since 1998 has shown a steep upward curve. The SNB puts this almost exponential increase down primarily to the influx of commodity trading companies. In addition, the already established businesses have grown massively. Previously ignored for the most part, these data verify the huge growth of the commodity trading business in Switzerland

FIG. 9

.

FIG. 9

GROWTH IN TRANSIT TRADE, 1950 TO 2010

(NET RECEIPTS*)

FIG. 10

SHARES BY COMMODITY GROUP IN THE TRANSIT TRADE IN 2009

(GROSS RECEIPTS)

The information provided by the Swiss National Bank also sheds light on the sectors in which these companies make their sales

FIG. 10

.⁷ The energy sector is by far the strongest player. Its proportion in Switzerland is even slightly larger than in the whole of world trade.

Another word on economic relevance: in 2008 commodity trading contributed roughly the same amount to the gross domestic product (GDP) of Switzeland as the engineering industry, namely around two per cent. But the latter employed about 95,000 people, while the figure was probably not even a tenth of that in the commodity trading sector. Since then commodity trading has continued to increase and by 2010 was already contributing over three per cent to GDP. The business thus employs relatively few people, but in return per capita sales are all the higher. The reason for the latter is that this business has traditionally made relatively low gross margins of just a few per cent, achieving its high profits mainly through enormous volumes. This is reflected in the sales figures: for the whole industry in 2009 these were 480 billion Swiss francs just for transit trade.⁸ To this has to be added the transactions not captured in the SNB statistics. In media reports for the Geneva region annual sales of 700 to 800 billion are quoted.⁹ In terms of world trade in commodities, which is a colossal business of 3,000 billion Swiss francs, the companies operating in Switzerland have a share of at least 15 to 25 per cent already and the trend points towards a significant increase in this share.

INTERIM CONCLUSION

Mankind is consuming more and more resources, most of which are traded internationally as commodities. Just how much commodity trading dominates world trade is illustrated by the fact that one in four dollars now changes hands there. And two out of every three cargo ships now transport commodities. The revenues from this multi-billion business more than trebled in value between 1998 and 2009, driven by rising commodity prices.¹⁰ In Switzerland the market increased as much as fifteen-fold during roughly the same period. Today the global arenas of this business are located around Switzerland’s Lake Geneva and Lake Zug – albeit behind closed doors.

A trader enjoys telling the story of the unfortunate long-distance truck drivers who painstakingly transported a tanker full of Kazakh oil through Afghanistan. When they set off oil prices were at the peak of the price hike.

COMMODITY TRADING

By the time they reached their destination a week later the same barrels of oil were worth only half the amount and their journey was a financial disaster.

03

COMMODITY TRADING: TOOLS AND MECHANISMS

Commodity trading is a complex structure of interlocking processes and interconnected players and encompasses very different phenomena. A preliminary distinction can be made between domestic trade and world trade

FIG. 1

. Taking crude oil as an example, total world trade volume coresponds to just under half of global output. In contrast, for coal it equals only an eighth since China alone produces and consumes almost half. However, if Shell Nigeria delivers oil to Shell Switzerland for example, this counts as intra-group trade. According to expert estimates this type of trading is extremely important. Governments also negotiate many commodity deals between one another directly, although they do involve leading export companies if necessary. Such deals include so-called ‘barter trades’, based on an offsetting transaction or an exchange of goods, for example oil for cashew nuts or armaments. Essentially, this permits contracting parties to trade whatever they chose to.

Quantitatively far more important is the ‘free commodity market’. On this market commodities can reach their end users in industry in two ways: either they are sold on the commodity exchanges or they are ‘sold directly’ by a commodity trading company. This is the primary business sphere of the trading companies operating in Switzerland and therefore the focus of this book.

FIG. 1

OVERVIEW: TYPES OF COMMODITY TRADING AND FOCUS OF THE BOOK

Whatever route is used to bring commodities to their buyers and regardless of whether it concerns a cargo of coffee, copper or crude oil, physical commodity trading involves the transport of freight, usually by ship. Hence, the trading companies are invariably also logistics companies. Their core business involves buying a commodity, shipping it from A to B and selling it at a higher price in order to cover their business costs and make a profit.

Direct deals between commodity traders and industrial customers comprise either deals with long-term purchase agreements, the traditional type of commodity trading, or deals on the spot market. The term ‘spot’ comes from the phrase on the spot. A spot market refers to all the sales which are made when prices are fluctuating rapidly and which have short delivery deadlines. According to Platts, a renowned data services provider on the commodity market, even today long-term deals outnumber spot deals by nine to one. Estimates for the oil market indicate a roughly 30 per cent share for the spot market. For natural gas, which is liquefied for sea transport, the figure is said to be 20 per cent of production volume.

BRENT CRUDE OIL AND CHICAGO PORK BELLIES: PHYSICAL EXCHANGE TRADING

Another part of commodity trading takes place on the exchanges. This is where major consumers and major producers buy, for example, wheat, crude oil or aluminium directly or via financial intermediaries at a price that is valid at the moment the transaction occurs at a certain reference site. The three major trading centres for crude oil are the NYMEX (New York Mercantile Exchange), the ICE Futures (Intercontinental Exchange) in London and the market in Singapore where the barrels (standard 159 litres barrels) from the region around Dubai are traded. Each marketplace focuses on its own particular type of oil. Thus so-called ‘Texas Light Sweet’ is bought and sold on the NYMEX. The price of this standard type is set in Cushing,