The Dawn of a New Order in Commodity Trading

The commodity trading industry is about to undergo its largest transformation in 30 years. Competition is increasing, as more commodity producers, traders, and end consumers angle to capture what we call the “total value of optionality.” This is defined as the combination of the absolute value of the commodity, the volatility of its price, and the frequency and magnitude of events that disturb the dynamic equilibrium of the commodity’s markets, so-called grey swan events.

Top commodity traders must be masters of “optionality” to survive the coming shake-out. These traders will prosper because they can pay producers more than end users can while selling commodities more cheaply to end consumers than producers can afford. Traders do so by carefully managing a range of options in relation to the time, location, quality, lot size, and logistics of sourcing or delivering their precious cargoes. To achieve this, commodity traders need to build global logistical networks at a competitive cost and attract the talent to optimize them. Business that have not yet become masters of optionality will need to reconsider whether they can continue to afford not to.

In fact, extensive logistical networks and inventory reserves already permit many commodity traders to correct a shortage or other commodity supply imbalance. Our research shows that commodity traders earned 35 percent less in revenues in 2010 than they did in 2009, even though commodity prices were higher.