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New era in global energy and commodity trading

London, 11 February 2013

The traders’ role in energy and commodities trading is changing rapidly, while physical trading has entered a new era of sophistication and scale. In a newly released and first-time study, Deloitte in Switzerland, the business advisory firm, has analysed the current issues and trends of one of the most important global and Swiss trading sectors.

Changing global economic conditions are giving rise to exciting new opportunities – and challenges – in energy and commodities trading. International trading houses are, whether in oil, metals or soft commodities, extending their reach and scope. In the study entitled “Trading Up – A look at some current issues facing energy and commodities traders“, Deloitte Switzerland presents its view on current issues and challenges facing energy and commodity trading.

Changing business models for trading companies

The energy and commodities trading sector continues to rapidly transform as more and more trading houses move towards a more integrated business model. In recent years, acquisitions of assets, whether producing, logistics and storage or downstream by trading companies have continued to proliferate, giving traders exposure up and down the value chain.

“Compared with a pure trading model where a company’s capital is essentially tied up in short term positions, moving into assets provides optionality but requires a longer-term commitment of capital with associated implications for the financing strategy for the business as a whole,” explains Chris Jones, Deloitte leader for Energy and Resources.

This need for higher capital, committed for the longer-term, combined with constrained credit for some in the current environment has led to innovation as companies explore new ways of funding both their trading and asset-based businesses.

“With the credit tap turned down, evaluating and creatively employing the different funding tools available is critical,” continues Jones.

Risk, regulation and compliance challenges

Risk management is a core competence for any trading organisation. Nonetheless, the changing financing and funding landscape is likely to bring further compliance requirements. Additionally, continued mooted and pending regulation (for example around position reporting and clearing) or expansion into emerging markets (with issues such as resource nationalism on the rise), are challenges which will need to be addressed.

“Whatever form new regulation or disclosure requirements ultimately take, many market players believe they are here to stay. As with any regulation or compliance challenges, the most successful organisations will plan early to absorb the changes into ‘business as usual’”, says Jones.

The trader’s choice of location

Geneva, Zug, London, Stamford, Houston and Singapore are the most notable trading hubs today. Based on Deloitte’s assessment, underlying changes in the market – both in sources of supply and demand – may lead to the expansion of some centres or new locations appearing. The key concerning the choice of location is the ability to secure the appropriate people with the right skills. Some locations – such as Geneva with its University program “Master of Arts in International Trading, Commodity Finance and Shipping” – are taking active steps to develop their talent pool for the trading business.

Deloitte’s findings are based on the results of interviews with Deloitte partners from all around the world as well as discussions with leaders from the energy and commodities sector.

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Download the paper HERE