2022 is a year that trading houses are unlikely to forget. In just 12 months the commodity trading sector faced tectonic changes which happened at an unusual and rapid pace. Here are five key reasons why.
First there was the end of Covid restrictions in developed economies. This triggered strong demand for commodities at a time when China was still locked down. Thankfully, Beijing eventually put an end to its zero-Covid policy, but that was not the end of global supply chain disruptions.
Second was the Russian aggression against Ukraine, which sparked a major energy crisis in Europe and food security tensions in many parts of the world.
Third, combined with the war, was the rising antagonism between the US and China. This prompted strongly worded discussions and statements – rather than concrete actions – about “deglobalization” or so-called “friendshoring” of production capacities.
Fourth, higher than expected inflation pushed most central banks to sharply increase their interest rates, ending an era of free money. That also pushed some financial institutions to reduce their exposure to commodity trade finance.
Fifth the energy transition accelerated, increasing demand for all sorts of raw materials needed to decarbonize the economy. Geopolitics also played a key role with both the US and the EU introducing new “green” policies, competing with each other and challenging China in supplying key minerals such as rare earths.
Commodity traders played a crucial role in all these five key areas. Sometimes proactively when they anticipated demand, but often under new and unforeseen constraints, such as the sanctions against Russia. However, these new risks did not prevent several trading houses from delivering record profits, particularly in the first half of 2022, thanks to high prices for oil, gas and wheat. This was also good news for Switzerland because it hosts so many world class players, especially in Geneva and Zug.
Overall, such resilience from the commodity trading sector benefits the Swiss economy as a whole, and more and more so. Though imperfect, data from the Swiss National Bank shows that in the early 2000s, chemicals and pharmaceuticals accounted for 20% of Swiss exports of goods and services, compared with 45% for other goods and 35% for services. Merchanting, of which a large part is commodity trading, then played a minor role. Today, chemicals and pharmaceuticals alone account for just under 30% of exports, just like that of other goods and services. Meanwhile trading has also increased and now contributes 15% of the total.
At the same time, the share of commodity trading in the Swiss gross domestic product doubled in a few years to reach almost 8% in 2021. That is close to the contribution of the financial sector. This is another major change to keep in mind.
