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Trafigura's profits soar on extraordinary market volatility


Volatility to persist due to significant uncertainties

Posts record profits despite fall in trading volumes

Sees energy transition providing business opportunities

  • Author
  • Eklavya Gupte
  • Editor
  • Jonathan Dart
  • Commodity
  • Electric Power Oil Metals

London — Trafigura Group posted a bumper 2020 year with record profits as it took full advantage of the "extremely volatile conditions and market distortion" caused by the oil price crash and the coronavirus pandemic, it said Dec. 9.

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Trafigura, which is one of the world's largest commodity trading houses, also expects this volatility to continue for some time, with "significant uncertainties" ahead, which bodes well for its business.

"2021 is likely to bring more refinery expansions in emerging markets and a recovery in both OPEC and non-OPEC supply, but demand remains a problem that is unlikely to be resolved until a COVID-19 vaccine is widely made available," it said in its 2020 annual report.

The oil market has still not fully recovered after Brent crude prices dived to near two-decade lows in April after sweeping pandemic lockdowns slashed demand and forced oil producers to make hefty output cuts.

The Singapore-based oil and metals trading house thrived under these conditions, and it posted a gross profit of $6.8 billion for the year ending September 30, 2020, compared with $2.9 billion a year earlier.

"Even when the most acute effects of COVID-19 start to recede, volatility will continue to prevail in the oil market for the foreseeable future and is also likely to increase in metals as the supply-demand balance tightens...," it said.

"We are confident that profits can continue on a somewhat higher plane than the average of the last five years."

Market distortion

The group's oil and metals traders took advantage of the extraordinary volatility, which increased demand for its services to manage the supply-demand imbalances.

The group's oil and petroleum products division posted a gross profit of was $5.26 billion, represented 77% of the group's total gross profits.

Despite record profits, the total volumes of oil and petroleum products traded by Trafigura fell 3% to 267.7 million mt for the year ending Sept. 30.

This represented an average of 5.6 million b/d in a market that suffered a slump in demand as a result of the pandemic.

The trading house said it was also able to tap into geographical trade arbitrage opportunities, which were amplified by the uneven regional impact of the pandemic.

Looking ahead, the group said it expects this volatility and market distortion to continue, as demand will be slow to recover from the effects of the coronavirus.

The company's fuel distribution and retails business Puma Energy made a loss a loss, and the group reported impairment charges of $1.6 billion.

Business opportunities

Trafigura, like many of its peers, is also starting to diversify its trading strategies to adapt to the energy transition.

"We emerge from [2020] with a stronger balance sheet, an improving asset portfolio and an enhanced and increasingly diversified trading platform that we believe is well placed to adapt to and to assist the accelerated global transition to a lower-carbon world," Trafigura Executive Chairman and CEO Jeremy Weir said.

With an increasing global focus on decarbonization and low-carbon fuels, Trafigura built a renewable and power trading division this year to position itself well for the energy transition.

"New technologies and new environmental regulations will likely result in market disruptions, but also provide business opportunities," it said.

While oil would continue to be in demand, the increasing pace of the energy transition and particularly electrification of the world's economy, will benefit Trafigura's business models.

"The energy transition will require significantly more copper, nickel and other metals, and so far, investment in these areas has been lagging behind future projected needs" Trafigura's Chief Economist Saad Rahim said.

Last week, Trafigura said it would invest $62 million into building a logistics and infrastructure-based hydrogen ecosystem around Europe, as it partners with other large industrial players

"Longer term, two long-standing and inter-related challenges remain: the accelerating energy transition and reversing the systemic and enduring under-investment in the value chain needed to make the energy transition happen," Rahim added.