Commodity traders need new business models to exploit volatility, says McKinsey

Tue 31 Jan 2023
Posted by: Phillip Adnett
Trade News

McKinsey logo shown on mobile phone

Global consultancy McKinsey believes it has identified the factors needed to achieve success in volatile commodity trading markets.

Commodity trading has enjoyed an upward trend over the past five years and its prospects look excellent for the years ahead, McKinsey said in a new report.

The paper states that this ‘new normal’ will require new types of traders to take advantage.

However, finance in the sector has been affected by high interest rates, volatile prices and the war in Ukraine, creating a need for an extra $300bn to $500bn in working capital to keep raw materials moving, reports the FT.

Cost of finance

Working capital requirements could rise by one and a half to three times the current levels depending on the commodity.

“Since the end of 2020, we have seen a doubling of the working capital requirements in the commodity trading sector,” said Roland Rechtsteiner, McKinsey partner and author of the report.

The cost of the financing the movement of raw materials such as oil, gas, sugar and gold has risen significantly because of volatility in prices and rising interest rates.

Trade routes

Furthermore, Russia’s invasion of Ukraine has trigged a shift in global trade flows, including longer, less efficient shipping routes for commodities such as coal, where prices have nearly tripled in the past year.

McKinsey predicts average shipping times will increase 8%, energy prices will rise three-fold, and interest costs will rise seven-fold, between the end of 2020 and 2024, increasing working capital requirements.

Energy transition

The energy transition is resetting volatility with inconsistent incentives, bottlenecks in the value chain, and current geopolitical turbulence clouding the supply and demand picture.

Annual investments in traditional hydrocarbons have dropped by 50% since 2013, but the level of funds committed to the energy transition in 2022 were only about one third of the $2 trillion needed to prevent the emergence of sustained bottlenecks.

One-off events

The flow of global commodities remains vulnerable to potential disruption from one-off events such as the pandemic and Russia’s invasion of Ukraine.

To capture opportunities, McKinsey identifies five factors that could be critical to commodity traders’ success in the years ahead:

  • Prioritise customer centricity as the energy transition reshapes commodities
  • Embrace the industry’s shift toward short-term markets, especially on new commodities
  • Invest in decarbonisation as an asset class to harness the ‘green premium’ as a potential source of first-mover advantage
  • Rapidly ramp up trading capabilities, because scale is a critical factor
  • Ensure that the trading platform and operating model balance efficiency and agility to enable growth, especially considering talent shortages