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Commodities titans dare to believe worst has passed

The titans of the commodities industry are daring to believe the worst is over but are braced for an increasingly uncertain outlook as “me-first” protectionist policies threaten to destabilise global trade. Those were two of the key themes to emerge from the sixth Financial Times Commodities Global Summit in Lausanne last week.

The head of Cargill, the world’s biggest agricultural commodities merchant, called on the commodities industry to stand up for global trade and or risk a return to the protectionist policies of the 1930s when American implemented the Smoot-Hawley Tariff Act on imported goods.

“Trade is not the reason so many citizens face hardships around the world. But it has become a convenient excuse,” David MacLennan said during the opening keynote address to the conference.

He said protectionist policies posed a direct threat to the world economy and could provoke a trade war with China. “Given the rhetoric, given the mentality and emotions in the United States, but also in the world” the risk of a trade conflict with China had “gone up”, he said.

On China, Jean-Sébastien Jacques, chief executive of Rio Tinto, the world’s second-biggest miner company, told the conference that after recent trips to the country he was unfazed by concerns about its economy.

However, he said the price of iron ore was hard to predict because there was a lot of privately owned idle capacity in China that could be restarted. Rio is one of the world’s’ biggest producers of the steelmaking ingredient.

Top oil traders said they expected Opec and other big producers to extend their agreement to curb supplies by 1.8m barrels per day for a further six months.

“At $50, there’s a lot of incentive for people to continue with the current policy,” said Russell Hardy, Vitol’s chief executive for Europe, Middle East and Africa. However, he added that a sharper recovery in the oil price could weaken Opec’s resolve.

Torbjorn Törnqvist, the head of Gunvor, echoed that view but said Opec had no interest in driving prices too high. The cartel, he said, is “well aware of what caused the crash in first place” — a reference to the supply glut brought about by high prices between 2011 and 2014.

But an extension of the current deal needed a greater show of commitment from Russia, the traders agreed. While Opec, bolstered by Saudi Arabia, had reached almost full compliance with the deal, Russia has not yet reached the 300,000 b/d it had promised.

Looking further ahead, Daniel Jaeggi, co-founder and president of Mercuria, said a supply crunch was looming as oil companies cut spending on more complex projects.

He said spending was currently focused on “short-cycle” projects like US shale, which provides a quick payback but also suffers from sharp decline rates. These barrels would not be able to satisfy growing demand in three to four years time, predicted Mr Jaeggi.

“We are sowing the seeds for potential instability in the future,” he said.

On President Trump, large commodities traders said they did not expect investment banks to return to physical commodity trading even if the White House succeeds in rolling back parts of the Dodd-Frank Act.

“It really was the management that drove the exit from the commodity business. Regulation was an excuse in many cases.” said Bill Reed, chief executive of Castleton Commodities.

Agricultural chiefs said their markets would remain well supplied, with plentiful harvests of grains and soyabeans expected in key growing regions.

Carl Casale, chief executive of CHS, a leading US farming co-operative, said: “The world that we live in today is the one we’re going to be looking at for quite a while. That’s our planning assumption and if we’re wrong we’d be happy.”

They said heavy investment in assets such as grain elevators, oilseed crushing factories and port facilities had squeezed profit margins across the industry.

There was no barrier to entry to those operations, said Chris Mahoney, the head of Glencore’s agricultural arm, comparing to the situation to the mining industry which has also suffered by over investment. “People sitting on their hands for three to four years would definitely help,” he said.

Throughout the conference traders discussed the role of blockchain and whether the digital technology could make settling of trades more efficient and transparent. Blockchain is the electronic ledger originally built to underpin bitcoin markets.

Proponents of the technology say it could ease the time-consuming process of exchanging contracts, letters of credit, inspection and other paperwork used in commodity trading.

However, some traders said that creating a platform where all traders and their counterparties and banks participate would not happen over-night. Jeffrey Dellapina, Vitol’s chief financial officer said: “Industry-wide solutions are a bit intimidating to think about. There are lots of counterparties and jurisdictions.”

Dan Hines, finance chief at Castleton said: “This needs to get everyone participating in it. It’s going to be a long effort.”

Reporting by Neil Hume, David Shepherd, Emiko Terazono, Henry Sanderson and Anjli Raval

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