Forget Glencore: This Is The Real "Systemic Risk" Among The Commodity Traders

Tyler Durden's picture

Back in July, long before anyone was looking at Glencore (or Asia's largest commodity trader, Noble Group which we also warned last month was due for a major crash, precisely as happened overnight) which everyone is looking at now that its CDS is trading points upfront and anyone who followed our suggestion last March to go long its then super-cheap CDS can take a few years off, we had a rhetorical question:

Judging by what happened less than two months later, it appears that we have our answer: for now at least, Glencore, which is now flailing and which Bloomberg reported moments ago is set to meet with its bond investors tomorrow (supposedly to allay their fears of an imminent insolvency), is firmly the "answer" to our rhetorical question.

And yet, something stinks.

First, a quick look at Trafigura bonds reveals that the contagion from the Glencore commodity-trader collapse, which "nobody could possibly predict" two months ago and which has rapidly become the market's biggest black swan, has spread and we now have a new contender. And while Trafigura's equity is privately held, it does have publicly-traded bonds. They just cratered:


... sending the yield soaring to junk-bond levels.


As discussed below, this may just be the beginning for the company which, because it does not have publicly traded equity - but has publicly traded debt - has so far managed to slip under the radar.

But who is Trafigura? Only the world's third largest private commodity trader after Vitol and Glencore.

From the company's own description:

Trafigura is one of the world’s leading independent commodity trading and logistics houses. We’re at the heart of the global economy. Every day and around the world, we are advancing trade – reliably, efficiently and responsibly. We see global trade as a positive force and we go further to make trade work better.

More important than some pitchbook boilerplate, is the company's history: Trafigura was formed in 1993 by Claude Dauphin and Eric de Turckheim when It split off from a group of companies managed by Marc Rich, aka "the king of oil" in 1993.

Who is March Rich? Why the founder of Glencore of course who as a reminder, was indicted in 1983 on 65 criminal counts including income tax evasion, wire fraud, racketeering, and trading with Iran during the oil embargo. Upon learning his prison sentence may be as long as 300 years, Rich promptly fled to Switzerland; he was so afraid of US authorities, he even skipped his daughter's funeral in 1996.

Marc Rich got a presidential pardon from Bill Clinton in a decision which was blessed by the kingpin of corruption, former DOJ head Eric Holder.  Clinton himself later expressed regret for issuing the pardon, saying that "it wasn't worth the damage to my reputation."

But back to Trafigura, whose summary financials reveal that the company - with $127.6 billion in revenues in 2014 and $39 billion in assets - is absolutely massive. In fact, in terms of turnover, it is virtually the same size as Glencore.


But the most important and relevant numbers are on neither of the pretty annual report grabs above. They are highlighted in red in the excerpt from the company's interim report: the $6.2 billion in non-current debt and $15.6 billion in current debt for a grand total of 21.9 billion in debt!

Now, this is less than Glencore's $31 billion (the implication being that Trafigura has a solid $6 billion equity cushion although judging by the bond plunge the market is starting to seriously doubt this) but the problem is that Trafigura's EBITDA is lower. Much lower.

According to CapIq, Trafigura had $1.8 billion in LTM EBITDA, suggesting a debt/EBITDA leverage ratio of a whopping 12x. If one wants to be generous and annualizes the company's disclosed 6-month EBITDA (for the period ended 3/31/2015) of $1.1 billion, the EBITDA grows to $2.2 billion. This lowers the debt/EBITDA for Trafigura to "only" 10x.

Indicatively, Glencore's own debt/EBITDA, and the reason for so much conerns about the company's solvency, is about half of Trafigura's.

At least on the surface, it appears that Trafigura, which is as reliant on the ups and down of commodity trading as Glencore, is far more levered, and exposed, to any commodity crush than the Swiss giant.

But what really set off our alarm bells, is that a quick skim through the company's annual report reveals something disturbing: a commissioned report titled "Too Big To Fail: Commodity Trading Firms and Systemic Risk" whose purpose was to explain why, as the title implies, commodity trading firms are not systemically important. The timing, just months before a historic rout for commodity traders, is odd to say the least.

As a general take, any time someone first brings up, and then tries to talk down the impact of something as being "Too Big To Fail", run.

More seriously, there are two problems with this analysis: as events in the past week have shown, commodity trading firms clearly carry a systemic risk: after all, one after another news outlet rushed to explain why yesterday's market plunge was the result of Glencore fears. It would have been the same with Trafigura's equity plunge... if the company had publicly-traded equity instead of just debt.

The second problem is the subheader to the paper:

Trafigura commissioned a white paper this year on commodity trading firms and systemic risk. Its author, Craig Pirrong, explains why he believes these firms are unlikely to have a destabilising effect on the global economy.

The paper's conclusion: "Commodity trading firms are not a source of systemic risk."


Who is Craig Pirrong? As the NYT explained in a 2013 article titled "Academics Who Defend Wall St. Reap Reward", Pirrong, a University of Houston professor, is just a member of that all too pervasive "paid expert for hire" group, academics without actual credibility inside their own circles, and who as a result will "opine" on anything and everything - usually involving Wall Street regulatory and "risk" matters, just to get paid.

This is precisely what Trafigura did when it commissioned him to "explain" why Trafigura is not systemic. Ironically it did so in August, just as all hell was about to break loose for the commodity traders, especially the most systemic ones.

And while the market has shown how the paid opinions of such "experts for hire" should be completely ignored, the question remains: just what was Trafigura so concerned about when it commissioned a well-compensated study meant to goal-seek the company's explicit conclusion: that it is not systemic, when it obviously is.

Opinions aside, at the end of the the market will decide just who is systemic and who isn't. One look at the price of Trafigura's bonds above has given us the answer: it is a move comparable to what happened to Lehman bonds - if not equity - the day after the bankruptcy filing.

Clearly the Lehman bonds could not believe what just happened until it was too late. For Glencore, and increasingly Trafigura, the bond price is finally signalling the realization that "this is indeed happening."

* * *

We'll save our discussion of Mercuria for another day.

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Proofreder's picture


What can go wrong ??

MalteseFalcon's picture

If the insolvency of these trading platforms leads to a meaningful loss in campaign contributions, then these firms are critical to the system and must be saved at any cost to the taxpayers.



Save_America1st's picture

Geez, you guys (The Tylers...whoever you are)...

I hope you guys are as good at predicting your own fate and that of ZH in the months and short year(s) to come as you are about predicting the fates of all these massive companies that are crumbling and taking the world down along with them.

You're not exactly "under the radar" anymore.  And I have this reeeeeaaaaally bad feeling that one of these days TPTB are going to blame you guys for all these problems.  They'll call you "economic terrorists" or some such type of fucked up thing, and put all targets on you for doing the research and for explaining your analysis to those of us who read ZH as the cause of all these problems...they won't blame the companies or the greedy banksters or the scumbag, treasonous politicians and Quadrillions in debt they created. 

They'll blame it all on you for ever saying anything about it for so long.  It only makes sense this will happen, because as we all know now in this fucked up world: 

“Truth is treason in the empire of lies.”

I sincerely hope you guys have a good bug-out plan in order.   

And before you blow up the server farm (wherever it may be), please wipe all user accounts clean.  Do us a solid "Hilary" on the entire archive and shoot us all a heads up so we can get a head start too before our doors get pounded in by the "Truth Police" storm troopers.

chunga's picture

Tyler: You’re gonna start a fight and you’re gonna lose.

Took Red Pill's picture

The real question is how are  Mortimer and Randolph doing?

SoilMyselfRotten's picture

Damn you ZH, you destroyer of companies!! <shaking fist>

J Jason Djfmam's picture

I am become debt, destroyer of worlds.

SoilMyselfRotten's picture

I'd upvote you SA but i'd inevitably be put on 'the list'.


P.S. Consider this my tacit approval <wink>

Antifaschistische's picture

"Opinions aside, at the end of the the market will decide just who is systemic and who isn't"

In what "end" are you referring to?  it seems that TPTB are the ones who decide who gets saved and who gets cannibalized and there's a massive amount of special interest affirmative action at this level.  So much so that a Presidential Pardon will even be used if needed.   So....Clinton didn't think the millions he probably got 'under the table' was worth his reputation!!  What a bunch of shit.

Jim in MN's picture

ZH was on the top ten financial blog list in the Wall Street Journal years ago.

And, I may be wrong on this, but the Tyler type isn't the bunker/canned food/ammo for miles type.

There's no bug-out plan.  Just a lotta booze and swanky ladies phone numbers for the Last Waltz, if and when that time comes.

Just guessing.

Most people who think 'THEY' can just 'get out' are idiots anyway.

A lot of present virtual company excepted, of course! 

Ow!  Stop hitting me with rifle butts and trench shovels!  C'mon!

Vylahkinnen's picture

What?! Are you calling me an idiot? Listen, I invested a lot of my money to build a spacehip by a Nigerian company. Sure, I haven't tested it. But if things go wrong, I'll just hop in and I am out. And when I am looking out of my cockpit to planet Earth - I will think about your words, Mister!

SoilMyselfRotten's picture

If that doesn't work out you can collect the Nigerian bank money they are holding in your name.

Right-on Left-off's picture

Such is only true in China so far.  Only the sellers and negative buyers go to jail for causing equity drops.

Tall Tom's picture

...please wipe all user accounts clean.  Do us a solid "Hilary" on the entire archive and shoot us all a heads up so we can get a head start too before our doors get pounded in by the "Truth Police" storm troopers. 


We have been archived all over the place on the net. It is far too late. They can wipe their servers clean and your posts, and my posts, will still be found. Furthermore they already know who you are.


So stop worrying. And when the time comes then you will not need someone else to tell you. You are quite capable for figuring that out on your own...I hope. From your posts it seems as if you are capable.

Herd Redirection Committee's picture

The day we have a legit Truth and Reconciliation trial, I will be holding my head up high.

The same can not be said of 'the other guys', regardless of how many billionaires they have been to mass orgies with.

jcdenton's picture

They'll blame it all on you for ever saying anything about it for so long.


Oh, I'm sure that will be one of their defenses at their trial. That is before their conviction and execution ..

Why do I say this with high confidence? Well, you see after 11 years of imprisonment ('93-'04), and numerous assassination attempts, President Reagan's Secret Agent (Totten Doctrine [1875]) Amb. Leo Wanta, was observed at the Jan. 20, 2005 Presidential inauguration, sitting with top brass (aka generals). Later that year, at the World Series in Minute Maid Park, he waves at "Sr." pointing out that his security detail is bigger than his.

Now do pay attention to the following: (listen to the 11 minute teaser. notice where it mentions the military [meaning generals])

In the Dec. '14 interviews, Wanta relays that he has DHS protection. (yes, there are some good elements in the DHS, as there is bifurcation in all the agencies).  So, if we can deduce that Amb. Wanta has superior security compared to the provisional head of the DVD, what does that tell us? It tells us that most of what we hear from the MSM (and unfortunately too much of the so-called alt-media) is BOVINE EXCREMENT! Let's put it in other terms via Jim Sinclair. It's all PSYOPs. So, let's do keep our eyes on -- the ball ..

Troy Ounce's picture



Video: "We're growing prosperity by advanced trade".

WTF. What's that?

Doubleguns's picture

Advanced trade = trading the future today. Nothing left for tomorrow. 

El Vaquero's picture

Just another way of saying this fraud is a pyramid scheme;)

general ambivalent's picture

Have you watched Looper? Basically, gold is traded back to this world and hid for future caches, and the future traders are essentially Blackwater mercs collecting on all the derivatives.

Syrin's picture

Yellen is laughing at this article.

ebear's picture

Fear the Talking Fed.

Zero-Hegemon's picture

What does blackened swan taste like?

The Once-ler's picture

 …  It’s very similar to eating crow.

Tall Tom's picture

Well...Properly served, it is traditionally overcooked after all. That is why it is charred. Some will mention that it is burnt to a crisp.


But do not worry too much. Dinner will be served...shortly. You will find out soon...soon enough.


Bon appatite. Choking on the ashes is not appropriate.

marathonman's picture

They serve an excellent black swan at the Goldman cafeteria - from what I've heard.

Pure Evil's picture

It's the equivalent of MUFF diving on the Wookie.

Tall Tom's picture

LMAO. But how do you know?

Zero-Hegemon's picture

Few have lived to tell that tale

Oquities's picture

it's a little less gamy than bald eagle...

Amish Hacker's picture

Yes, and not as salty, somewhere between California condor and spotted owl.

Hippocratic Oaf's picture

Lehman are still paying partial coupons. If you picked them up at 2cents on the dollar, you won!

BTFC (crash)

junction's picture

As Glencore and now Trafigura get flushed down the commodities market toilet, Marc Rich must from his grave be laughing at what happened to these companies.  Now if only Stemcor, the giant Oppenheimer trading company, files for receivership as its debts become insurmontable.  No doubt, they will turn to Tony Blair, former UK Prime Minister, who is close to MP Margaret Hodge, the friend of pedophile degenerates, as she proved when she headed the London Borough of Islington.  Hodge is a member of the Oppenheimer family who made it to Parliament when a long term MP died suddenly, leaving an opening.  Exactly as what happened for Tony Blair, who became head of the Labour Party in 1994 after party leader John Lewis died suddenly of a heart attack.

Pedronicus's picture

John Lewis is a department store. John Smith was the guy who died.

junction's picture

Exactly right.  I looked up Smith's name in wikipedia to double check when he died, then somehow put in the wrong name.  The facts about MP Margaret Hodge are the main reason I made this posting.  

KnuckleDragger-X's picture

If nothing else, the mushroom cloud should be awesome......

ZippyDooDah's picture


I'm calling a moratorium on "BTFD" comments.  All.Done.Now.

Tall Tom's picture



DJIA 30,000 in 2016. (Of course the US Dollar will not be worth a shit...)


As Foreign Markets at the periphery collapse the wealthy oligarchs in those Nations will transfer their funds to the USA. We will be the last to fall. But we will fall.

El Vaquero's picture

I wouldn't count on order.  Once the developed economies really start going, we're all going to go quickly. 

Mark Mywords's picture
Mark Mywords (not verified) Sep 29, 2015 10:36 AM

Holy FUCK is this bullish!

r101958's picture

Since June 2015 GLEN is down 70%. But today is up 11%. WOW! Of course, the -70% since June includes the much touted 11% rise today. LOL.

Kaervek's picture

Worst should be over, right?



... right?

tc06rtw's picture

 Don’t worry!  The Fed’s  got your back…  and your front… your sides… your top… your bottom… your house… your wife… your kids… 

Kaervek's picture

All your base...