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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JoeySandwiches's picture

I like to imagine old lady Yellen trying to shoo all these black swans away with her trusty broomstick. Gonna need some bigger artillery, Janet..just try not to kill us all with it.

Winston Churchill's picture

Hitlery borrowd Yellens broomstick.Prolly deleted.

Can you imagine those two and Pelosi  playing the witches in MacBeth ?

tc06rtw's picture

       …  must I ?

El Vaquero's picture

I always hated it when I had to read Shakespear.  I was never really interested enough to put my mind towards deciphering the language, and thus reading it was painful.  Accordingly, I am not going to try to imagine Yellen, Pelosi and Hillary as the witches in MacBeth. 


But I don't have to imagine them being witches at all. 

hongdo's picture

You have to see Shakespear performed by a good company.  Especially over-acted hammed-up comedies.  The way it was intended for the rabble.

skinwalker's picture

Shakespeare wasn't the author. 

RopeADope's picture

If you are not systemic you can avoid audits which would show your assets do not really exist.

ebworthen's picture

Zing!  Razor sharp there, keep up the great work.

The Emperor and his entourage have no clothes!

Kayman's picture

"Clinton himself later expressed regret for issuing the pardon, saying that "it wasn't worth the damage to my reputation." "

Ahh... yes... the old Clinton standard.  Damn, I sold out too cheap.

venturen's picture

really...$150 Million and counting...Clinton's apolgies are too cheap. He is a liar

Temporalist's picture

Good thing there are no such thing as defaults anymore.

The Once-ler's picture

 Yeah…  Whatever happened to them?

El Vaquero's picture

We're saving them all up for a rainy day.  Swans don't like to fly in the rain. 

THE COIN's picture

Marc Rich, Pincus Green, Vinnie " OLA ", Gary Cohen, Marc Fischer.

NYMEX in the World Trade Center.

falak pema's picture

Anglo American, Glencore and all those others including Koch Bros, are now all being caught up in the deflationary circle of commodity kings.

Oh when the Kings go marching up the Hill

Great Movie : The Hill... with Sean Connery.

Sisyphus and the Oligarchs of Rule Britannia.

Just remember that Pericles's Funeral oration--it served nearly word for word as template for Lincoln's Gettysburg speech--mentions the word "Hoi Polloi"...

Hoi Polloi = The Unwashed or the plebes; aka the majority. (for, of and by the people)

Hoi Oligoi = The aristocratic (arrogant) few.

As Thucydides relates  during the War of the Peloponnese, Athens was about Hoi Polloi and Sparta was about Hoi Oligoi !

Hey Hoi does it feeeel on that Hill ?

Every man for himself and may the devil take the hindmost!

Kayman's picture


Best movie to represent our overlords is Breaker Morant.  Time to find a scapegoat to blame for their dirty, greedy deeds.

Solio's picture

Too big is failed!

SillySalesmanQuestion's picture

Could this be shy the PPT has been working overtime since late last night...?

tommylicious's picture

look at that nasty, scruffy bastard on the video.  shave you bitch!

Mark Mywords's picture
Mark Mywords (not verified) tommylicious Sep 29, 2015 10:55 AM

That's a relevant comment. OMG! A hairy-faced man! The horrors!

arbwhore's picture

Remember, Gartman is a commodity bull... at the moment.

Normalcy_Bias's picture

You forgot to mention this:

Trafigura found guilty of exporting toxic waste:

Complete scum bags




bentaxle's picture

"Complete Scumbags...."


Sure are! I even remember watching the BBC progamme, I think they call it Panorama, from the time?


Trafigura'a actions came to most people's attention when they took out an injunction in the British Courts in a perverse attempt to bury any and all stories about the dumping of toxic waste in Africa being picked up and reported in the media. If I also recall correctly a UK satirical publication known as "Private Eye" published anyway and told Trafigura's lawyers to F... Off!

Scooby Dooby Doo's picture

Exciting times indeed.

big rock's picture

Cargill is a)the largest privately owned company in the world and b) is in fact the largest commodity trader in the world and c) will mop the floor, at 20 cents on the dollar, with the likes of 1)Glencore, 2)Trafigura, and 3)--just you watch, Dreyfus. Vitol will survive unscathed.

Jim in MN's picture

Funny story:  I interviewed and got nearly hired as Cargill's Director of North American (something, something, mumble mumble).  There were only two candidates left. 

Then the VP doing the interviewing apologized and said the upper management had realized that they never hired anyone that high up who hadn't been in 'the Cargill Way' for most of their career.  I guess they kind of forgot or this was specialized enough that they didn't have anyone so they let it ride....almost.

I hope 'the Cargill Way' encompasses more than the golf course jocularity, secrecy, and paranoic levels of loyalty that it appears to.  Or, Cargill ain't cleaning up anything but their own entrails.

With all due respect to the family.  It's just.....

We Ain't In Kansas/Ioway/Minnesoder No More.

Urban Redneck's picture

Back in the early days of the dot com 1.0 Cargill had more profit, than Bill Gates' Microsoft, David Glass's Walmart, Jack Welch's GE, and even Lee Raymond's Exxon.   

And yet thousands of mad tinfoil hatters cannot seem to put two and two together when trying to idenitfy them.

venturen's picture

funny how you pull the ponzi master Goldman and JP Morgan out of commodities and all prices fall and the other players get destroyed. Who doesn't love an oligopoly....with access to an unlimited printing press

Ancientkarma's picture

It is also strange that falling prices bring down giants,the public benefit.......our rulers don't,why can't our politicians and regulators see through this conundrum?

Sam Spade's picture

Craig Pirrong is a professor at the University of Houston (not Housing, haha).  Sometimes I wish ZH would invest in a good copy editor...

Glass Seagull's picture




Well, time for them to start lightening up on their booked/hedged shipping.

Time for route rates to "poop that corn."

Yen Cross's picture

 Ooops... There went 16k in the dow.

Jim in MN's picture

I told y'all those DOW 15K hats would be useful again.

Central Bankster's picture



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."



No, a better way to say this is that the market for bonds is pricing in the "risk" of a Lehman style event.  Wrong or right, this is the current "market" for the risk of that.  If you disagree, place your bets!

bnbdnb's picture

Should have done an IPO. What idiots.

jjsilver's picture

Of course there will be a full scale investigation and forensic audit into the culprits behind the commodity rigging causing mass financial destruction.

ghostzapper's picture

Guys: stop worrying so much.  DB just pledged some of their derivatives as collateral to a new fund managed by Corzine that is now plasantly long Trafigura 2018s.  We're good. 

The Indelicate Genius's picture
The Indelicate Genius (not verified) Sep 29, 2015 11:30 AM

commodity traders are useless parasitic cunts who will be first up against the wall when the revolution comes.

El Vaquero's picture

I find that doubtful.  If most people started blaming the banks for their misfortune in a SHTF scenario, it isn't the executives or major shareholders that would be dragged out into the street, it would most likely be the tellers who know about as much of what their bosses are doing as the people dragging them out into the streets. 


You want to start a revolution?  We don't have the logistical supply trains to fight one. 

Die Weiße Rose's picture

meanwhile, somewhere near Queensland: 18000 Glencore coal-miners are watching their canaries....

Share market sheds $56 billion as commodities tank; Glencore crash shakes resources

The Australian share market has lost $56 billion in value, as a share price crash for global commodities giant Glencore raised fears about companies across the sector.

Despite carnage for local mining and energy stocks, nothing in Australia matched Glencore's near 30 per cent plunge in London overnight and a matching slump in Hong Kong on Tuesday.

Fears about the heavily indebted Glencore's ability to survive caused the rout in its share price and a surge in the cost of insuring its debt, leading many analysts to question whether this might be the commodity sector's Lehman Brothers moment.

Stockbroker Marcus Padley said the market scare on Glencore was based on an analyst report out overnight.

  "If current commodity prices continue, in other words there's no bounce from here, then they've effectively said Glencore and Anglo American have no value," he told the ABC's The World Today program.

"Every analyst will be going through Australian companies working out how much debt they have, much like everybody was looking for who's in debt during the global financial crisis."

IG market strategist Evan Lucas said Glencore may have as much as $US50 billion in debt, and markets seem to have twigged to the implications of that last night.

"It's all stoked fears about: a) China; b) around the future of commodities; and, c) what does that mean about the future of those who do have a high level of debt on their balance sheet going forward into the uncertain future," he told ABC News.


Curiously_Crazy's picture

That was yesterdays news. Todays close was up over 100 points or 2.1% again today. I guess there are still true believers out there in BTFD.

Catullus's picture

Anyone want to guess their off balance sheet exposure?

Consuelo's picture

"Clinton himself later expressed regret for issuing the pardon, saying that "it wasn't worth the damage to my reputation."


A-ha-ha.   A-Ha-Ha-Ha.    A-HA-HA-HA-HA...    A-HA-HAABBBBBBBEWWWWWWEEEEHHAHHAHAHAHAHHAHHAAAA!!!!!!!!!!!!!!!!!!!!!!!!!!

buzzsaw99's picture

when the bond price craters it's time to mark it zero

TheAntiProgressive's picture

Current Assets - Current Liabilities - (30-50% write down in inventory from march 2015 should be close to toast)