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Geopolitics has increasingly become a critical factor in the world of commodities trading, influencing everything from supply chains to foreign policy. In the third episode of Fast Forward, we sat down with Jeremy Weir, chairman and CEO of Trafigura, to explore the profound impact of geopolitics on various aspects of the energy transition.
The key points covered in the discussion include:
Listen to the full episode and subscribe to Fastmarkets’ Fast Forward podcast on Spotify, Apple Podcasts, Amazon Music or other podcast providers today.
The challenge for commodities traders today lies in navigating geopolitical issues and fragmented supply chains, which is a change from the emphasis on price and efficiency in the past.
Trafigura focuses on managing supply chains, handling price volatility, and ensuring consistency in complex environments. The mission is to transport commodities efficiently from source to consumer with transparency and competitiveness. Maintaining transparency helps build trust with the stakeholders, including working closely with governments to address supply chain complexities and regulatory challenges.
The marketplace and the supply chain are also becoming increasingly complex. As an example, the minerals and metals supply chain is shifting from focusing solely on mining to also addressing processing and its risks, such as emissions. This is on top of existing challenges like managing permits, local communities and inflation. Trafigura’s global footprint and participation in various commodity streams enable a better understanding of marketplace dynamics and this analytical strength allows for effective communication of insights to customers.
The world is highly fragmented, with clear policy lines being drawn by governments worldwide. Addressing these challenges will be difficult, despite advancements in communication, technology and international travel.
There’s some business you just can’t do and some counterparties you just can’t deal with. But ultimately, we do have to deal in challenging environments.
The government determines regulations and companies must comply with these rules. As a commodity trade house, Trafigura’s role is to stay updated on tariffs and regulations and ensure compliance like any other business. Compliance can be complex, especially with changing regulations that require further clarification. Effective compliance requires ongoing engagement to understand regulatory goals and interpretations. Open trade has created intricate supply chains that will require significant time and capital to reshape and governments should recognize these complexities.
Compliance teams in organizations should be viewed as business partners and consulted during uncertainty. Trafigura’s compliance team maintains strong ties with regulators and keeps the company informed about changes in sanctions, particularly for commercial teams. Robust compliance procedures are vital to protecting the organization and its employees in a multinational setting.
The fragmentation in certain markets is driving up costs, making material transportation more expensive and less streamlined. For example, the tanker market is experiencing significant changes with the grey fleet now making up about 13-14% of the tanker fleet. Longer shipping routes in the Black Sea and the Red Sea, caused by the conflict and sanctions, have also increased fuel demand by around a thousand barrels per day in maritime fuel for the bunkering market.
Recent events, such as the Ukraine conflict and the European energy crisis, highlight the risks of over-reliance on a single sector. This has prompted a move towards creating a diversified global supply chain. One example of this is metal processing, which has historically been a global activity. However, today’s economic dynamics challenge the viability of smelting metals outside of China, given its dominance in metal processing.
On the other hand, new alliances are forming as the landscape evolves. Government entities from the Middle East are now entering the scene, contrasting with the historical predominance of privately-backed Chinese enterprises. For example, Saudi Arabia is diversifying its investments by establishing itself as a processing hub and developing their mining industry. Meanwhile, the UAE is making strategic investments in specific sectors, such as those in Zambia.
Trafigura is tapping into various forms of finance to facilitate commodity flows. One example of this is the Lobito Corridor project in Angola, in partnership with DFC. The initiative will alleviate congestion, reduce emissions, improve road conditions, enhance supply security and significantly reduce transport time from the copper belt to the coastline from five weeks to five days.
Trafigura entered the renewables market to align its future strategy with the evolving energy landscape, which it believes will increasingly rely on a blend of electricity and hydrocarbon and non-hydrocarbon fuels. Weir believes that oil will remain a key part of the current energy mix and the transition to alternative energies will progress in fits and starts, influenced by raw materials, technology and capital availability. Transitioning to new energy sources takes time, especially given the volatility of renewable energy in providing consistent power. The focus is on preparing for the future at a pace dictated by the market. As society and stakeholders demand change, businesses must adapt.
In terms of carbon markets, the main challenge is the absence of a unified global carbon pricing system. While getting a unified pricing system will be difficult, mechanisms like carbon border adjustments are addressing fiscal leakage and new schemes are emerging to help us understand the cost of emissions. Trafigura is partnering with Palantir to monitor scope 3 emissions and understand the emissions footprint of acquiring commodities like copper and oil, followed by identifying and implementing mitigation strategies.
As for ESG, the biggest challenge is the lack of standardized criteria, which makes compliance and benchmarking difficult. Varying regional standards and the absence of a clear carbon price hinder the establishment of schemes like green premiums. Addressing this issue is crucial for making meaningful progress in this field.
A major challenge exists within the power markets. It is not just about transitioning energy sources but also managing a substantial rise in global power capacity and future demands.
Renewable energy requires significant capital investment, but efficiency is often suboptimal. For example, solar energy efficiency in China is in the high teens percentage-wise, while in India, tracking solar panels can reach mid-30% efficiency and that is considered quite high. It is crucial to remember that installed capacity does not always translate to available power.
Decarbonization places immense pressure on existing systems. Even in developed markets, grids are outdated and cannot handle future power demands. This issue is even more pronounced in emerging markets, resulting in significant volatility in power surges.
The power demand for AI, data centers, supporting infrastructure and industrial power usage across various sectors is set to grow. Current approaches to power generation, energy transportation and storage need to be reevaluated, especially considering the variable nature of renewable energy.
Looking ahead, commodity prices are expected to rise and more diverse supply sources will emerge. While higher prices and some inflationary effects are anticipated, these may not significantly impact long-term component costs. The main challenge lies in ensuring sufficient supply to meet demand and exploring new technologies to replace existing materials or methods.
Fastmarkets’ Fast Forward podcast provides invaluable insights for industry professionals, metal traders and battery material buyers. For more in-depth discussions and to stay updated on the latest trends, be sure to listen to the full episode and subscribe to the Fast Forward podcast.