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Mercuria Interview with Le Temps

27th April 2013

“Mercuria will open up its capital before the end of the year”
By Sylvain Besson and Pierre-Alexandre Sallier

Marco Dunand and Daniel Jaeggi, the two founders of the oil trading group Mercuria, explain their strategy and respond to critics of commodities traders. The group has more than a thousand employees and will post close to 100 billion in turnover in 2012.

Over the past ten years, discreet trading companies – with oil as the most-traded commodity – have turned into an industry with 1,900 billion in annual turnover. This development has attracted media interest and the condemnation of NGOs, and even prompted the publication of a Federal Council report.  Mercuria is a local company – founded in 2004 by two Swiss men – which has become a group with more than one thousand employees. Their turnover was 76 billion dollars in 2011 and was likely close to 100 billion in 2012. Their profits remain a secret, but were estimated in the press to be 400 million in 2011. We talked with the group’s two founders about their strategy and the critiques of commodities trading. 

Le Temps: The Federal Council’s recent report on commodities trading was seen as protective of the industry. What did you think about their recommendations, particularly in regards to calls for increased transparency?

Marco Dunand: The report offers a relatively objective description of the situation. I don’t think the government is protecting this sector any more than other economically important activities. It’s not surprising that the Federal Councillors would seek to better understand a sector that represents 3.5% of the country’s gross domestic product, and 15% of Geneva’s economic activity. Given the size – and visibility – of trading companies, it’s important that they commit to a certain level of transparency, particularly in regards to the impact of commodities on daily life.

– Yet the image problem persists: ten days ago, protestors were condemning the “exploiter’s” summit in Lausanne…

M.D.: We are one of the main sponsors of the Financial Times Global Commodities Summit, which is the first to enable the trading industry to engage in a dialogue with civil society and NGOs. Unfortunately, it’s likely that this event will soon be held in Asian or Middle Eastern cities rather than Lausanne, since it has received no political support here. Not a single federal politician attended the event, which shows that this kind of meeting is not considered to be in the public interest. And the demonstrations show the extent to which the public perception of commodities trading is based on myths. 

– What myths?

M.D.: The first is the claim that we influence world commodities prices. But the amount of speculation on price movements is a very small part of the total business volume.

Daniel Jaeggi: There is also some confusion about what we do, since we are seen as commercial intermediaries who just take their share of the profits. In reality, our job is to buy the merchandise from a producer – where they produce it – and deliver it to the user, for example a Chinese refinery. To do this we must find 200 million dollars to buy a supertanker’s cargo, without knowing to whom we will sell it – nor for how much – after 60 days of transport that we must organise. And it is up to us to protect the cargo from losses that could provoke price fluctuations during that time period. Another example? In Houston we consult a meteorologist to try to anticipate the impact of weather conditions on the very short-term renewable energy market.

– But you must admit that progress must be made in terms of transparency.  Even the financial press refers to the sector as “largely unregulated”…

M.D.: You get the impression, when you hear that, that we do whatever we want and are accountable to no one.  That’s not the case. Some financial institutions that traded with embargoed countries [editor’s note: Iran] were fined amounts that serve as a deterrent and remind us of the risks involved in activities that skirt international rules. Our bankers are the first buffer: financing litigious operations would require them to take joint responsibility for them. We pay a team to focus entirely on determining whether or not we comply with the rules and principles of more than 70 monitoring organisations around the world, the number of which has increased five-fold in the past few years. In addition to the financial authorities, we also must answer to those in charge of security or sanitary conditions, given the very real – physical – nature of the merchandise that we transport.

– This doesn’t seem to prevent scandals from erupting, especially in Africa.  Is it possible to obtain significant volumes of raw materials without resorting to opaque transactions?

M.D.: Of course!  It’s up to each of us to act responsibly. Furthermore, the situation is changing thanks in part to the fact that debtor States or aid beneficiaries (under IMF programs, for example) are required to use new procedures such as selling their production through competitive bidding.

– Can you explain why it is that Lake Geneva-area firms have yet to relocate to Singapore? A tax rate on profits – and income – that is four times lower must be quite enticing to traders.

M.D.: While it’s true that Switzerland remains competitive within Europe, trading has become global. And how do you remain competitive if your competitors pay lower taxes? For us, the choice is a little more complicated:  we are Swiss and we like living here.

D.J.: Everything cannot be reduced to a percentage. But it’s true that it made financial sense for us to leave London at the end of the 1990s and transfer our business to Geneva, in terms of the exchange rate and rental prices. Since then, things have changed.

– What do you think of Geneva’s proposal – following pressure from Europe – to replace the tax benefits offered to trading companies with a single tax on profits of 13%?

M.D.: At this level, the gap between Switzerland and Singapore is acceptable. But calling this solution into question would pose a significant threat to the role of trading in this city. 

– But how can you explain your group’s location in Cyprus, an offshore centre?

M.D.: This is a legacy from the small trading company we took over in 2004 to create Mercuria. It initially belonged to two Polish men – who still hold equity in the company – and was based in Cyprus. But following recent events on the island, we might reconsider that location. 

– More and more of your competitors are going public in order to keep growing. Will Mercuria be next?

M.D.: Our capital is currently held by the founders and 150 employees. In general, there are two reasons to go public: to raise capital or to sell your company. We don’t need to do either of those things today. But we are interested in opening up 10 to 20% of our capital to external shareholders. We have asked Credit Suisse to help us identify two or three partners who would each be interested in acquiring 5 to 7% of the capital.  

– What would you say if these partners asked you how to resell their shares? Will you tell them they’ll have ample opportunity to do so in a future IPO?

M.D.: If they ask that question first, then it means they’re not the right partner. We are looking for entities who are ready to make an investment for at least 5 years, and who are interested in benefiting from the skills of a partner in the global energy market. It could be a buyer country such as China or the USA, or foreign interests from producer countries such as the Middle East. We will of course go over the exit options. But we are looking for more than just financing: the bonds we already have fulfil that function. 

– When do you think you will open up your capital?

M.D.: We are currently narrowing down our list to five or six candidates. We would like to finalise the transaction by the end of the year. 

“One step ahead in China”

The two heads of the oil trading group Mercuria don’t plan on turning into an industrial group or a bank. A peek into their upcoming expansion plans and their new subsidiaries.

– Refineries, gas stations, port terminals… The big trading companies are buying everything up.  What about you?  Weren’t you interested in the refinery in Switzerland that was sold a year ago?

M.D.: No, because we don’t think we would be good industrialists.  What we’re good at is understanding the energy market.  We work with specialists for the rest.  We also just sold half of our hydrocarbon storage company Vesta to the Chinese company Sinopec so they could continue to expand. And we plan on developing more of these kinds of collaborations.

– Are your competitors’ transformations a sign that trading is no longer profitable enough in itself?

M.D.: Most traders would like revenues that are less volatile.  Beyond that, opinions differ. We think that solutions can be found within the trading industry. Fundamentally, our job is to deal with inefficiencies that will persist, but shift from one market to another.  We earn our living thanks to market imbalances. Our goal is to stabilise our trading revenues while adapting to changes in the market. That’s why we invest in logistics, such as shale oil in the United States.

– Does this also explain your sudden interest in industrial metals?

M.D.: That is only connected to our interest in China, since we have an advantage there given our familiarity with the clients, the exchange rate, and local logistics.

– Do you have an in-house hedge fund to speculate on markets that you know better than anyone else?

M.D.: No. Maybe we will someday, but we would have to change our company’s structure in order to set up a completely separate activity.

– Like your competitors, Mercuria arranges financing for other traders.  Do you want to become a bank?

M.D.: It’s true that large European establishments specialised in trading have downsized.  Our goal is not to replace them, but to provide our expertise to Asian or American banks that want to provide financing to the sector but don’t have the necessary skills.

– Don’t these activities transform trading companies into financial institutions, which could jeopardise the entire system if they falter?

 M.D.: No, because traders only syndicate the loans.  The bank that provides the money is the one taking on the risk.

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