Trafigura replicates its oil market tactics to dominate LNG
Trafigura is blazing a trail for trade houses, adopting highly successful tactics used in oil markets, to get an edge in the burgeoning liquefied natural gas (LNG) sector.
Oil traders usually act as a go-between for producers and end users, investing in logistics and storage to facilitate trade, while also providing credit and shouldering risk for their customers.
Commodity traders are now stepping up their activity in LNG, adding liquidity and carving a niche in a market previously dominated by producers and oil majors such as Qatar and BP, as new supplies create fresh trade opportunities.
Trade houses including Vitol, Noble Group and Guvnor are also attracted to LNG through rising global supply, growing competition and increasingly scattered pockets of demand fuelling spot market trade.
Swiss-based Trafigura, best known for its oil and metals business, is leading the pack, having become the top LNG trader in around two years after leaping into LNG markets in 2013 with a major deal to supply Mexico.
Trafigura declined to comment on its strategy or growth outlook.
"They're taking the classic trading model from other energy markets and applying it to LNG, using infrastructure and shipping to take advantage of opportunities, it's the typical bag of tricks used by traders," Jason Feer, head of business intelligence at Poten & Partners said.
Earlier this year Trafigura took advantage of a glut of cheap tankers available for spot charter, agreeing a rare deal with shipping company Golar LNG to lease six vessels on a single-voyage basis.
It has also leased storage at India's Kochi terminal and Singapore's Jurong Island import terminal, providing flexibility and security to execute trades at short notice that other players cannot easily match.
"If somebody fails to perform for them then they've got backup and vice versa, if they're distressed, they're long a cargo, then they can always stick it into storage," a source at a rival trading house said.
Flat forward prices may keep pushing Trafigura to maintain trading momentum in order to repay the costs of leasing tank space. In a rising market, by contrast, simply storing fuel adds to its value, helping pay down fees.
Trade houses ability to manage risks around a buyers terms and conditions, along with managing payment, have helped them increase their market share of LNG.
"They use their balance sheet, they're willing to go places other people aren't, they're willing to take risks that major oil companies aren't," Feer said.
Oil major Shell is fronting a significant chunk of supply for Trafigura's various positions into Latin America and Egypt, say trade sources, showing how traders are partnering suppliers wary of exposure to potentially risky new buyers.
Shell declined to comment.
"In countries like Egypt some of the traders are more comfortable taking the credit risk," said Noel Tomnay, head of global gas and LNG research at Wood Mackenzie.
Along with Egypt, new importers of LNG this year include Pakistan and Jordan.
Oil majors are prepared to pay traders to shoulder counterparty risk, particularly when they are dealing with less creditworthy buyers.
"It's providing insurance for a margin, whether it's for a oil major, or a big producer or a project," the source at a rival trading house said.
Trafigura traded 1.7 million tonnes of LNG in their 2014 financial year which ended on September 30 and traders and analysts said this could have doubled in 2015. "There's going to be a very significant jump in their volumes this year, they clearly have ambition," said Feer.