The World For Sale by Javier Blas & Jack Frachy
Read as part of the Business Teacher Book Club (join us on Twitter @BusinessTeach11)
The lesson that goes with this blog can be found at www.wolseyacademy.com/casestudies
This book covers a heck of a lot of ground (and a lot of history). I found it a slow burn initially but in the later chapters it seemed to really hit its investigative journalistic stride. Lots of case studies and pen portraits of the men (usually) involved in the commodities trade. These silent actors have so successfully shaped the economy behind the scenes (and made a fortune in the process). Lots of interesting anecdotes and case studies to be taken away from this book, a few of them, in very abbreviated form, are below.
The advantages of being a ‘Middle Man’ and dealing where others dare not.
Commodity traders thrive when new markets open up very quickly. Their expertise and access to buyers on the world markets allows them to offer good prices to (usually) very poor areas in exchange for their commodities. Many moments in history have acted as a sort of ‘big bang’ moment for commodity traders, in particular the nationalisation of the Middle Eastern oil markets and the fall of the USSR and the mass privatisation that followed. In both cases it allowed the traders to act as the middlemen, ensuring goods reached the global markets and local elites received vast rewards – and obviously with them making a very healthy cut in the middle.
Commodity sales are shaped by the existence of ‘futures markets’ – the ability to buy a certificate guaranteeing delivery a commodity for a certain price at a certain date. Buying these futures when they are low and hoping prices rise before the delivery date, can make you huge profits. This secondary market in commodity futures is huge. While ports like Rotterdam became the physical hub of the oil market (ideally located halfway between the Med (and hence the Gulf via Suez) and the oil coming down from the Baltics (Russia) the oil tankers and silos themselves were merely chips in a bigger game. So often oil tankers would be kept out at sea, waiting for oil prices to rise, a floating city of inventory, before they docked and sold their goods.
When new markets opened up traders could move in and pay ‘commission’ (or bribes…) to local officials in exchange for oil contracts at a lower than market price – the official got instant returns and the traders got to pocket the difference when it was sold on. Some countries like Jamaica, with very low loan ratings struggled to get funding on the international money markets – here traders stepped in and were willing offer trade credit for various commodities in exchange for lucrative set prices on other commodities in which the nation had an abundance.
For example, Jamaica desperately needed fuel but didn't have the dollars to buy it, it also was a rich producer of bauxite for aluminium. Unable to secure favourable loans on the world markets the commodity traders extended them credit for oil in exchange for preferential prices on bauxite. High risk - astronomical reward. Sweeteners the commodity traders paid to Jamaica to secure the deals included high profile incentives - including the funding of the Jamaican bobsleigh team - the same one that famously was turned into the movie Cool Runnings.
The commodity traders seem to do very well when finding work arounds for sanctions. They go to someone like Iran or apartheid SA and tell them they'll give them a fixed low price - they accept as they have no choice - and the traders will find ways of making the commodity clean - and then sell for a huge profit. Such methods might include transferring goods between ships while out at sea. South Africa apartheid lasted about a decade more than it should have, according to the book, thanks to the work of the traders providing SA with an avenue to exchange their exports for foreign cash.
Another example is the Iraq "Oil for Food" program, designed to help the Iraqi people while still controlling what Saddam could spend money on. Oil would be sold to traders, who would sell it and the profits would go to a UN bank account which would use it to buy food and medicine for the Iraqi people. However, Saddam was able to direct the oil quotas to companies and organisations he favoured. Soon he let it be known that charges should be paid to Iraqi embassies around the world in order to secure oil quotas at reduced rates for commodity traders. Glencore did this. Eventually a UN investigation, after the fall of Saddam and the release of Iraqi documents, made it clear that this was going on at a large scale. A couple of American traders were imprisoned, but Glencore got off lightly because it was based in Switzerland, and while the UN did the investigation it fell to the Swiss police to prosecute. They didn’t.
Glencore emerges as a notorious company in the book. In an excellent example of backwards vertical integration, they bought up coal mines in the 90s because there wasn't a coal futures market to bid on at the time. By doing this backwards vertical integration they could influence the supply (and price) of the commodity they were selling. It also guaranteed them access to coal at a low price each year. And then China took off, demand soared - and Glencore cashed in.
Glencore have also been at the centre of some controversy. After the fall of the USSR they moved into Romania. Selling them lower quality varieties of oil than they promised. Mixing blends of oil, falsifying documents, and buying off any official that noticed. Glencore was eventually rumbled, and a London Court forced them to pay compensation.
Africa appears a lot in the book, usually as a victim of commodity traders. Taking advantage of the rampant corruption across the continent commodity traders are able to make some big deals. Additionally, Africa acts not just as a supplier of commodities but as a consumer of ‘last resort’. Given that consumer welfare legalisation is both of a lower standard and less enforced across the continent often commodity traders dump their second- or third-rate commodities into the country. Dirty oil and chemicals with high arsenic levels, often the waste products from making the high-quality products heading for more developed nations, are dumped into those markets. There have a been a number of high profile toxic accidents and environmental destruction as a result.
Glencore was also able to take advantage of its sheer size to discover information about the market before others could react. For example, a drought in Russia's grain growing regions in 2010 was picked up by Glencore first, they had the contacts with the Russian farmers and knew a bad crop was coming before anyone else. They quickly bought up grain futures - using their insider position to get ahead of the game - and placed bets "going long" that the price of grain would rise. To make sure it did the company dropped hints that Russia ought to place a ban on exporting grain given the circumstances. They did - and Glencore pocketed a huge windfall. With food prices rising across the Middle East and Africa this become a hugely important contributor to the Arab Spring.