We explain the example of Trafigura, how things are done and what Rosneft shareholders are afraid of. We assess the prospects for the expansion of REIT Prologis in Europe.
Disclaimer: when we talk about, that something has grown, we mean a comparison with the same quarter a year earlier. Since all issuers are from the USA, then all results in dollars. When creating the material, sources were used, inaccessible to users from the Russian Federation. We hope, Do you know, what to do.
Trafigura Speech: troubles of the famous trading company
Singapore, but Swiss-based trading company Trafigura Group has increased its credit line by $2.3 billion — twice as much., than a month ago. Let's figure it out, why is it important for Rosneft and the entire stock market.
Trafigura is one of the largest trading houses on the planet. The company trades in energy resources, what constitutes 61% her proceeds, as well as metals and minerals — 39% her proceeds.
The company has released a fairly detailed brochure on the, how commodity trading works, including agricultural products. The essence is something like this: resource trading is now arranged in about the same way, how in 19 century, — traders play a crucial role in it, they are also resellers.
Let's say, a farmer in America wants to sell corn to a Taiwanese supermarket at a price 6,25 $ per bushel. Trader undertakes the organization of delivery with all required actions: pays for loading grain into the elevator, and from there to the ship, Next to Taiwan, pays insurance and cargo transportation. All these costs are approximately 1,15 $ per bushel, and as a result, the trader earns 10 Cents.
Actually, here lies the answer to the question, why the producers of raw materials themselves are not very actively engaged in the trade of their goods. It's a pretty tedious and low-margin activity with a lot of hassle.: storms, price fluctuations and force majeure of different strengths.
According to trafigura's annual report, with 231.308 billion in revenue in 2021, it had approximately 4.623 billion operating profit, and the total profit was 3.074 billion, of which approximately 500 million are non-core financial income.
The situation is generally normal — and even better than usual.. In 2019, the company had 900 million profits for 171.5 billion in revenue.. 2021 was an exceptionally good year for the company: raw material prices rose. Trafigura's final margin over the past 7 years on average is approximately 1,2%.
The same situation is typical for other trading houses.: they earn on large volumes. In absolute numbers, the amounts are not bad, bread with butter and caviar is enough.
Although it is worth noting, that some particularly large companies have their own trading divisions: E.On, Archer Daniels Midland (ADM), Bunge, Shell, BP, — because for them it's all generally cost-effective because of the volumes.
All in all, one might say, that trading companies are responsible for, so that the raw materials reach the final consumer, and without them it would be harder.
The share of trading companies in the structure of trade in key resources is very large:
- Bunge, ADM, Cargill and Louis Dreyfus control from 75 to 90% world grain trade;
- Vitol, Glencore and Trafigura in oil trade control volumes in the region of half of oil production by OPEC countries. Trafigura's share is 330.3 million tonnes of crude oil and petroleum products per year, which is approximately 8,25% from oil consumption in the world;
- Trafigura sold 105.5 million tonnes of minerals and metals last year: 13,3 million tonnes of non-ferrous concentrates and 9.5 million tonnes of refined metals, what adds up to 21,24% from global consumption of both resources in 2016, 23,1 million tons of iron ore — 1,12% from ore consumption in the world and 59.6 million tons of coal — 0,68% from coal consumption in the world;
- trade offices are not only sellers of services, they often have ports, Terminals, processing plants. For example, Trafigura has all of the above.
For trading companies, the main problem is access to financing.. When trading companies organize loading, for example, oil per ship, they sell a futures contract for delivery, to fix prices. As collateral for the futures, they must provide partial collateral for the transaction - a percentage of the value of the commodity - the initial margin.
Developments in Eastern Europe have led to logistical disruptions and volatility in commodity prices. Because of this, exchanges have greatly increased the size of the initial margin., to have more money on hand in case of trader default. Banks also increased their commissions., acting as intermediaries between exchanges and trading companies.
As a result, now in Europe some energy trading companies are forced to make 80 € initial margin on contracts worth 97 € per megawatt-hour. In the case of LNG supply contracts, for example, the size of the initial margin can reach 3/4 of the value of the cargo, which reduces the economic attractiveness of exports.
Trafigura has $79 billion in debt, of which 64.286 billion need to be repaid within a year. She has about 10.677 billion of money directly in her accounts., there are still goods for 29.653 billion and 24.748 billion of counterparty debts. So its need to increase the credit line is justified..
Trafigura's troubles are already driving up the cost of transportation and contracts around the world for all companies.. All market participants see the problems of such a large trading house and raise prices for everyone. Literally everything becomes more expensive to transport – from grain to toys.
By the way,, larger trading houses are doing something like Trafigura. So we should morally prepare for the growth of costs in the reporting of most issuers as in the US., and in Europe.
And what will happen in the event of the bankruptcy of Trafigura - and it's terrible to think. Although, probably, the company will be saved at the last moment. Or maybe, and they will not save - and then a small economic crisis may begin..
This story is also important because, that Trafigura is an important partner of the Russian Federation in the export of oil. On Trafigura, for example, accounts for a significant part of Rosneft's exports (MCX: GROW). And Trafigura has a stake. 10% in the promising Taimyr field.
Trafigura accounts for 8,69% from Russian exports, so further aggravating its problems could lead to serious difficulties for Russian oil exports.. After all, in this case it will have to be sold at a greater discount., than now: back in mid-March, Russian oil was worth 18 $ cheaper per barrel, than American.
Furthermore, in light of recent events I would expect, that the U.S. government will put pressure on Trafigura, to force her to abandon Russian business.
U.S. banks are huge and well-capitalized, therefore, the threat of losing the ability to finance its operations through the United States can seriously affect the actions of Trafigura, which for now simply suspends investments in the Russian Federation, but does not leave the country.
All in all, the situation with Trafigura needs to be monitored. It seems to me, the company could solve some of its problems by going public and getting money from investors.. But its capabilities in this area are now limited.. Quite possibly, that it will end this year at a loss or with a minimum profit. What, Admit it, somewhat reduce the attractiveness of its shares in the eyes of potential investors.
Now I will buy all the warehouses: Prologis wants to expand its European business
Logistic REIT Prologis (NYSE: PLD) wants to buy from blackstone investment fund (NYSE: BX) warehouse assets in Europe.
Prologis can buy about 2 thousand warehouses in the Old World. A real estate portfolio with 12.088 million square meters looks something like this:
- Great Britain — 4 million square meters;
- Germany – 2.3 million square meters;
- Netherlands – 1.5 million square meters;
- Sweden — 1.3 million square meters;
- Finland — 267 thousand square meters;
- Denmark — 511 thousand square meters;
- France — 1.4 million square meters;
- Italy – 350 thousand square meters;
- Spain — 460 thousand square meters.
Total value of assets, who want to buy Prologis, – about 21 billion euros. See, is it a good deal?.
Prologis now manages a billion square feet — 92.903 million square meters., – of which 215 square feet in Europe. Prologis' existing European assets are worth $22.5 billion. Blackstone Assets at Price 1902,71 $ per square meter will cost Prologis not cheap in comparison with the existing ones - about the 55,13% more expensive.
At the same time, Prologis itself has debts of $ 20.744 billion., but the money in the accounts is a little more than half a billion. So that, probably, she's going to have to borrow money., that in the conditions of rising borrowing prices, it is not at all cool. It may even have a bad impact on a company's ability to pay dividends..
At the same time, there is no denying, that the demand for warehouses and logistics capacities is now very large. And if Prologis has calculated everything well, if successfully closed, the transaction could benefit her and her shareholders greatly in the long run.. Moreover, the main assets fall on the most attractive corners of the EU from an economic point of view..
For that., however, can be objected to, that a recession may soon begin in the EU, caused by known events, and the same warehouses can be bought in a year cheaper. Or not: the situation is changing almost every minute.
Chances are high, that Europe will again send the economy to "work from home" and there will be a "recession without a recession": consumers will stay at home again, Play games and watch movies, uploading orders to online commerce. Agree, such a mild version of the state of emergency in Europe has already worked out in a couple of years of the pandemic. In this case, the logistics capacity will have even greater value..
The worst option here would be to bid by Blackstone or one of Prologis' competitors for a higher selling price.. If Prologis will be traded and the price will increase, then this purchase risks becoming "indigestible" for the company's reporting..
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