Trading vs Merchandising (Sales?)

Not all physical traders are created equal. The swashbuckling days of Marc Rich and his disciples travelling the world sourcing any commodity that they could turn a quick profit on are over. Traders and trading companies are specialists, devoting significant resources to building knowledge, relationships and physical infrastructure to their chosen market niches.


This means that trading jobs are increasingly siloed. In large trading houses, there may be a team of "traders" but really, all the commercial decisions are made by the desk head and the rest of the team is just executing the strategy without a huge amount of autonomy.


Merchandising

Merchandising is effectively selling. In some commodities, particularly metals and to an extent, crude oil, trading houses secure long-term contracts through offtake agreements which give them a steady stream of product. Often these deals allow the traders to purchase material at a discount to the prevailing market price (or basis/premium), in return for prepayment or financing of some kind.


While this may seem like a good commercial decision - being able to buy cheaply - it means that the trading house is always long ; they are committed to buying. Commodity behemoths like Glencore or the oil majors actually own production assets, magnifying the effect further. These companies can rarely have a short position - either basis or outright price - their business model relies on having a very competitive cost of acquiring or producing material. In a rising market this is fantastic, but life can get tricky when the market softens. This is where the role of merchandiser comes in. Given that the desk has little flexibility in positioning, the traders main role is to sell the material for the highest price possible, while paying the minimum in logistics costs.


This changes the game somewhat in terms of the skills you might think are important in this business. While a healthy risk appetite, analytical skills and market intuition might be useful at some level, many successful "traders" are first and foremost sales experts with great attention to detail. Cultivating and maintaining a relationship with a large consumer can be career-defining.


But isn't the point of a commodity that it doesn't matter where it comes from, as long as it meets specification? How can a relationship be important if price is the only consideration?

Fortunately, this is not the case. Consumers often have huge consequences for their product if their inputs aren't delivered on-time and to specification. Companies also tend to run just-in-time inventories - as storing commodities ties up cash and often requires a special facility, it makes much more sense to have product delivered as and when it is needed. While the accountants love this, it means that there isn't a huge margin for error. Purchasers of commodities will therefore tend to use people they trust to handle their supply.


While delays can be a problem, off-spec material can have disastrous consequences. The industrial machinery that processes many commodity products can have very low tolerances for impurities. Furthermore, certain harmful by-products have to be disposed of properly - this can incur high costs for the consumer. In the copper business for example, mined material can contain significant amounts of the element arsenic, which is highly toxic. Processing and storing this safely is not an easy task - smelters will typically pay much lower prices for high-arsenic material, and some may reject it outright.


All this boils down to the role of a merchandiser to be one of reliability. No consumer wants to deal with any of these supply chain issues - their business is producing their end product whether it's bread, chocolate, industrial machinery or jewellery. A physical trader can forge an extremely successful career by simply fulfilling this need, without having to be a rockstar speculator or market wizard.


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