Multi-Disciplinary Reading – Book Reviews

The world for sale, Javier Blas & Jack Farchy, 2021 – This was a fascinating mix of history of commodities trading and geopolitics, as well as a glimpse of how the world economy has evolved since WW-2 – from the growth in Europe and Japan post-war, to Nixon years and the great inflation of the 70s, to the rise of Wall St. in commodities trading in the 80s, globalization and the crises across countries in the 90s, the fall of the Soviet Union and the rise of China.

My notes –

• The book’s focus is not on commodity traders of wall st. but the ones that buy and sell physical commodities (Glencore, Trafigura, Cargill, Vitol, Mercuria, Gunvor etc.)

• Glencore – world’s largest metals trader, top 3 oil trader and largest wheat trader. Trafigura – world 2nd largest metals and oil trader. Vitol – World’s largest oil trader. Cargill – Leading agri products trader

• They buy natural resources from one place and sell in another bridging supply-demand mismatches and perform price arbitrage (Adam Smith’s invisible hand)

• World’s trade in natural resources and manufactured goods rose from $60 billion post WW-2 to $17 trillion in 2017 (25% of it is commodities)

• Key events – 1. Opening up of markets with the collapse of dominance the large oil companies (seven sisters) and the rise of the petrostates (middle-eastern and latin american oil-rich countries) 2. Collapse of the soviet-union in 1991 3. Spectacular economic growth of China 4. Financialization of the global economy drove business towards commodity traders

• Turnover of 4 largest commodity companies in 2017 – $725 billion. In 2011, the combined profits of top 3 was bigger than Apple & Coca-cola combined

• Most of these transactions are outside the jurisdiction of national regulators and trade through shell companies

• Soviet Russia understood the potential of oil as a strategic weapon (Might be what it is pursuing now with the Ukraine war?)

• Business is supreme. Political matters are not business (Philipp brothers’ basic rule)

• Washington financed billions of dollars of exports to carry the American diet to the world. Between ’55 and ’65, Cargill quadrupled the volume

• Soviet oil was produced and consumed within its borders in ’55. Between ’55 and ’65 it increased exports from 116k bpd to 1 million bpd (Soviet Economic Offensive)

• Commodity traders thrived on information edge. They had sophisticated system that was second only to DoD and CIA

• During Suez crisis of 1956, Cargill’s traders bet the canal would be closed and shipping freight rates would rise as ships took long route around africa (sounds like Evergiven crisis from ’20?)

• Great grain robbery – Soviet Russia’s Belusov in ’73 bought almost 30% of US wheat harvest by negotiating deals with several grain traders. The secrecy of the traders was leveraged by Russia to buy more quantities of grain than the US could afford to sell leading to severe losses for the traders

• Between’48 and ’72 (post war), oil consumption in US tripled. In Europe, it went up 15x and in Japan 100x.

• Western corp oligopoly (seven sisters) set oil prices pre 1960. Soviet oil undermined their dominance by selling oil cheaper. When Standard Oil (Exxon) cut posted price for middle-east, the sheikhs were livid and Opec was born (in 1960)

• When Israel attacked Egypt and Syria in 1967, Suez Canal was closed until 1975 (war had lasted just 6 days but its impact for 8 yrs)

• Israel and Iran wanted to bypass the Suez and had been working on Eilat-Ashkelon pipeline to get oil from Persian Gulf to the mediterranean. Iran used a shell company in Liechtenstein and Israelis a Panamanian entity to hide their ownership of this pipeline

• The 254 km pipeline saved 22k km circumnavigating Africa (when Suez was closed between ’67 and ’75) making Iranian oil most cost competitive in the mediterranean (200k bpd)

• Nixon’s policies like dropping the gold standard and the fed’s loose monetary policies (at Nixon’s insistence), devalued the dollar and oil shot up and with it, causing the inflation of the 70s (sounds familiar?)

• Arab Light crude was $1.90 in 1960s and a decade later was at $1.76 entering the 70s. By ’71 it was $2.24, ’72 – $2.48 and ’73 it was $3.29 and shot up to $11.58 by ’74 at the mercy of middle-eastern politics and ended the decade at $18 in ’79 and $28 in ’80 (A flat decade followed by a 15x). The global post WW-2 economic boom from ’48 to ’72 was over and stagflation took over

• The commodity traders helped rebels, dictatorial and communist regimes – be it in Libya, or South Africa during Apartheid or countries shunned by IMF and Washington for communist connections, as long as the country was rich in resources

• Producing a tonne of Aluminum requires as much electricity as a US household uses in a year. Hence Al was referred to in trader circles as “congealed electricity”

• Tolling deals – Financially low risk deals for commodity traders – like supplying alumina and collecting aluminum from smelters in Jamaica (Asset-light business model of Marc Rich + Co. that allowed it to compete with Alcoa & Alcan)

• Aluminum quadrupled between ’85 and ’88 (due to a corner executed by Marc Rich + Co at LME)

• The spike in oil prices in the 70s, plunged several countries into chaos and millions into poverty. Moscow and Washington were waging proxy wars across the globe and trade embargoes proliferated

• Where risks were numerous, rewards were enormous. Commodity traders expanded into merchant banking and private equity and engaged in capital arbitrage – raising funds in industrialized world and investing in EMs

• Being able to produce documentation to show a commodity had come from a different part of the world than it actually had opened up opportunities for profit. They had customs forms and stamps from every country in the world

• Countries that did not align with either Moscow or Washington joined together and could secure crude from OPEC at cheaper rates (They couldn’t afford financing in dollars at 20% interest). Commodity traders took advantage of this by setting up fronts in Burundi or Kenya with local govts. and buy cheap oil and resell at big markups

• Circumventing embargoes was how traders thrived

• Oil which entered ’80s at $30, dropped to $20 and oil-rich nations in OPEC felt the pinch and started cheating on production quotas pushing prices further down

• Collapse of the Soviet Union made it integrated with the world economy and suddenly Russian aluminum, copper, zinc, oil and coal flooded the global markets (like a closing-down sale for commodities)

• PepsiCo took 17 Soviet submarines, cruiser, frigate and destroyer as payments for Pepsi

• In the newly independent Russia, inflation skyrocketed and rouble collapsed

• Heavy crude looks like marmalade and produces more fuel oils and less diesel & petrol. Light crude looks like cooking oil and produces more petrol and petro products. Most refineries can handle 40-50 diff varieties of crude

• 90s commodity prices were mostly low due to crises in Mexico in ’94. South-east Asia in ’97 and Russian sovereign default in ’98 and Brazilian crisis in ’99

• When per capita income is below $4000, people spend most of the income on food, clothing and housing. Above $18-20k extra income is spent on services that require little commodities. Between these two as income rises above $4k, there’s a sweet spot for commodity demand (China crossed this in ’01)

• Consumer goods like fridges, washing machines, household appliances and cars took off. Rice gave way to pork and poultry. 1000s of kms of highways, power plants, airports were built, along with schools and shopping malls in China when per capita income went over $4k

• Copper demand – China was same as Italy in ’90. By ’00 it was 3x Italy and by ’17 China’s Cu demand is half of global demand. Oil – 1.5 mil bpd in ’01. 3x by ’09 to 10 mil bpd by ’18 (equivalent of entire production of Saudi). This caused the commodity supercycle

• Between ’98 and ’18, BRICS + Indonesia, Mexico & Turkey accounted for 92% of inc. in metals consumption – 67% in energy and 39% inc. in food consumption. Crude rose from $10 in ’90 to $50 by ’04. (Low prices in ’90s had curtailed capacity expansion and when demand hit, prices went through the roof).

• Mercuria and Gunvor helped Russia sell its Oil and enriched its coffers and gave confidence to the rise of Putin. Between ’99 and ’05, Russian exported surged by 50%. Putin realized that Oil meant money and power. Mercuria’s cumulative profits between ’07 and ’18 was $3.9 billion

• Putin made a deal with the oligarchs that as long as they stayed out of politics, he would not seek to reverse privatization (Khodokovsky Russia’s richest oligarch was made an example of, for defying this, as he spent a decade in prison and Rosneft took over his oil property)

• Russia’s oligarchs could enrich themselves only as long as it pleased Putin. Russia’s natural resources ultimately belonged to the state

• Between ’81 and ’01, sub-Saharan Africa’s economy remained same in size. Between ’01 and ’11, it quadrupled

• During hyperinflation in Zimbabwe, Cargill issued its own money with the logo of Cargill Cotton as the presses couldn’t print money fast enough

• During GFC, Oil which traded at $147.50 in early July tumbled to $36.30 by end of year

• Rising food inflation of 2010 was one of the causes of Arab spring (Easiest way to create political problems is to have hungry people)

• US sanctions were routinely violated by commodity trades. BNP Paribas paid $9 billion for violating sanctions in Cuba, Sudan and Iran

• US uses the dollar to sanction countries and banks as no one can afford to be locked out of the US dollar (Weaponising the dollar)

• Even as western commodity traders stepped back, China’s commodity traders took over to overstep sanctions buying oil from Iran. Iran one time supplied 1/6th of China’s demand

• During Covid when oil prices plunged to zero and below, Glencore’s traders were buying and storing oil in the world’s largest tankers and selling futures, tripling their money in 3 months. Glencore made $1.3 billion trading energy in the first 6 months of ’20

I can’t imagine the amount of effort it takes to write books like these in terms of research. I don’t think the summary does justice to the book as its written as a gripping read for what can be a dry subject. Please do read the book if you find the summary interesting. 10/10