How do commodity traders secure new sources of supply?
Cold call? Knock on a door? Genuinely curious what the origination process looks like from beginning to end. I imagine there’s a crapload of networking.
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I can’t speak to metal/ags, but for energy a lot of people who call themselves commodity traders don’t really do this. You can just trade exchange products financially with no physical exposure. Or financial, non-exchange products in power. But assuming you mean physical commod traders, in energy its mostly about signing long-term offtake agreements with suppliers. But this usually requires really big balance sheets, logistics and back/middle office teams, which is why I lead with most “traders” don’t or can’t really do this. Its the Trafis/Glencore/Vitols, oil majors of the world. Or for power utilities and IPPs building plants, which have a whole different market structure for delivering their supply.
But for how the large physical energy players find supply, its more a matter of developers of new supply find them. Theres whole business development teams at both companies doing outreach and then a supplier will do a competitive solicitation process to find offtakers with the best terms. A lot of logistics goes into this - a supply owner absolutely does not want the offtaker unable to move the supply they paid for, so the trader needs to prove they’ll be able to move it for the duration of the contract (or pay penalties) and vice versa for the supplier. So again, its a small world of traders who can do this, and a small world of potential large suppliers (owners of LNG terminals, gas/oil patches, power project owners in rarer cases) so they don’t need to be cold calling anyone. The other avenue is if you are a large energy house, you just buy the supply. Buy out an oil/gas E&P, build your own LNG terminal. Build your own power plant. This is what makes oil majors “majors” - they’re vertically integrated supply owners, traders, and deliverers to end users.
Hopefully this is what you were asking. Again maybe metals/ags is different, but I think it’d be broadly similar, just replace mines and massive farms with gas patches. Maybe there are small players here and there who grab a small amount of supply, but its such a logistical, expensive, regulatory and overall risky proposition to be moving physical energy it would be the exception and not the rule.
Thanks for this colour, really appreciate this!
What I’m curious in, how do these agreements even start? Referral? Cold outreach? How is the BD conducted?
So if we’re staying with the large scale energy landscape, from my experience a supplier looking for offtake, or a buyer looking for supply, will issue an RFP/RFI to market participants they have a relationship with, or more publicly, which offtakers/suppliers then respond to if they’re interested. For more regulated landscapes like natural gas or power, often offtakers will need to pre-register with the relevant regulatory entity (pipeline owner/utility), do things show they can post credit/collateral, are authorized to participate in certain markets, and can manage the logistics. Then the supplier will issue the RFP/solicitation to these pre-registered parties.
I think if you’re asking how do things start even before that, its really case by case. Many of these relationships have been around a long time. The oil majors are old, utilities are old, etc. The better thought experiment would be a new entrant, maybe an international player or acquisition, in which case your buying those pre-existing relationships or regulatory approvals. Otherwise ya it does just boil down to calling people. Here is a somewhat tangible example, since I’m bit hard pressed to think of one in oil/gas in this vein: a former employer is an early entrant in the hydrogen/e-fuels business. They needed to get water/carbon (I think, it could have been another gas) to make an e-fuel like methanol to deliver to an end user. The water they could get by buying the right land, but carbon is harder. So they were digging around an area of the country looking for industrial facilities with excess carbon they could purchase that wasn’t fossil fuel related, such as paper mills. And I’m pretty sure just hitting the people up on LinkedIn to set up the initial meeting.
The other thing to be explicit about just in case is re: the original question about how traders get supply, in energy at least its more about how end-users get supply. And often times a “pure”, middle-man trader who owns no physical assets isn’t really in that physical delivery process. Traders definitely play a role in hedging, liquidity, and speculation around the physical process, but mostly the supply owners, demand owners and transmission owners have some system worked out between themselves, because the infrastructure is so expensive and long lived. So some “traders” take on this hybrid, physical asset owner role in order to participate.
LNG is the main exception I can think of right now. The commod houses do have a big role in moving that, somewhat similar to their involvement in oil.
But definitely someone in ags/metal should chime in because anecdotally I’d think the picture can be different because storage, transportation, and physical risk is really different (ie oil spill vs sugar spill).
Curious to know your background, if you are open to sharing
Sure, generally. I've worked across power markets for about 8 years. Worked at a niche broker doing grid modeling and power transactions, asset owner/IPP with a trading desk, and am now at a prop trading/marketing shop. All doing data science/quant type work. Studied econ and math undergrad.
Do you use alt data in your models?
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