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The HC Commodities Podcast
Schism & Domination: Founding Trafigura & Glencore: Mark Crandall Part 2
01:02:30
In Part 2, Mark Crandall relives the events that led to the founding of Glencore and Trafigura. Why did Claude Dauphin go his separate way and what was the founding vision for Trafigura? How had Marc Rich already set the vision for the trading houses which would lead to their domination? How has that dominance led to almost insurmountable barriers to entry for aspiring competitors today? And what was it about these singular individuals that led to their success?
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- [00:00]
Mark Crandall
Foreign.
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Paul Chapman
Welcome to the HC Commodities Podcast, a podcast dedicated to the commodities sector and the people within it. I'm your host, Paul Chapman. This podcast is produced by HC Group, a global search firm dedicated to the commodities sector. Today we return to the second part of our interview with Mark Crandall, one of the founding fathers of the trading houses and the commodities sector as we know it today. In part two, we discussed the rise of Trafigura and how a small number of trading houses have been able to build such a competitive advantage around them that they've come to dominate the sector. What it means, the qualities it takes to leave one of these trading houses and what the future might hold as we enter the energy transition. As always, you can really support the show by leaving us a positive review on the platform we're listening on and as always, I hope you enjoy the episode. Mark, welcome back to the show.
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Mark Crandall
Thank you.
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Paul Chapman
So we left off with Mark Rich, now very much concentrated and in charge of Mark Rich and co. His, his partners, that leadership team from the generation before have left and he's got this, the four guys running the business and he's just hired his lawyer as a sort of praetorian guard or as you said. And at that point, Willie, Willie resigns. Can you pick the story up there? Because I know it's slightly salacious, but it. Well, gossipy, but it's a fascinating because obviously this, this is the genesis of. Of two of the greatest trading houses we have today.
- [01:35]
Mark Crandall
I would add there was one other thing that happened in that same year. It was a busy year in 1992, maybe it was even the end of 91, maybe I'm wrong here, but Mark pioneered the concept of purchasing commodity related assets. That's when that occurred. So when you now see a company like Glencore with a massive position owning mines and processing businesses that are all related to commodities in each of which, each of those businesses needing a trading element and that identifying this opportunity to invest in the underlying assets as a way to solidify one's trading book that dates from the same era. So this is late 91, 1992. The story is an interesting story. I tell it just because not very many people know it. I was personally very, very involved, intimately involved with this when it was happening. But there was a company in the day called Zood Electra, which means Southern Electric and Zud Electra was a Swiss company that had been around since the glory days of Argentina before the First World War, when if you know Argentina.
- [03:08]
Paul Chapman
Well, it was the fourth largest economy.
- [03:09]
Mark Crandall
In the world, yeah, it was a rich country. Foreigners came to Argentina, built electricity plants, railroads. There's still very significant intergenerational English influence, well, UK influence in Argentina. Lots of people with UK names, they all came down to build stuff in that era over time. I don't know when this happened, but there were 80 years that went by or 90 years that went by. Zud Electra gradually divested all of its activities and became just a Swiss listed company that had something like $100 million of cash and that was it. But interestingly, the board of Zudelectra was all of the great and the good in Switzerland. So if you were the CEO or the chairman, whatever was appropriate of Nestle's or any of the other big Swiss companies, you had a seat at the board of Zudelectra, even though Zudelectra essentially had $100 million sitting in a deposit account at the bank and had nothing to discuss at the board. So it was more like a dinner club in London for the titans of Swiss industry. And Mark very much wanted to be part of that group. He was at the time, as I said, distanced from the us. He was officially a fugitive. And I'm sure the idea of being part of this really establishment entity struck him as a good idea. So he, you know, I presume by prior arrangement, because I'm sure this stock doesn't trade, he bought a meaningful chunk of Zudelectra and then once he got there, he suggested to the other board members that Zud Electra should make commodity investments using the insight that Mark and Mark Rich and company behind him had as to what would be very good investments. And indeed they went out and started buying stuff beginning with I think a small mine. I can't remember that I wasn't involved in that transaction. But then buying an oil field in the extreme south of argentina called Santa Cruz 1, Santa Cruz Uno, which turned out to be a terrific investment. I, I was involved in that. But that isn't the point of the story. The point of the story is Zood Electra then became a full time commodity company. All right? It morphed into, into what became Xstrata. Xstrada is Zudelectra. It's the same entity and that's where it came from. In late 91, I think Christmas of 91, we bought Santa Cruz. You know, Mark then went on a roadshow in Switzerland. I was on the road show with investors explaining how Zudelectra was now going to become a dynamic commodity investor. And then they changed the name to Xstrada. And then years later, Xstrada was bought back by Glencore.
- [06:50]
Paul Chapman
Yeah. Fascinating. And I guess that morphing that we've seen of trading houses into mini majors in some sense. Right. Where they have bought these critical assets that have provided them that optionality, that information flow as well, has been crucial to their success.
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Mark Crandall
Absolutely. And that was really pioneered by Mark. I only say it because I think people overlook. This was actually, in a way, Mark's final great contribution to the business. He figured that out before everybody else did.
- [07:20]
Paul Chapman
Yeah. And today you look at a traffic hero with huge shipping ownership and control.
- [07:24]
Mark Crandall
I mean, absolutely. I know it changed the model completely because the theory was if you understood the underlying price movement in a commodity, you really understood the business. You could get a more leveraged pop at price changes if you bought big assets rather than individual cargoes. That was the underlying idea. Anyway, back to the story. The story was Willie left. There are tremendous rumors about whether Willie quit because they had a fight with Mark or whether Mark fired him. No one's going to know the answer to that except Mark and Willie, who are no longer with us, or at least Mark isn't. But there were lots of rumors in the company. So you had this rather febrile atmosphere going on with people saying, oh, my God. Oh, my God, what's going to happen next? And then what happened next was Claude and Danny and Alec Hackle. Not Alec Hackle. Many. Weiss scheduled a series of conversations with Mark. Keep in mind that the Mark Ridge culture was a real gossipy culture, wasn't a particularly big company, and the insiders all knew each other, so there were very few secrets. I'm sure those meetings were meant to be secret, but they were essentially negotiations about the future course of the business. And for better or for worse, they didn't progress very much. And by the late summer of 92, or whenever there was. I think it's summer of 92, I think the three guys were getting a little frustrated, and we're not seeing an obvious path forward. And then, tragically, Claude's father died. And Claude's father had run a scrap metal recycling business in Cannes in northwest France, where the Normandy invasion was. And Claude had sisters, but not a brother. It was clear that he was going to have to take over his father's business, at least on an intermediate business, intermediate basis, long enough for him to sell it. So he called Mark and he resigned. And then, because of the gossip that happened in Mark Rich, word got around with lightning speed that Claude had quit. And Manny Weiss thought It was out of solidarity with Billy Strather and in essence, as a political statement to Mark about their frustration that they hadn't been able to resolve all these future issues. So Manny quit, having had apparently no idea that Claude's father had died and that that was what had precipitated this. It all happened in a couple of hours. So suddenly you had Billy gone several months earlier and Claude and Manny gone. Danny was out of the office that day or something, but he didn't get wrapped into that maelstrom. So he was still standing on day two. And that was how the whole unwinding of Mark Rich really started, because those guys left and they were in contact with each other and meanwhile Mark had to appoint replacements, of which I was one of them. I was given Claude's job and somebody else was given Manny's job, obviously. And there wasn't really a direct replacement for Villi at the time that I. Not that I remember. Anyway. Anyway, this cooked along for the balance of 92 and into very early 93. And then essentially through a whole concatenation of events, I came to the conclusion that just like those four guys before, I was not going to get any traction persuading Mark, let's say, to democratize further the ownership of the company. I had significant discussions with Mark and with Bob Tomagen about the importance of democratizing the ownership and having Mark at least set a pathway to change of control. Not immediate, but nonetheless a pathway needed to be set so that people had an understanding what. What motorway they were on going forward. And I came to the conclusion that he just wasn't ready to implement any really meaningful changes. So I resigned.
- [12:28]
Paul Chapman
Why was that, do you think? Because obviously, like he. He'd been collegiate and had, you know, Mark Rich was always employee owned. What was behind that, do you think?
- [12:37]
Mark Crandall
Now, Mark, for most of Mark Rich, Mark himself, I don't know the exact percentage he owned, but I'm going to just be arbitrary and say 20%. It's a guess. It could as easily have been 35. Right. But it wasn't 50. The point is there was a broad group of partners and everybody was sharing in the pie and everyone was pulling on the rope. All right. Mark wasn't the dominant owner for most of what we think of as Mark Rich and company. That's why his other partners got rich enough to retire early. What was happening here in very early 93 was ownership had become very concentrated in Mark, along ultimately with control. And essentially depending on how you want to look at it, these people had left Manny and Willie and Claude. And you could characterize that as saying they were forced out. They weren't. I mean, they weren't fired in that sense, but you could characterize it as them being forced out only in the sense that Mark was not prepared to give them the things they wanted. Which was a roadmap to how eventually the company would again look like it had done before, with numerous intermediate level owners, but nobody who owned a controlling position and could characterize himself as the undisputed boss. So that was the transition they wanted and I wanted. And I think Mark was just too nervous about the future to give that up because they'd started Mark Rich together as a group of people leaving Fibro. It all ended up with these more or less equal shares. I'm sure Mark had a bigger share than the other guys, but not in a dramatic way. And over time, this thing had become distilled into ownership by him. And I don't think anybody really knew how to deal with it, including Mark. I don't really blame Mark for being nervous in that situation, but what he needed to do was come up with a plan for how over the next 10 years, eventually it would begin to look like the old Mark Rich with numerous owners and without Mark being, you know, sitting like the wizard of Oz, making every decision at the end.
- [15:15]
Paul Chapman
Yeah, hard to give up, I guess, all that power. So, so you, you then resign, which is a quite a ballsy move for a 34 year old, leaving the head of trading at Mark Rich. So what was the state of play at that point?
- [15:31]
Mark Crandall
Well, what actually happened was kind of a funny story. Mark invited me to come to Zug. So I came and I flew over and we were going to have dinner. And when I got out of the airplane and got into the car to drive to Zug, the phone rang and it was one of the guys. I don't remember who it was actually, to be honest with you. I want to say it was Manny Weiss, but maybe I'm making that up, maybe it was Danny. But whoever it was said, hey, listen, the rest of us all think that Mark's ready finally to make a plan and to let the company go into the ownership of new guys. And you're the one having dinner tonight, and we're all kind of with you in spirit, and we're telling you that Mark's prepared to talk, so you're gonna have this conversation. So there I was, and Mark and I sat down and we had a conversation. And indeed, what I was told in the car was True, Mark was prepared to talk tacless, as we say, as they all said in Mark Rich in Yiddish, which means talk the real subjects. So we talked about things like could part of the company belong at infinitum in trust for his daughter, for example. A variety of things like that. But it went from vague discussion about my leaving the company to my sort of acting as the intermediary for that two hour period or three hour period between the assembled previous guys and Mark. And Mark agreed to sell the company. And then a couple of days later, Graham Sharp, my colleague and, and good friend, wrote a beautiful term sheet summarizing that conversation that I had with Mark. And within a week or 10 days I went over, I think it was the following weekend, I went to Claude's house for lunch. He lived in Hampstead like I did in London. And there at the house was Billy and Manny and et cetera. And so the, the band got back together and using Graham Sharp's term sheet as a basis over the course of the next few weeks, negotiated the final deal with Mark, which included. And this came up during my dinner. It was the only contentious topic during the dinner was I said that one of our demands, if we could have demands, was we wanted the right to change the name. And we landed at the end of dinner on we were going to pay him. Whatever we agreed to pay him was going to get paid out of the internal cash flow of the company. We weren't going to leverage the transaction with banks. And once we got him below 50% by gradually buying back his shares, at that point we would have the right to change the name. And indeed that threshold was passed with surprising speed. It was just a little over a year later. I was in Buenos Aires on a business trip and picked up the newspaper and discovered that the company had changed its name to Glencore.
- [19:26]
Paul Chapman
Yes. Which, well, you tell us famously what it stands for. And did you come up with that name?
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Mark Crandall
No, I think that I've always heard it attributed to Billy, but I don't actually know that. He never told me that I heard that from third parties, but I presume it's true.
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Paul Chapman
Yeah. So it's global energy commodity resources. And I know that, I know that because we obviously nicked it for Enco Insights, which is our global senior advisory network.
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Mark Crandall
No, I, I had no idea that's what that meant. So I'm hearing this for the first time. It sort of makes sense.
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Paul Chapman
Okay, so Glencore's created, you've got a plan to buy them out. The Four Horsemen are in it alongside yourself. This is 93. When all this happens or is all.
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Mark Crandall
Inked, this is 93. This is like March of 93. Ish. Okay.
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Paul Chapman
And then somehow. How does traffic here get started?
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Mark Crandall
What happened was that I was actually with Claude over in Conn's visiting the scrapyard, and Mark called him. And I guess this was order of magnitude three weeks or a month maybe, after I'd seen Mark and we'd sort of kicked this process off. I don't think it was more than a month. It was pretty quick. And Mark had a conversation with Claude. I was actually on the phone, if you remember. You're old enough to remember those French phones. He used to have a second earpiece that someone could.
- [21:01]
Paul Chapman
I've seen him in the movies put it that way.
- [21:05]
Mark Crandall
You're younger than I am. So I've actually used him. And there was one of those in Claude's office at the scrapyard. So I listened to the conversation, which was in French there. I spoke French, and Mark basically said he didn't want to kill the deal, but there was some stuff he had agreed to in the heat of the moment that, having reconsidered, he really wanted the acquisition group to reconsider. To be honest, I don't remember what the issues were. But the point is, Mark tried to reopen the negotiation, in essence, and Claude told him he didn't want to do that. So it wasn't a very long conversation, but it ended with Claude hanging up the phone, saying, okay, so now we're not involved in this anymore. Of course, life is a good deal more complicated than that. So the next thing that happened, which I recall several days later, but I don't even remember with whom I had the conversation. But we were approached by Billy and Manny and Danny, saying, guys, you kind of precipitated this. And Graham wrote the term sheet, and Mark had that original conversation. And we really don't think it's right to sell you down the river, but if really you don't want to do this, do you mind if we go ahead and try and do it? We're prepared to have another rounded negotiation with Mark, even if Claude isn't. And we said, sure, of course, by all means. And in between, a few days before that occurred, we had all been hauled over to Claude's house again, which is where all our important decisions were made, and had dinner. And Claudette said, you know, you're very welcome to stick with these guys and go ahead and complete the acquisition of Mark Rich, or I'm going to set up A new company. And I even chose the name. He wasn't very good at names. It was called Raw Materials Trading. Not sexy. Anyway, that's what he told us and we all had to decide. And the group that became the Traffic era founders were all people particularly close to Claude. And we all elected whatever was involved in that to go with Claude. And the business was meant to be, at least at the beginning, focused on scrap metal and the scrap yard that he had effectively inherited from his father. With the idea of stepping out into other European markets. We began with Hungary and then Romania where there were imperfections in the scrap market, where we thought using the knowledge of a Western European scrap processing and trading place, we could build a business. Which indeed happened. The energy and resources sector is experiencing unprecedented change. To help navigate this change and capture.
- [24:28]
Paul Chapman
Its opportunities, HC Group launched Enco Insights, a global advisory network dedicated to the sector providing senior advisors and subject matter experts to investment and infrastructure funds, law firms and corporates.
- [24:44]
Mark Crandall
Enco Insights leverages HC Group's 20 years of connections in energy and commodities to give clients the expertise they need when.
- [24:52]
Paul Chapman
The stakes are high and Insight matters. Learn more@encoinsights.com yeah, so you go with Trafigura and the other three carry on with the Glencore. They go back with the Glencore plan. So Claw's never part of Glencore per se. And that's where we get that, that split. Mark Rich morphs into Glencore with Willie and Danny and Manny and you, I guess, Graham Sharp, Eric to Turkheim and Claude go and build Trafigure and, and.
- [25:22]
Mark Crandall
The two metals guys, Danny Posen, who is the son of Felix Bozen, one of Mark's original partners. All right. And Antonio Cometti. So they were both Switzerland based metals traders. So that's that trap started. Two metals traders and the four people from the oil department.
- [25:41]
Paul Chapman
Yeah, and this is I get to ask my, my question of a lifetime. So talking about Claude not being very good at names, where did Trafigura come from?
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Mark Crandall
Trafigura, we, we had to buy an off the shelf company. And the Dutch lawyer, that was the only one he had, so we bought it. And then we spent literally a solid month doing nothing but talking about could we come up with a better name. And we finally came to the conclusion that the fact that it seemingly meant nothing was actually advantageous. If we wanted to operate in, you know, 100 countries around the world, we didn't want something that accidentally had a meaning. And we also wanted a name that could be easily shortened, which it was Traf. And also one that would be pronounced more or less the same in every language. So we realized after a month that even though the name was meaningless, it wasn't a bad name.
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Paul Chapman
Well, you did say seemingly meaningless. I believe it means it comes from Lautra figura. Right. You know, the other person or maybe the person who originally created a Trafigura, that's what they used it for. But anyway, what is kind of remarkable, right, Moving so over the next 30 years, let's say up until today you've had Glencore, Vitol, Trafigura, you know, Mercuria. But certainly between VTOL and Trafigura and Glencore sort of the, they've dominated the commodity trading space. There have been, there's been ups and downs and obviously they've been accelerated by the banks, you know, regulatory changes, banks getting out, those sort of consolidating forces that have been, that strengthen their moat around them. But everyone always sort of says how remarkable these characters were in actually building teams and the relationships that they built and sort of the ability to recruit. Like you, you mentioned in part one. We can try and get your reflections on what made the trading houses so good and what was there at the early stages of Trafigura that meant, you know, you became a very, you were a very senior figure in the beginning. That meant that they were so special at capturing that opportunity at the time.
- [27:56]
Mark Crandall
One thing I, I will say with a note of pride, it's something I'm actually very proud of. If you actually went and looked at the field of battle from around 79 all the way through to the mid-90s, and you look at the number of small physical trading companies that tried to become big, none of them made it. Mercuria made it and we made it. Vitol, oh, Vitol was Mark rich era. They were already around. They weren't as big, but they, they weren't incumbent. So when we started it was Glencoren Vital versus the world. And there were many, many days when I didn't think we were gonna make it. And meanwhile, all around us there were physical trading companies trying to become the same thing that Trafigura became, but they didn't get there. So Trafigura led by Claude, had something that all those other guys didn't. And I attribute it to, mostly to the concentration on metals, which I think was hugely important. We were energy traders, but the metals world is a stickier world. Once you've got a client relationship, you typically have a long term contract. So you have Something around which you could build your business. And we were, we were able to make money pretty easily and pretty quickly in energy. And meanwhile we were trying to build a metals business that at the beginning didn't make money because those moats in the metals business were really tough. For example, you couldn't buy a concentrate that had a particularly low amount of arsenic in it unless you could blend it. Because there was no way you could overpay for low arsenic unless you could capture that value by blending it with some other concentrate stream that had higher snack. When you're a beginning trader, you don't have the other concentrate stream. So everything you try and do is in its own silo and they inherently lose money. So the metals guys were trying to sign up for this, that and the other thing and everything they touched inherently was unprofitable. And of course Graham Sharp and Eric and I were constantly saying, geez, this is kind of frustrating. And Claude was saying, guys, these people are buttering your bread. That's what you get to eat tomorrow. So we are doing absolutely the right thing. We have got to have a great long term metals book because that's the thing on which we're going to lean. The first year we have a bad year in oil. And I think that vision is why Trafigure made it and most of the other wannabe oil traders didn't.
- [31:23]
Paul Chapman
Yeah, there's confirmation bias there, right? As you say, there were lots of others around, but the chairman of HC Group is Simon Collins, who was a former global head of medals for Trafigure and speaks just so highly of Claude perhaps in contrast to kind of what you know. And I met Claude as well and as a firm we did some work for him. So this contrast of kind of this sort of sharp elbowed you think of when you think of a commodity trading leader, I mean Claude was intensely good at. You mentioned this to me off air, finding young talent and really empowering them and really good at building relationships. Right. I mean the other thing you could say about Trafigura, it might have been the vision and foresight to get into the right markets, but also the leadership team that was taking Trafigura through its next phase of growth, the 2000s to today, a lot of them were handpicked by, at least up until very recently, were handpicked by Claude.
- [32:16]
Mark Crandall
He did handpick everybody, but he wasn't the guy out there in the energy market. Keep in mind he was a metals trader. So he'd come into energy, but his background was all Metals. So the recruiting was very significantly done by Graham and Eric and me. Eric recruited a bunch of people from the banks and Graham knew people in the oil business even more, even more than I did. And I did a lot of recruiting as well. Claude obviously approved everybody that we brought in, but it wasn't a single handed operation. Claude, Claude was especially good with senior level people with whom he established a very easy rapport. He was lethal. He could have sold ice to the Eskimos.
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Paul Chapman
Yeah, there's powerful sort of the salesman side of it. But that point, what he was, was hiring people that there was no concern about hiring someone who might be smarter than him. Right, And I guess you shared with me as well.
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Mark Crandall
No, no, he had no issue with that at all. Just quite the opposite actually. My father was very similar. My dad surrounded himself during his business career with really smart people. And man, there is a big difference between managers who try and hire up versus the ones who hire down. If you're a smart manager, you surround yourselves with people who might embarrass you with their intelligence because at the end of the day you're going to take credit for their work. And Claude absolutely got that. He loved being around people who were.
- [33:55]
Paul Chapman
Really smart and would also, you know, sit there and, and just listen to someone explain their business plan to him. And you know, sometimes he'd walk out after 10 minutes without saying too much, at least in my experience. You know, like there was sort of a, you know, he could see through and peer through whether people understood what they were talking about or not.
- [34:14]
Mark Crandall
Absolutely. He was. Claude was interesting because Claude, I don't think ever formally. I mean he may have graduated from high school but that was it. He never went to university. And he always had a little bit of inferiority. I don't really think he had an inferiority complex, but he clearly was challenged by the fact that he didn't have book learning the way that some people did. But he had incredible native mathematical ability. My instinct is that he must have been partly dyslexic or something like that because he was one of those people who got information through listening rather than through reading. Although when he put a spreadsheet in front of him, he could spot a mistake in a spreadsheet in a New York minute. It was really remarkable. He would just immediately hone in on the structure of a spreadsheet and what numbers were making it sing and he'd find the mistake. It was deeply embarrassing to be theoretically one of the university taught intellectuals and do a big piece of work and have them blow it up in five seconds because he spotted a mistake with this kind of preternatural instinct that he had.
- [35:41]
Paul Chapman
Yeah, okay, so where do you end up with Trafigure? And can you give some sense of kind of the growth of the company during that period? And then I kind of want to understand, get your reflections on what made these trade, you know, in aggregate, right. These sort of four or five key trading houses, the Mercurials and VTOLs, how they just came to end up dominating the sector certainly in the last decade.
- [36:03]
Mark Crandall
I think that the answer to the second thing, how they came to dominate is that in fact the barriers to entry are extremely, extremely high. You know, the example that I give to people I know your audience are commodity traders. So I don't have to simplify quite so much, but I nonetheless think this simple example is an example of why the trading companies exist the way they exist. So if you can imagine that you're capable of buying a gasoline cargo in Romania and sending it to New York for blending in the really good old days like the 70s and 80s, you could do that profitably. That's why you had little trading houses that could do that trade. There would be a $5 per ton margin or something and you'd make your money and you could go home and you'd have trading houses that were particularly borrowed into Romania or particularly borrowed into West Africa that could do those sorts of transactions. What happens now is, again, this is metaphorical, it's not literal. If you wanted to do that trade today, purchasing in Romania and selling in New York, you'd almost certainly lose money. You would have a built in negative margin. So how can you make a living if everything you do has a negative margin? Well, obviously what you rely on is changes in the structure of the pricing in the market, which is too hard to explain, but changes in backwardation and contango.
- [37:40]
Paul Chapman
You need events, right? So two or three times a year there are these events that upend all those, that structure and you can make extraordinary amounts of money, but you've got to be willing to kind of lose.
- [37:49]
Mark Crandall
To make a metaphor, which is actually a good metaphor, even though it's simplistic. This actually occurred on a regular basis, but it's just one example of optionality. So here you are, you load your cargo, you're going to go to New York. In today's world, you're going to lose a dollar and a half a ton. And as you are passing Italy, you get a call from the Nigerians and the Port Harcourt Refinery has fallen over and they need a cargo of gasoline to arrive within the next seven days. Well, that's not something you can do unless there's a cargo already on the water. So within reason, you can charge what you like in that instance, because you have got the only cargo that can fit into that window, and you only had it because you're on your way from Romania to New York. Well, multiply that 100 fold and you get something like what's happening at a trading company today. Every individual transaction is a money loser. But if you have 10 of them, six of them are going to have a happy accident happen. So they're actually going to turn out to make money, but only if you have 10 of them. So if you want to start up a competitor to Trafigura, you got to have enough money to go sign 50 contracts, each of which is a guaranteed money loser. And you're going to have to retain staff for five years while you do that and pay people the same kind of money they make at Traff, even though their trading books are actually losing money, just so you have a chance to reach the scale necessary for those accidental, optional profits to start happening. That's why these people have become dominant, because the size of the moat is just bigger and deeper than it was 30 years ago. Today. I cannot imagine how one could start a new physical trading book in that way. It's inconceivable.
- [40:15]
Paul Chapman
Well, the shortcut is obviously trying to make bets in the financial market and hope that covers the costs for the first couple of years. But as you say, those barriers to entry are there and huge, and we've seen, and that's played out in just the number of participants in this sector. So just on your career, what point do you leave Trafigura?
- [40:32]
Mark Crandall
I left in 2005. We got involved in a dispute with the US government about a cargo coming out of Iraq which was alleged to have smuggled oil on it. We went back and forth with the US Government for a couple of years. It was a very unhappy moment. And I was at the front end of that with the U.S. because I was the only U.S. person that was on the board. So I was kind of the person they were in dialogue with. And it took a lot out of me. So when we finally got that settled, I decided that my time was done, it was time to change my attention to doing something different. So I headed off and started doing renewable energy.
- [41:24]
Paul Chapman
Yeah, so now we're at this stage. I mean, the, the, the, the amount of money these trading houses is in making has been enormous. And actually they were at the forefront of ensuring that European energy markets functioned with Russia's invasion of Ukraine. What gives you pause about the trading houses today in terms of continued growth? I mean, there are a few challenges on the horizon. They are very enormous entities now. There's obviously regulatory scrutiny, especially when we had the credit crisis in at the same time as Russia's invasion of Ukraine. And the world in some ways is on a retrenchment from a large period of globalization, a long period of globalization and ever more free trade, I guess. What are your thoughts today and what advice do you have to the new leaders coming into these trading houses?
- [42:18]
Mark Crandall
I have very mixed feelings. I'm not on the inside. So it's tough for me to really know exactly where these just enormous numbers are coming from. I mean they, they're really making tons of money now. We've had some really enormous price movements over the course of the last several years, but they seem to be cranking out really impressive profitability numbers with tremendous consistency. So that implies that once you reach the kind of scale where they reached, this business of accidental optionality is really, really important. You know, your book becomes big enough that if you optimize around the edges, the amount of money that's involved in that optimization is very significant. Clearly I don't know whether we're going to de globalize something like oil. It seems very hard for me to believe. I believe we may de globalize the manufacture of some things which are made overseas. We may not have the complexity of supply chains that we've had the last 20 years. With one part of a widget being made in Thailand and another part of the same widget being made in China and things put together in the Philippines and finding their way to Long beach and into your own, that may change. But I think oil is seasonal. So you're always going to have certain places that need lots and lots of diesel during the summer driving season and in the winter export diesel and same backwards with or same with gasoline. So I don't see globalization getting to the point where physical commodities do not move around the way that they have so far. With possibly some exceptions, something like the steel business, which is now really dominated by China. Right. Globalization, if that's a word, could really change a lot of shipping dynamics. Because today the world consumes about 2 billion tons a year of iron ore to be with a boy. And a billion of that is actually made into steel in China, so fully half of it. And what that means is that Iron ore is basically on a railway to China. That will change and maybe that will have an impact over time, but I don't see those sorts of threats in the oil business. You have the theoretical threat, but I think it's not something I would lie awake at night if I worked at Traff, that in theory we're going to reach peak oil consumption. There's even people who believe we already have.
- [45:39]
Paul Chapman
Hello, I'm David Hunt, founder and managing director at Hyperion Search. Founded over a decade ago, Hyperion Search has helped organizations from major utilities to startups recruit their leadership teams and key individual contributors to accelerate both their growth and the energy transition. Our three main verticals are renewable power, energy storage and E mobility. The energy transition and the talent that delivers it has been our passion since day one.
- [46:04]
Mark Crandall
To find out more, visit hyperionsearch.com or.
- [46:07]
Paul Chapman
Listen to my Leaders in Clean Tech podcast. Available on all platforms. But typically markets get more volatile as they degrade. Right, we even covered that.
- [46:15]
Mark Crandall
No, no, I agree. This is, this should not keep me.
- [46:19]
Paul Chapman
It should get more fun. Yeah. Just one question as well, and this is a bit of a challenge, right? And I've sort of heard it from some senior leaders. Is that as that system, as that accidental optionality platform as you describe it, which I love, has grown, there is the argument that actually some of the exceptional talent that these trading houses have raised, these, the people who've been able to go to very distant lands take risks, both price risk but also personal risk in terms of the locations they're at, the relationships they're able to build. A lot of that is kind of going away. A lot of it. You know, a lot of the markets become very much more transparent, screen based. You know, you can go in the office at seven and or six and leave by two kind of thing. Now it's not a problem where they're making lots and lots and lots of money. But is there a sense that the role within these huge behemoth trading houses has changed and then in some sense they might be overpaying? I don't like, I don't want to get lynched on the street, but you know, I don't know what your take is on that.
- [47:20]
Mark Crandall
I don't know whether they're getting overpaid, but certainly the skill sets in the companies I'm sure is evolving. So if you wind the clock back 30 years just to make the point more forcefully, you know, your, your star performers were the ones that had the customer relationships and now your star performer is probably the Optimizer who's running the book and figuring out the most clever way to squeeze the extra dollar out of that optionality. And the people talking to the countries or the refiners are less important as a percentage of what's being made because more of the market has become transparent. Less of it is actually transacted person to person than was the case before. And the markets are more transparent anyway. However, people are not going to get knocked out. Because it's important to realize that 30 years ago, maybe the reason you got that Nigerian cargo was that you knew the guy very well. I remember one of our mark rich guys who used to look after one of our important suppliers in Nigeria told very funny stories about spending four days in a remote village at a wedding and returning to Lagos wearing Nigerian traditional clothes and finding with the hotel full he had to go to the home of the Dutch ambassador and ring the doorbell dressed head to toe as a northern Nigerian chieftain. Those sorts of jobs I'm sure exist less today than they did 30 years ago. But the thing is that person in Nigeria probably still has to deal with Trafi Europe. Because now the guy in Nigeria is really well educated. He's not dealing with anybody because he likes them or because they come to his nephew's wedding. He's dealing with them because they have the best price. But that giant book which creates that moat and creates all that optionality means at any given point in time when he goes out there to find who can pay the most for his cargo, the answer is always going to be it's vtol, Glencore, Trafigura or maybe Mercuria.
- [49:57]
Paul Chapman
Yeah, And I do think as well actually as, as new technologies surpass our ability to optimize at kind of that micro level. I think that the big risk, the big bets, the big value is going to be created in some of those long term bets. Right. It comes back to your Claude saying we should build a metals book or we should get into LNG and we should get into coal, as he later did. Right. That pays off in five, 10 years.
- [50:21]
Mark Crandall
And that's where you're absolutely correct. This is the same call that Mark made when he said we should own an oil field that's going to turn out to be the future of the business. So you're absolutely correct. Where is the money made? The money's made on really big strategic decisions which then get translated into tactical decisions, but really big picture stuff and then building teams of people, which is the management skill necessary to execute the vision that you had in the first place, Claude had the people skills and he had the vision. So did Mark and clearly so did the original team at, at Vitor.
- [51:05]
Paul Chapman
Yeah. And Mercurio. Right. I mean, it's a. As you say, as you highlighted, if we were to go back 25 years, there'd be a plethora of these, these trading houses. One final question in the time that we have left and I've really enjoyed the discussion, but it's pertinent to you yourself, as you said, you've gone on to be involved in renewables business, the lumber business. One of the discussions that we had in preparation for this was, and I think it's key to anyone listening who's in that current leadership and future leadership of these trading houses is the role that they can play being in at the ground floor of the energy transition. And one of the examples you gave was green ammonia, which you've been heavily involved in about actually way as way back in the day that the trading houses started to take risks on this nascent oil market, which then unlocked it, which then allowed oil to flow around the world and sold for high prices. Some of these green commodities at the moment just don't have markets and therefore very hard to invest in. Can you just give us some sense of, of your thoughts around that and the trading house's role in the energy transition and some of these newer commodities?
- [52:06]
Mark Crandall
Yes. I don't want to go on and on, but just to be clear, when, when I started trading precious metals options in, I'm, I'm going to say 1982. So 40 years ago. Right. And we would call other options traders and we would say, you know, what price will you sell a $300 gold call for? And the guy would give us a number and we'd say, how do you come up with that? He'd say, well, I'm happy to sell at that number. That just seems like a good number for me to sell it. So he was living in a world where he looked at the world and autonomously said, this ought to be the price. I'm comfortable just owning this or being shorted. In this case, if he was selling a call because he had a view about what was going to happen to the price. Now that was the world of 40 years ago. Today nobody no grown up in the commodities markets thinks about price that way. You may have the view, I think coal looks cheap, I may buy it. But when somebody says, do you want to buy this coal cargo or this oil cargo? Any competent trader immediately says, what's the price of the most similar thing in Rotterdam. What's the price of the most similar thing in New York? What's the price of the most similar thing in Singapore? And you, you work out a theoretically correct price and thus you know what's a cheap price and what's an expensive price because you're actually building it into a whole tapestry of prices for all sorts of related commodities. Nothing is being done sui generis. Nobody just says, oh, this would be a good price to pay for this oil cargo. They derive the price from existing market information. But in Mark's day, when he had his break with Jesselson and Mark wanted to put oil in storage in Rotterdam because he thought the price would go up today, if somebody walked into their boss's office and said they wanted to, they'd think they were smoking crack. That's just not how it's done today. But that is how it was done then. I raised this just to highlight the problem with green ammonia and indeed any of these energy transition bodies, whether that's going to be liquid hydrogen or ammonia or whatever else it is, there's no obvious reference points. The absence of a market means that for a modern trader, it's almost impossible to open your mouth and speak a price. You don't know where to begin. Where am I looking for my reference point, everyone? If I wanted to sell ammonia to traff today, there might be a price they would come up with. But where they would start is, is there any reference price like a Platts published reference? Maybe you can sell to me at a premium to that or a discount to that. And that way we, neither of us has to have a view on the absolute price of ammonia. But the problem is those things don't exist in hedgeable form. There is a Platts price for ammonia, so you could actually buy ammonia platts related. But the ammonia that that Platts quote relates to is traditional gray ammonia, meaning ammonia that's made out of natural gas. So its price movements are based on primarily the price of natural gas and idiosyncrasies of the ammonia market, but almost nothing to do with green ammonia, which is made by electrolysis of water. So there's no reference out there, so nobody knows what the price should be. And when we've gone to traps and vitals and said, would you be willing to buy ammonia broadly, the answer is no, not in. Not in that sense. Because the only way we could do it is to say we think 750 is a good price. Would you like to pay 750? And the answer Is. No, not really. They'd much rather wait until there's a traded market where they can make sure that they're buying ammonia cheaper than what they perceive to be the market value. But it becomes a chicken and egg problem. Until the market comes, no one can trade it. And until you can trade it, there's no market. So that's where we're kind of stuck with the energy transition. And unless government step in and backstop some of this, it's going to be very hard to get it off the ground.
- [57:10]
Paul Chapman
Or is he the argument there that actually it goes back to Claude saying we need to be in medals, right? Like, if you fundamentally believe that that commodity and you know, and that, I guess this is the ultimate bet, right, Is, is green ammonia going to be a transportation, a transporter of electrons in the future? Well, let's start building that, you know, accident.
- [57:31]
Mark Crandall
No, you're absolutely right. And that may be, that may be how this is solved. We're not quite there yet because the world isn't yet convinced that it needs ammonia. But there, there, I, I want to finish with one little observation which I make to my. A lot of the younger people who work with me on a regular basis, but it's super important understanding why these things are difficult. Your typical consumer of an industrial commodity is buying it to turn it into something else. They're buying electricity to make cars with, or they're buying ammonia to make fertilizer with. What they really care about most of the time is that if they have competitors in the same business, that each of them is paying more or less the same price for the ammonia, just to use ammonia as an example, that's all they really care about. Because at least in theory, if the price of ammonia goes up, the price of urea fertilizer will go up, too. So as long as you have the most efficient urea factory and as long as you're not paying more for ammonia than your competitor down the street, you should be okay. So somebody came along to you and said, hey, how would you like to buy ammonia 5 years forward, I can sell it to you for $100 cheaper than the price today. You would look at that as an industrial consumer of ammonia and say, why the hell would I want to do that? If the price of the money goes down further and my competitors can buy it five years from now, $200 cheaper than today's price, I'm bankrupt and nobody else is going to buy it five years forward. So why would I stick my neck out? What, because I'm Trying to make a hundred bucks. I'd rather just keep my neck well inside my shell and just wait and see where the price is and I'll be fine as long as my factory continues to be efficient. Now that's the correct answer for the industrial consumer. The producer though is about to go spend a billion dollars on electrolyzers to make this stuff and his banks are saying you need to show that you can sell it, so go find someone to buy it. Well, the structural characteristics of the market mean that there isn't anybody who naturally wants to buy ammonia five years from now. So you have a structural disconnect between producers who pressured by their banks, need to sell five years old and consumers who really want to buy hand to mouth. And that's true of most of the major markets. I mean, singular exception in the petroleum market is for example, aviation, where you'll see the major carriers buy jet forward. But what are they doing? They're only buying forward jet to the extent that they're selling forward tickets. Other than that, they don't want to hedge because it's irrational to hedge, it's irrational to purchase forward. So this energy transition space is going to be challenged because there isn't a natural standstill buyer, but there are natural sellers.
- [60:59]
Paul Chapman
Yeah, fascinating. Well, I think you should put together a paper and I think as everything right, this will create a new suite of opportunities for people. And some of these big bets are being made today. Some of them are waiting and again we're in kind of a period of political volatility and the rest of it. But presumably if you want an area that doesn't have a moat around it, you know, some of these new commodities are one of them.
- [61:24]
Mark Crandall
You're absolutely correct. There's going to be some money made here and I'm, I'm hoping I'll be one of the people who helps figure out how to do it, but I haven't got it yet.
- [61:33]
Paul Chapman
Well, Mark, it's been absolutely fascinating and as importantly, very enjoyable having you on. So, you know, I think I and my audience thank you for your time, love to have you back on in the future and, and sort of pick the story up on, on where this, the energy transition is going and, and all the rest of it.
- [61:51]
Mark Crandall
Thanks Paul, I really enjoyed it. You're a very good interview. This is a very amusing. It made me, made me remember a bunch of stuff that are not typically present in my mind. But I had a really blessed career and I had a hell of a lot of fun. So it's fun to look back on.
- [62:14]
Paul Chapman
Thank you for listening. To find out more about HC Group, our global offices and our expertise in search within the commodities sector, please visit www.hcgroup.com.