Geneva is known for its wealth management industry, its hundreds of banks and independent asset managers, some large, some small, all huddled around the Rue du Rhône. Less well known are the commodity trading and the commodity financing businesses, which mean an enormous amount to the local and even national economy. But it’s a relatively new industry, as Dominique de la Barre found out.
The derrick closest to Geneva is probably one of those solitary pumpers in Alsace sucking up a few barrels of oil per year, mostly for show it seems. Yet the city is full of oil, having gradually crawled up to third place as an oil-trading market, pushing London off the rung.
And oil is only one of the many commodities traded in the city, which is either home to, or houses offices of, some of the world’s top commodity traders, like Glencore, Trafigura, Louis- Dreyfus, Cargill, and the lesser-known Gunvor, Addax or Vitol.
Their business is essentially quite simple: To buy physical commodities, such as oil, coal, iron ore as well as sugar, cotton and fertilisers, match them with buyers, and engineer the sale. Meanwhile, specialised banks, BNP Paribas, Crédit Agricole and ING among them, are involved in financing those purchases. It is a very profitable business, one that made up over half of the Swiss growth in 2010, and while it does generate lots of cash, it is noted for not creating too many jobs.
Christian Weyer, a retired banker, now in his late eighties but still active, was around at about the time the machine got going in the 1970s and actively participated in fuelling it. The original trigger for this economic development, he suggests, was actually an event in a faraway land decades earlier. In 1952, namely, King Farouk of Egypt was toppled in a coup that ultimately brought Gamal Abdul Nasser to power. Nasser, after some ideological soul-searching, decided to go with Arab nationalism. In Alexandria, a city founded in 331 BC, one thousand years before the Arab conquest of Egypt, the Jewish community, which had been present there since Antiquity, “took fright and took flight.” Among the refugees was Nessim Gaon, who was born in the Sudan, then an Anglo-Egyptian protectorate. “He hardly spoke any French,” Weyer remarks with a hint of admiration for the man’s survival skills. “But he knew how to trade groundnuts and sesame seeds.” He was not alone, nor was it the only commodity being traded by these immigrants. Others were active in cotton trading, a staple crop in the Nile valley, in the days when affluence in the West was pushing demand for blue jeans and T-shirts and other easy-to-wear clothes.
Plus ça change…
To this day historians debate whether trading is the oldest profession on earth or merely the second oldest; what is well established is that trading appeared in Mesopotamia around 4500 BC. The economic role of a trader is to deliver goods purchased from a producer to a consumer or user, thereby creating value; for instance oil in the ground in Arabia is worth less than when delivered to Northern Europe in the winter. A trader also allows the producer to concentrate on what he does best, producing, by taking on price and delivery risks and providing related services such as transportation, logistics, storage and arranging financing. Much later, around 1800, David Ricardo, a Scottish economist, would develop the theoretical framework to justify the value of trade: countries that trade with each other are better off than those who do not. And mercantilism as a system has flourished for millennia creating wealth, poverty, knowledge, wisdom, war and peace all at the same time, and pushing the discovery of the planet humans live on.
But back to Geneva in the fifties… Gaon, from his humble start, went on to become the leading, the best known and most active property developer in Geneva, leaving his imprint on the city with such landmarks as the Ports Francs, the elegant building of the Chase Manhattan bank and, of course, the Grand Hotel Kempinski, previously known as the Noga Hilton, where Noga is an anagram of Gaon. There are a number of reasons why these Egyptian traders settled in or around Geneva in the 1950s. Some had followed King Farouk who had bought a house in Lausanne, where they found a number of established trading houses, such as André & Cie, often supplying the huge demand for agricultural foodstuff from nearby Nestlé. More importantly, perhaps, in those early days, Switzerland was one of a handful among European countries not to control capital flows and able to boast an infrastructure undamaged by war, not least a functioning telephone system. In the 1960s, a second wave of trading companies set up shop in Geneva, Cargill International, Alcoa International, Continental Grain among them, as well as some smaller British and French traders concerned by political instability at home.
… plus c’est la même chose
The real turning point in the history of Geneva as a trading centre came with the Yom Kippur war in 1973, triggering the first oil shock. The price of a gallon of crude oil rose fourfold from USD 3 to USD 12, and caused a revolution in the way oil was sold throughout the world. Before the war, oil-producing countries would sell exclusively to the Seven Sisters, as the major oil companies were then called, within the framework of a very rigid and inefficient system. With oil now a scarce commodity worth USD 12 a barrel, transportation of oil was set to become a lucrative business for intermediaries. A new generation of traders emerged, whose business it was to find the best buyer for a cargo at the best price, in the process creating a market which the majors, accustomed only to dealing exclusively among themselves or with sovereign states, were ill-equipped to serve.
There are other reasons why Geneva, specifically, and not some other city became the leading commodity trading centre it is today. Some of these are well known and apply to the country as a whole: excellent infrastructure, a stable legal and tax system, and an educated, multilingual workforce. Two other factors are worth mentioning, the first of which is the presence of the United Nations. In a business where deal making, securing contracts and negotiating (or breaching) economic embargoes is essential, the ability to meet a foreign ambassador over drinks in a hotel lobby counts for much. The second is the need for money, which is why so many banks are also involved in the business. Because someone has to guarantee the financing for moving of goods across great distances, and usually that will be a bank. In Switzerland, getting a hold of large sums of money quickly and without bureaucratic fetters was a lot easier than, say, in France. Banks, however, are generally reluctant to taking risks – unless the profits appear to be astounding, at which point they will drop their guard, as the 2008 recession showed. In Geneva, they rely on the SGS, formerly known as Société Générale de Surveillance, the world leader in inspection, verification and certification. In a nutshell, a Genevan trader having closed a deal say on a load of crude to be taken from Angola to Rotterdam will have the money put up as a security by a bank. The SGS will be on hand in the port of departure and arrival to ensure that the right quality material is being loaded and unloaded. SGS will also ensure that the cargo arrives within the defined time frame.
All the controls and checks, however, cannot prevent the plain reality that in the face of really big money, ethical and legal standards often take a beating. One of the more famous cases was that of Marc Rich, the founder of the predecessor company to Glencore. He is credited on the one hand with having created the spot market in oil while on the other hand he was indicted by a grand jury in the United States in 1983 for having breached the Iranian embargo. He was famously pardoned by President Clinton in 2001, hours before leaving office. Closer to home, Trafigura, a leading oil and commodity trader with operations in Geneva, was embroiled in a serious incident when in September 2006 a ship chartered by the company offloaded waste at the port of Abidjan in the Ivory Coast through a local contractor which illegally dumped the waste at sites across the city. Many thousand residents started suffering from various illnesses shortly thereafter and a dispute erupted regarding the nature of the waste, the cause of the illnesses and the determination of liability for the illegal dumping. Later that month, two senior Trafigura executives who had flown to Abidjan were jailed by the government until, on February 14th 2007, Trafigura concluded a settlement agreement with the Ivorian government, which included a USD 198 million payment, securing exoneration from further legal proceedings and the release of the two executives. Investigations and court cases into this series of events have been conducted in the Ivory Coast, the UK and the Netherlands.
On the carousel
Christian Weyer became involved in trading in days that might seem gentler in retrospect. He arrived from Paris in 1970 to work at the Geneva office of the Banque de Paris et des Pays-Bas, today BNP Paribas. Weyer recalls finding a solid bank, ably managed, which concentrated on private banking, a business requiring very little capital. Paribas Suisse had a strong balance sheet. It was Weyer who came up with the idea of using it to finance trade, chiefly in oil. “The bank in France was run by engineers, who had an intuitive understanding of the role of oil in the economy, as opposed to maize or corn,” Weyer recalls. “When I first talked to them about financing the oil trade, they listened.” By the early 1970s, the bank had opened branches in the Gulf as well as in New York, competing head on with the large US banks on their home turf, by offering a new type of service to their very best customers.
The instrument Weyer chose to use to finance those oil shipments was the letter of credit. While it had been developed in the late Middle Ages by Lombard bankers, it had since fallen in disuse. Under a letter of credit, the issuing bank undertakes to provide payment to a seller of goods on behalf of a buyer. Since a bank like Paribas would know the buyer – for instance an oil trader located in Geneva or elsewhere in Europe – better than the seller, it would feel comfortable taking on a credit risk on the buyer that the seller would be unwilling to take.
Oiling the rails
Leading bankers such as Weyer played a key role in financing these traders. The oil traders, smart though they were, were often little more than bucket shops, three to four strong, backed by capital of perhaps USD 1 to 2 million. By the early 1970s, oil was selling for USD 14 a barrel, and so a the cargo of a small ship, carrying 100,000 tons or one million barrels, would be worth USD 14 million, far beyond the financing means of these traders.
In early 1982, the Mitterrand government nationalised most of the French banking sector, though Paribas Suisse, having managed to escape the government’s clutches, gained a freedom of action denied to its parent in France. “Take the following example,” says Weyer. “An oil trader wanted to buy a shipment worth between USD 100–200 million to be delivered to a refinery in Sicily. The oil exporter would be loath to grant payment terms to such a small trader and so would require the benefit of a letter of credit issued by a well-known bank. The exporter was now happy but the bank in turn was bearing the credit risk, the ultimate source of which was the ability of the Italian refiner to pay. To minimise that risk, the bank might demand that the oil refiner produce a second letter of credit, issued by an Italian bank, of which it would be the beneficiary – a so called back-to-back transaction. This was all new then. Sometimes,” carries on Weyer, “we would cause the regulators some cold sweat. If for instance the back-to-back letter of credit did not cover the full amount, then we would ask the refiner to pledge stocks of refined goods such as petrol or heating oil as collateral. This came as a surprise to the regulators, who were unused to a bank owning physical rather than financial assets on its balance sheet.” In fact, the regulators’ concerns were not totally unfounded as Paribas was now bearing the price risks
on those stocks, the risk that they would not be able to be sold at high enough a price to cover the liability under the letter of credit, should the refiner not honour its commitment.
Following the break-up of the Soviet Union, Russian traders became big players in oil. Initially the Russian traders would buy for cash – therefore at a discount – the oil at the well head as opposed to the delivery point stipulated in the oil future contracts. For instance, a contract on West Texas Intermediate, a particular classification of a variety of crude oil, stipulates that the shipment has to be delivered to Cushing, Oklahoma. However, Russia is a continental power that needs to deliver its oil to a loading point for export. “We at Paribas then entered this new business, of financing the transport from the well to a loading port, where it could be sold into international markets. Since the Russians were buying at a discount, they quickly became very rich,” recalls Weyer.
Banks in Geneva, and men like Weyer deserve a large part of the credit in the development of Geneva as a trading hub. In the 1970s, they developed new techniques of secured financing, where the cargo acts as collateral, which allowed them to finance trading operations with little or no equity. However, trading was never an easy business. The sums involved have always been high and so there is a lot of room for risk and a great deal of temptation to somehow pad or cook books, and of course for outright stealing. But the days of Gaon and men like Weyer seem halcyon in comparison to the business today, which has grown to enormous proportions (see box Trading figures). Indeed, sesame seeds, dates and dried figs cannot compare to loads of cobalt ore, bauxite, iron and, of course, the most lucrative darling, oil. New, ever more complex techniques, called structured trade finance and prefinancing have been developed, and they are not entirely uncontroversial. Oil prefinancing allows a country, usually a poor one, like Angola or the Republic of Congo, to borrow against future oil revenues; the technique has drawn criticism from NGOs such as Global Witness for being expensive, opaque and prone to misuses by politicians.
Furthermore, the speculation around soft commodities, which grew recently as an alternative to toxic mortgages is putting the world’s less fortunate at risk and fuelling unrest. Still, as the traders will say, someone has to do the job, and the profits involved do make it well worth having the occasional blind spot. Their job is just to connect the dots, and, to paraphrase Orson Welles as Harry Lime, if one of those dots stops moving, does anyone really care?
Nowadays, Geneva ranks as the second most important trading centre in commodities, behind London but, quite possibly, as the most important centre for the financing of commodities trading. Perhaps 500 companies, employing between 9000 and 10,000 people are now active in commodity trading in Geneva, with 2010 turnover pegged at an estimated CHF 17 billion. Oil and gas dominate the business in Geneva but hard commodities such as metals and soft commodities such as sugar, cotton and grain also play an important role. It is estimated that 10% of world cotton, 20% of sugar and 30% of grain are handled in Geneva, a huge proportion. Furthermore, Geneva traders handle a staggering one-third of the oil in the free market globally. This so-called “transit trade” is a major growth factor for the Swiss economy, one that is also very dependent on the state of the world economy and hence rather fickle. It is also one of the reasons for the extremely high rents in Geneva, where apartments are rare, in particular quality dwellings.
Thus, traders in Switzerland, whether located in Geneva or in Zug, play a major role in the world and Swiss economy. Glencore is a case in point. The world’s largest commodity trading company, located in Zug, was listed on the London Stock Exchange in May of this year and is now valued at over GBP 27 billion, to the point where it is no longer dependent on the banks that financed its operations when it was founded in 1974. Other large trading companies, such as Mercuria or Trafigura, started with humble beginnings. Mercuria, for example, founded as recently as 2004, now ranks as the fifth largest independent oil trader, employing 800 personnel, of which 200 are in Geneva. The Russian presence remains strong with large Russian oil-producing companies such as Rosneft, Lukoil and TNK-BP having established their own trading company in Geneva, to which one might add independent traders such as Gunvor, with its strong links to Russian oil companies. Altogether, up to 75% of all Russian oil exports are handled through Geneva.
Christian Weyer is a well-known international banker and financier with over 50 years of experience. He began his career with Chase Manhattan Bank as a senior credit officer in Paris and Geneva and subsequently worked as an executive at Banque Paribas until becoming President of Banque Paribas (Suisse) in 1984. During his career, Weyer has been credited with innovating new forms of trade finance and lines of credit and was instrumental in the growth of several large oil trading firms some of which have now reached worldwide stature. From 1988–1992, he was special advisor to Banque Indosuez (now Crédit Agricole) in energy matters. Since 1992, he has been President of Enerfin in Geneva, an advisory firm providing investmentbanking services to junior oil and gas companies. Weyer is a shareholder, founding member and Director of Geopark, a London listed (AIM) oil and gas exploration and production company active in Latin America.
Article by Dominique de la Barre