Javier Blas Explains How Commodity Trading Shops Really Work

Tracy Alloway (0:10)

Hello and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:14)

And I'm Joe Weisenthal.

Tracy Alloway (0:16)

Joe, big news today from Europe, which is that Russia is cutting off supplies of gas to countries, Poland and Bulgaria specifically, that refuse to pay in rubles. And this is something that has sort of been expected in some sense, but lots of people are viewing this as the beginning of the weaponization of commodities.

Joe Weisenthal (0:40)

Yeah, and it fits with a theme, obviously, we've talked about several times, which is this sort of, I guess there's two things. I mean, on some level, it's like this fracturing of the commodity supply chain, trade routes changing, but then also the changing nature of like the financing side of commodities. And so the idea that, okay, you can buy the same commodities, but you have to do it differently in a different currency.

This fundamentally is beginning to shift just the way commodities are paid for and financed.

Tracy Alloway (1:12)

Right. So this is a point that I think a number of our guests at this point have made. So Zoltan Pazar, Pierre Anderon, Jeff Curry, if countries aren't importing Russian gas anymore or oil, they need to find that from somewhere else. And simultaneously, it means Russian gas and oil might be going elsewhere, like to China, to the East. And all of that rerouting is going to take additional money.

And we've seen lots of players in the commodities talk about this. They've talked not only about the upfront costs of transportation of commodities, but they've also talked about what all of this means for the market itself. And we've seen intense amounts of volatility, which to some extent mean that the commodities traders are making loads of money, but on the other hand, they are having to deal with this volatility and it can disrupt their business.

Joe Weisenthal (2:02)

Right, and of course, this is obviously, and you mentioned it's something that Zoltan has been talking a lot about, but you know, all these trades are financed, there's leverage involved, there's borrowing. And when you have a really big jump in volatility, then of course, financing gets more expensive, you have to put up more collateral, you get margin calls, things like that.

Also add in the complications of, you know, some banks have been sanctioned and you can't deal with some institutions. So the financing side of all these trades just gets much more costly and complex.

Tracy Alloway (2:37)

Yeah, and it's not exactly as if it was transparent to begin with, and now it's just become even murkier in some respects. So today, I am very pleased to say we are going to be digging into the financing side of commodities trading. And we really do have the perfect person to talk about it with. We're gonna be speaking with Javier Blas. He is of course a Bloomberg Opinion columnist, but he is also the author of The World for Sale, which is a book on the commodities trading houses, an excellent book on the commodities trading houses. So again, the perfect guest.

Javier, thank you so much for coming on Odd Lots.

Javier Blas (3:12)

Thank you for having me.

Tracy Alloway (3:13)

I kind of, I'm sort of amazed we haven't done this sooner.

Joe Weisenthal (3:16)

You're one of the most requested guests on Twitter. People are always saying, what are you getting Javier? And it's like, we're gonna get her onto it. And then we ran into Javier in the newsroom. It's like, let's just do it right now.

Javier Blas (3:26)

I think that that's my parents probably on Twitter reaching out to you.

Tracy Alloway (3:32)

Why don't we start, I guess, with the basics. I mean, sort of potted history of your book, but how did we wind up with a situation where we have all these independent commodities traders who are dealing with important goods, things like oil and gas that we depend on for transport and heating, food supply, vital strategic goods, with seemingly not that much oversight?

Javier Blas (3:57)

Well, yeah, you are absolutely right.

We need the commodity traders because commodities are not produced generally where they are consumed. So you need someone to take the risk of moving the stuff from A to B.

And that's the role that the physical commodity traders play. I mean, these are not guys who are betting on the futures market or the options market behind a screen. These are guys who go into upcountry, as we call it, and mining the DRC deep into Africa, Peru, oil fields in Iran, and they get the oil, they put it in a tanker, and they transport to the consuming markets. And they finance all that process. They deal with all the logistics, which are mind-blowingly complicated in some cases. The main reason is because commodities are not produced where they are consumed, and they need someone to intermediate that risk. And that's quite a lot of risk. It's financial, it's logistics, it's credit, it's operational, it's weather, it's risky in terms that some of these commodity traders are often operating on war zones, and you still need them to get the commodities out. And they get paid very well for that service.