By Amine Bouchentouf
While Glencore (GLCNF.PK) may garner attention and headlines, smaller commodity trading firms can also offer a strong return on investment.
Following my recent column on Glencore, I received many inquiries regarding the commodity trading industry. While Glencore may be the most visible and notorious commodity trading house out there, there are certainly other similar companies with significant global operations worth looking at.
Commodity trading companies offer investors yet another way of getting exposure to the global commodity industry. The industry is truly vast, and you have several different players to choose from.
The first commodity trading houses began to appear in the late 19th and early 20th centuries as privately held, family-owned businesses. To this day, several of the world’s leading trading houses are still privately held, such as Louis Dreyfus Commodities and Cargill. Fortunately, a large number of the commodity trading companies are now publicly traded, thus giving investors direct access to this important industry.
The first thing you need to determine is the kind of exposure that you’re looking to achieve. The industry is vast, and you need to focus your selection process based on two critical factors: type of commodity; and geographic exposure. Not all commodity traders are created equal, and each one has different strengths and weaknesses. Identifying these characteristics will help you make the right decision.
If you’re looking for broad exposure to various commodities with a global footprint, then Glencore is certainly a company you should consider. Make sure you read my previous analysis so you get a better understanding of the pros and cons of such an investment.
Another diversified trading company worth examination is Noble Group Ltd (NOBGY.PK). Noble is little known outside commodity circles, but it is a real powerhouse in commodity distribution and supply chain management. With revenues of more than $40 billion, Noble is a fully diversified company with activities in agriculture, energy and metals. Noble’s activities in agriculture are particularly strong. The company is a leader in global coffee and cocoa production and distribution.
Noble is one of the top three distributors of coffee in the world, with operations in Vietnam, Brazil, India, Indonesia, Colombia and even the United States. It grows and trades arabica as well as robusta varieties of coffee, and has particularly strong relationships with roasters in the United States, Europe and Asia. In cocoa, Noble is present in many of Africa’s leading cocoa-producing nations such as Nigeria, Cameroon, Ghana, Togo and Sierra Leone. Its customers in this segment include many of the world’s leading chocolate manufacturers.
In addition to a strong presence in agricultural commodities, Noble is also active in oil, gas, carbon credit trading, iron ore and aluminum. With Noble, investors get a very broad exposure to various key commodities throughout several strategic geographic locations.
Another commodity trader I recommend is Bunge Ltd (NYSE:BG). With roots in Latin America, Bunge is today one of the biggest agricultural traders in the world, with a market cap in excess of $10 billion and revenue of more than $45 billion (2011 fiscal year numbers). One attractive attribute is that Bunge is a very flexible and nimble operator in what is usually a slow-moving industry.
Bunge’s main area of strength is North and South America, where it is a leader in the oilseed business and transforms soybeans, rapeseed and canola oil into vegetable oils for both the direct-consumer market as well as for the animal-feed industry. Those in turn offer exposure to both the industrial farming sector as well as the farm-to-consumer supply chain.
Furthermore, with Bunge, you get a worldwide leader in the biodiesel market. The company began trading sugar recently and is already the second-largest sugar trader in the world, a testament to its flexibility and ability to successfully enter new markets. Through its activities in the sugar markets, Bunge has access to several key markets.
First, it sells sugar directly to retail and wholesale consumers as a food staple. Second, it has invested heavily in sugarcane milling infrastructure, so that it’s now a leader in sugar-cane-based ethanol. And finally, it is also able to generate and distribute electricity from sugar-cane waste.
Bunge is the perfect example of a company being able to generate diversified streams of revenues from a single commodity and is worth taking a serious look at.
Disclosure: The author doesn’t have any positions in the stocks mentioned.