After a period of intense volatility, the commodity trading industry has moved into a more stable period, with the sector’s 2024 gross margin more than 20% lower than the prior year. Despite this normalization, margins are still double the levels set in the 2010’s, following the global financial crisis of 2008, highlighting the elevation and expansion of trading over the period. 

Increased competition has raised the challenges traders face in capturing value, necessitating a careful balance between pursuing growth and maintaining efficiency. To thrive, traders must prioritize portfolio resilience and robust operating models while navigating the complexities that accompany growth in today's market.

A need to reevaluate trading models and cost management

Market stabilization has led to a reevaluation of trading models, as overall commodity trading gross margins fell to around $95 billion. Many major commodity markets, particularly energy, were less constrained, driving prices and volatility down. In oil, for instance, production outpaced lower-than-expected demand growth, keeping prices lower and more stable, despite cuts by the Organization of the Petroleum Exporting Countries and others. A milder-than-average winter in most parts of the northern hemisphere also prevented spikes in natural gas prices across multiple regions.

Despite the margin drop, the results reflect a long-term positive trend, with gross margins more than doubling compared to 2019. Key factors such as globalization, the energy transition, and geopolitical shifts will continue to create volatility and risks for traders. The year 2024 is viewed as a baseline for future growth unless extraordinary market disruptions occur. 

The 2024 margin decline highlights the complexity and rising costs in trading organizations, with talent costs surging because of the aggressive hiring initiatives over the past couple of years. Costs per trader, excluding bonuses, have risen by over 25% since 2019, leading to a 45% increase in overall operating expenses. The increase has put pressure on trading management to improve cost-income ratios and seek new growth avenues, prompting traders to rethink their operating models for greater efficiency.

Rising competition and increasing staffing costs reshape commodity trading

Over the past five years, the commodity trading landscape has transformed significantly. Established traders are diversifying into metals and low-carbon fuels, increasing competition in physical arbitrage. Major energy companies are expanding global trading capabilities, while Asian conglomerates leverage market exposure and supply chain control. 

Digitally advanced participants are disrupting markets, especially in power and gas, emphasizing the need for more robust risk management. Financial players like banks and hedge funds are re-entering, providing liquidity and reclaiming margins. Meanwhile, passive private capital increasingly engages in co-investments and trade finance, prompting firms to focus on growth despite a more than doubled overall market size.

Three strategies for commodity traders to thrive in an evolving market

For commodity traders, growth in 2025 and beyond will require a shift from the rapid expansion seen during recent volatility. Organizations should focus on becoming more professional and systematic. 

Key areas of preparation include enhancing optionality strategies, expanding risk management priorities, and improving efficiency and resilience. These strategies are essential in steady markets with heightened competition.

Leveraging optionality and asset optimization for consistent returns

Systematic optionality can drive consistent returns in low-volatility markets with the right tools. Traders are focusing on transformation assets like refineries and renewable energy. Success hinges on capabilities in structured finance and optionality valuation, alongside a shift towards operational focus, considering health, safety, and supply chain risks. 

A systematic asset optimization strategy is crucial as portfolios grow, emphasizing real-time monitoring and flexibility management. Effective refinery asset management can enhance margins through optimized energy management, supported by advanced technology and analytics, boosting enterprise value for specialized traders, and demonstrating resilience among leading hedge funds.

Expanding risk management to address new credit and supply chain risks

Commodity traders face heightened risks from exposure to new counterparties, geopolitical uncertainties, and supply chain vulnerabilities. Concerns include increasing credit exposure and a 43% yearly rise in demand for trade credit insurance. 

Geopolitical conflicts and government interventions have intensified, impacting price stability and regulatory support. Supply chain challenges, especially in renewable energy, can obscure credit risks and offer potential trading opportunities through better supply chain insights.

Focusing on efficiency and resilience in trading management

Trading management must focus on efficiency and resilience by investing in automation and artificial intelligence to optimize logistics. While technology enhances scalability, companies must also maintain a sharp focus on objectives and retain the flexibility to pivot from projects.

Traders also need to integrate various risks, such as credit, liquidity, and operational risks, into their decision-making. A successful capital allocation strategy must consider all risks and be supported by a comprehensive risk strategy.

Adapting to competitive markets while managing costs and growth

As traders adapt to a changing return profile, they must manage costs incurred during boom years while seeking growth in competitive markets. The allure of past record profits may tempt organizations into unfamiliar territories, yet trading management needs to professionalize to navigate increasingly complex risks. 

Balancing this adaptation with commercial agility is crucial. With competition rising and market volatility not inflating margins, industry participants must be resilient and responsive. Traders face the challenge of balancing their desire for growth with the necessity of disciplined practices to stay ahead in the market.

This report uses data from Altana, the world’s first value chain management system, as part of its strategic partnership with Marsh McLennan. It also uses data from Marsh’s proprietary Helios and MiCredit tools.