War, sanctions and the worst energy crisis in half a century. It doesn’t sound like a great business environment. Unless you’re a weapons manufacturer, an oil company or a commodity trader.
The profitability of Big Oil is so well known, it has become a magnet for politicians. US President Joe Biden has accused the industry of “war profiteering.” In Europe, lawmakers have gone further, slapping the sector with windfall taxes. Armaments companies have also started to attract attention.
In the case of the commodity traders, after a dollop of expert tax engineering, the result has been a level of profitability that, coming as bombs are falling in Ukraine and people are freezing in much of Europe, looks grotesque. They’ve completely escaped scrutiny, however. It helps that most of them are privately owned, disclosing little about their financial performance. When your profits depend on market volatility triggered by a war, it comes in handy to be shy. But from the few examples known, the bonanza of the last 18 months is undeniable. As it is, their ultra-low effective tax rates can make Goldman Sachs Inc. look like a left-wing charitable enterprise.Take Trafigura Group, one of the most powerful traders in the game. It publicly releases its accounts, making it a rarity in a sector that prefers secrecy over transparency. On Thursday, it reported $7 billion in net profit in its 2022 financial year — a record high and nearly as much as it reaped over the previous five years combined.
Between April and September, the company made an astonishing $4.4 billion in net profit – that’s almost $1 million per hour, every day, including weekends, for six consecutive months, just for buying and selling stuff. The company, owned by about 1,100 traders-executives, has distributed $1.7 billion among its shareholders.Trafigura said in a video released alongside its annual results that it was a “myth” it profited from the energy crisis. But it’s not myth; it’s fact. Everyone in the industry, from European giants like Glencore Plc and Vitol Group to US behemoths like Cargill Inc., profited from the supply chaos that the Russian invasion of Ukraine – and the subsequent Western sanctions – created. That’s not bad in itself: They helped consumers and producers struggling under enormous disruptions. But the industry should be honest about the source of profits. It helped too that Trafigura – as almost every one of its rivals – pays very little in taxes. Last year, its effective tax rate was a paltry 12%, or about half what Wall Street banks pay in a normal year (about 20%-25%), and a lot less than Big Oil typically coughs up (closer to 30%). In paying little in taxes, commodity traders have a lot in common with Big Tech. The trading houses typically operate from low-tax jurisdictions. In the case of Trafigura, its top executives work in Switzerland; the company is incorporated in Singapore, and its ultimate parent is owned by a foundation registered in Panama. The structure isn’t unusual in the industry, where home is often a place like the British Virgin Islands, Cyprus, Luxembourg or the Bahamas. While the recipe for making eyewatering profits is relatively simple, it also takes nerve – and lots of credit lines from willing banks. Commodities markets have been wildly volatile recently. The supply-chain chaos sparked by Covid-19, followed by the Russian invasion of Ukraine, triggered historic price gyrations.Trafigura disclosed some data that shows how risky trading was. Its value-at-risk, a measure of how much money it could lose in any given day, soared on average to nearly $200 million, up from less than $50 million in 2021, and less than $10 million in 2018. That’s, perhaps, the biggest defense the commodity traders can deploy to justify their profits. They are indeed making money, but by risking quite a lot too. Trafigura and its rivals are providing a service that not many can. Building the supply chains Trafigura created took years and money. Profiting from that effort and capital seems fair – to a point. Western politicians have always faced a delicate balance in taxing and regulating the murky world of commodity trading. The low tax bills look hard to justify. The laissez faire under which the sector operates is also an anomaly, particularly when the industry has asked governments to support them with cheap credit lines. But changing it would require a level of cooperation from low tax jurisdictions that’s difficult to imagine today. And more regulation in the West would only accelerate the industry’s shift to China and the Middle East, where commodity traders enjoy even less oversight.
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