(Oil Price) – Back in June, we reported that Singapore-based oil and commodities trading powerhouse Trafigura Group was still dealing with the fallout of a massive nickel scam that rocked global metal markets in 2023, as well as the effects of past corruption scandals.
Trafigura has grown into one of the biggest diversified commodities traders in the world: last year, the firm traded an average of 5.5 mn barrels of oil a day–the equivalent of the combined oil demand of the UK, France and Germany–and sold more than 100 million tonnes of metals and bulk commodities, including coal. Trafigura’s full FY 2023 revenue of $244 bn surpassed that of British oil major BP Plc. (NYSE:BP).
Well, it appears that scandals are not about to depart from the giant oil trader. Bloomberg has reported that Trafigura is facing a loss of up to $1.1 billion in Mongolia, linked in part to suspected fraud by its own employees.
According to Bloomberg, the company’s staff manipulated payments while concealing a mountain of overdue debts, a malpractice that continued for years without raising any red flags. Speaking privately, nine bankers have described the potential loss as ‘astounding’, considering Mongolia’s consumption of ~35,000 barrels a day is worth roughly $1 billion a year, or less than 0.3% of the oil traded by Trafigura.
“The key question, as always, is how quickly and effectively one learns from mistakes and implements corrective measures. Not merely by reshuffling or dismissing staff and launching a lengthy recovery process, but by strengthening the company’s governance, internal processes, and controls,” said Jean-Francois Lambert, a consultant and former commodity banker.
Mongolia does not issue import licenses to international companies such as Trafigura, making it impossible to directly supply the local market. This means that traders must rely on local distributors; Lex Oil LLC in Trafigura’s case.
The Mongolian company has been taking Trafigura’s oil products on credit and selling them on to fuel retailers, with an agreement that Lex Oil would pay in the future after making deductions for customs and freight duties.
Further complicating matters is the fact that Lex Oil has been providing credit to its own customers, while hedging transactions. Unfortunately, Trafigura’s accountants in Singapore and Geneva failed to recognize just how big Trafigura’s exposure in Mongolia had grown over the years, even as the bills hadn’t been paid when they were due.
Last year, Trafigura reported that it had found “deliberate concealment of overdue receivables” but said the alleged misconduct was not limited to hiding the debt. The company revealed that for years, its employees manipulated data and documents to misstate the calculations for charges like customs and freight.
Trafigura Profit Drops 73% As Oil Price Boom Fades
Trafigura is likely to take a big write-down for its latest scandal, which comes at a time when its profits are shrinking. Back in June, the company posted the smallest profit since the 2020 oil crisis as volatility in energy markets hit new lows. Trafigura’s net profit dropped to $1.47 billion in the six months through March, good for a 73% decline from a record $5.5 billion posted a year earlier. Trafigura’s revenue fell 5.4% to $124.2 billion, while group equity increased to $17.3 billion.
The company’s energy division saw operating profit before depreciation and amortization drop by half, to $3.35 billion while the metals division recorded a 11% increase from a year earlier thanks to easier comps after the company took a large impairment charge for an alleged nickel fraud. Trafigura is still dealing with the fallout of a massive alleged nickel scam that rocked global metal markets last year, as well as the effects of past corruption scandals, as detailed by the Financial Times.
“In a less stressed environment than the same period a year ago, demand for our services remained strong,” Chief Executive Officer Jeremy Weir said in the report published on Thursday. “In the near term, supply chain disruptions continue to persist, including due to ongoing threats in the Red Sea and commodity markets remain vulnerable to sudden shocks and price spikes.”
The latest set of results signals that a period of record profitability for the commodities trading industry fueled by Covid-19 and Russia’s war in Ukraine is coming to an end. The past three years have seen dramatic price swings that tend to favor commodities traders. For some time now, Trafigura and its peers have warned that the blowout profits they have been posting over the past couple of years are unlikely to be sustained over the long-term, although many industry experts believe that the baseline has been set higher.
By Alex Kimani for Oilprice.com
