Home Commodities Commodity trading generated $100 billion in 2023 despite uncertainties, says McKinsey

Commodity trading generated $100 billion in 2023 despite uncertainties, says McKinsey


Commodity trading generated over $100 billion EBIT (earning before interest and taxes) in 2023 despite commodity markets experiencing significant levels of uncertainty, managing consulting firm McKinsey and Company has said. 

The $100 billion translates to over $150 billion in gross margin, it said, adding that given this “dynamic”, success in the years to come will increasingly hinge on the ability to manage and respond to unpredictable market circumstances. 

McKinsey said this in its report “The critical role of commodity trading in times of uncertainty”, penned by Piotr Pawlowski, Roland Rechtsteiner and Joscha Schabram. 

Wave of new entrants

Earlier this month, US management consulting firm Oliver Wyman said its analysis showed trading gross margin in commodities declined from the 2022 record high of $150 billion to around $100 billion in 2023. “Although margin declined, 2023 still ranks as the second highest level of industry profits, after sustained growth since 2018,” Wyman said. 

McKinsey said, “The rapid growth of commodities markets has drawn a wave of new entrants — such as tech-focused trading players, hedge funds, and banks, as well as players involved in mining and processing — creating a need for additional liquid and risk management offerings.”

Players with a comprehensive, nuanced understanding of the markets will be best positioned to extract value, while the rest will need to invest in new skills and capabilities, it said, adding that this is a positive development. 

It said commodity trading value pools have shown resilience despite increased stability in the market environment, decreased volatility in commodity prices —from 2022 to 2023, price volatility decreased by 30 per cent for West Texas Intermediate (WTI), 58 per cent for spot Dutch TTF Natural Gas, 38 per cent for Henry Hub, and 27 per cent for copper — and ongoing worries about an impending recession. 

Uncertainty over energy security

“After growing rapidly from 2021 to 2022, total trading values overall remained relatively stable in 2023,” the report said.

Commodity markets remain tight, and changes in demand and supply have become harder to predict despite the decrease in market prices, it said.

“Further, uncertainty around the security of the energy supply contributes to price volatility, which is amplified by higher, shifting interest rates,” McKinsey said. 

High interest rates affect the cost of debt required for investing in new capacities and could result in changing or even abandoning some business opportunities. This dynamic particularly affects large projects with substantial capital expenditure commitments, it said.

Supply chain disruption has also constrained global trade activity, the report said. “Both large-scale geopolitical developments (the Covid-19 pandemic and Russia’s invasion of Ukraine) and local events (such as the slowing of cargo traffic in the Panama Canal because of drought and Houthi attacks on cargo ships in the Red Sea), have affected product availability and prices,” McKinsey said. 

Competition in power & gas to grow

Dwelling on the impact of these factors on commodities, the management consulting firm said oil and oil-based products are still the largest value pool, but their profitability decreased in 2023.

“Although there was more flat-price volatility in 2022 versus 2023, there was still a significant amount of physical volatility in 2023, particularly due to trade flow reorders in the wake of the Russian invasion of Ukraine and the Houthi missile attacks in the Red Sea,” the report said. 

 The trading value pool for power and gas increased overall in 2023, it said adding that while demand for crude oil is projected to continue much of this decade, competition for power and gas, particularly LNG, could see increased competition.

On the agriculture front, McKinsey said large agricultural players are expected to retain control over the production side, effectively driving global trade while adopting techniques from traders of oil and oil-based products. 

New geopolitical powers

“At the same time, new start-ups with strong technological capabilities have the potential to disrupt the market. So too do existing traders of oil and oil-based products with downstream portfolios that require switching to green fuels,” it said.

The report said metals and mining is expected to become more important over the next few years, with demand increasing alongside the proliferation of energy-transition technologies. 

“In turn, this demand will likely give rise to new geopolitical powers and could change trading dynamics as we know them. Large mining players, similar to players in oil and oil-based products, are expected to engage in more trading activities, resulting in further competition,” it said. 

Looking ahead, McKinsey said commodity markets will be influenced by greater interconnection and the growing role of power in the energy transition.

 The shifting dynamics in commodity markets call for trading organisations to invest in new capabilities to capture value. In some cases, lower barriers to market entry will give rise to niche players powered by data and AI, it said.

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