How asset-intensity has impacted the ability of commodity trading firms to earn exceptional profits during the coronavirus crisis, on year 2020 : the case of Glencore and Trafigura
SONAR|HES-SO
- Ramos, Mady
- Piller, Robert (Degree supervisor)
- Genève : Haute école de gestion de Genève
119 p.
Bachelor of Science HES in International Business Management: Haute école de gestion de Genève, 2022
English
The energy sector was one of the industries hit hard by the Covid-pandemic: after unprecedented demand destruction of crude oil and global storage reaching their limit capacity, the price of West Texas Intermediate (WTI) went negative for the first time in history on April 2020. With the crude oil forward curve forming a super contango, commodity trading firms with access to storage facilities did capitalize on this market imbalance to earn record profits.
One such trading company is Trafigura, a trading house operating under an asset-light Business model, which realized a record Net income of $1'599 million. In the same market context, one would expect Trafigura's direct competitor, the mining company Glencore, which operates under an asset-intensive Business model, to have achieved the same record levels of profitability. However, Glencore closed the financial year with a Net loss of -$3'946 million. Glencore's CEO attributed this loss to significant Impairment losses of $5'715 million caused by the economic activity slowdown and increased levels of uncertainty.
From this assertion, the author inferred that Impairment losses are positively correlated with the proportion of fixed assets owned by a company, and that asset Impairment losses are negatively correlated with earnings. Hence, the research question of this paper is: "How has asset intensity impacted the ability of commodity trading companies to earn record profits during Covid-19? "
This research is conducted based on two main assumptions: firstly, Glencore's asset-intensive Business model undermined its ability to earn record Net profits; Secondly, Trafigura's asset-light Business model was the main driver of its record Net profit. To carry out this research, Net income is defined as the dependent variable, and Financial metrics such as Profitability and Efficiency ratios as the independent variables. The data was extracted from Glencore and Trafigura's Consolidated annual financial statements. The period under observation is 2013- 2020. In this paper, 2020 is referred to as the year of the Covid-pandemic or Coronavirus Crisis.
The quantitative analysis is organized into three parts: part I offers an overview of the evolution of key balance sheet positions, profitability, and efficiency ratios of Glencore and Trafigura. Part II tests the statistical significance of the assumptions. Part III presents the statistically significant predictors of Glencore's and Trafigura's Net income using Pearson's coefficient correlation analysis. Finally, an attempt is made to build a reduced Multiple Linear Regression model that can best predict Glencore's and Trafigura's Net income.
The findings of this research are as follows: Part I reveals that Glencore's Operating margins (EBIT and EBITDA) have remained relatively stable since 2007 and that the deterioration in Glencore's Net income is not due to asset inefficiency, i.e., the high proportion of fixed assets, but rather to the declining profitability ratio, i.e., the Net income earned in relation to sales achieved. For Trafigura, the conclusion is that, on the whole, turnover levels, profitability, and performance ratios have remained fairly constant and that the exceptional performance during the Covid pandemic was an isolated event.
In the second part, the first hypothesis testing demonstrates that despite Glencore's Net loss and Trafigura's record Net profit during the Covid pandemic, there is NO statistically significant difference in the Net profit achieved by these competitors; the test of the second hypothesis confirms the claim that Glencore's Operating profit (EBIT) is superior to that of Trafigura. This outcome corroborates the conclusion in Part I that Glencore has no major operational inefficiencies and that asset intensity has not prevented Glencore from earning exceptional profits during Covid-19.
In Part III, the Pearson's coefficient correlation analysis reveals two key findings: firstly and surprisingly, for Glencore and Trafigura, PPE levels or asset intensity is a variable not statistically significant and weakly correlated with the Net income. Secondly, for both Glencore and Trafigura, Impairment losses are a variable statistically significant and highly correlated with Net income. The expected negative correlation between Impairment losses and Glencore's Net income was observed. However, unexpectedly, in the case of Trafigura, a positive correlation was observed between Impairment losses and Net income. This divergent outcome raised the question of the role and impact of Impairment losses on earnings.
This paper's conclusion is that in the case of Glencore, the observed negative correlation reflects a pattern similar to "big bath" behavior which describes a company that registers Impairment losses in a period when its profits are already lower than expected, thus allowing it to improve its future profits. As for Trafigura, the observed positive correlation fits the concept of "income smoothing," which describes a company that, in its desire to maintain steady earnings growth, records Impairment in periods of exceptionally high earnings.
One such trading company is Trafigura, a trading house operating under an asset-light Business model, which realized a record Net income of $1'599 million. In the same market context, one would expect Trafigura's direct competitor, the mining company Glencore, which operates under an asset-intensive Business model, to have achieved the same record levels of profitability. However, Glencore closed the financial year with a Net loss of -$3'946 million. Glencore's CEO attributed this loss to significant Impairment losses of $5'715 million caused by the economic activity slowdown and increased levels of uncertainty.
From this assertion, the author inferred that Impairment losses are positively correlated with the proportion of fixed assets owned by a company, and that asset Impairment losses are negatively correlated with earnings. Hence, the research question of this paper is: "How has asset intensity impacted the ability of commodity trading companies to earn record profits during Covid-19? "
This research is conducted based on two main assumptions: firstly, Glencore's asset-intensive Business model undermined its ability to earn record Net profits; Secondly, Trafigura's asset-light Business model was the main driver of its record Net profit. To carry out this research, Net income is defined as the dependent variable, and Financial metrics such as Profitability and Efficiency ratios as the independent variables. The data was extracted from Glencore and Trafigura's Consolidated annual financial statements. The period under observation is 2013- 2020. In this paper, 2020 is referred to as the year of the Covid-pandemic or Coronavirus Crisis.
The quantitative analysis is organized into three parts: part I offers an overview of the evolution of key balance sheet positions, profitability, and efficiency ratios of Glencore and Trafigura. Part II tests the statistical significance of the assumptions. Part III presents the statistically significant predictors of Glencore's and Trafigura's Net income using Pearson's coefficient correlation analysis. Finally, an attempt is made to build a reduced Multiple Linear Regression model that can best predict Glencore's and Trafigura's Net income.
The findings of this research are as follows: Part I reveals that Glencore's Operating margins (EBIT and EBITDA) have remained relatively stable since 2007 and that the deterioration in Glencore's Net income is not due to asset inefficiency, i.e., the high proportion of fixed assets, but rather to the declining profitability ratio, i.e., the Net income earned in relation to sales achieved. For Trafigura, the conclusion is that, on the whole, turnover levels, profitability, and performance ratios have remained fairly constant and that the exceptional performance during the Covid pandemic was an isolated event.
In the second part, the first hypothesis testing demonstrates that despite Glencore's Net loss and Trafigura's record Net profit during the Covid pandemic, there is NO statistically significant difference in the Net profit achieved by these competitors; the test of the second hypothesis confirms the claim that Glencore's Operating profit (EBIT) is superior to that of Trafigura. This outcome corroborates the conclusion in Part I that Glencore has no major operational inefficiencies and that asset intensity has not prevented Glencore from earning exceptional profits during Covid-19.
In Part III, the Pearson's coefficient correlation analysis reveals two key findings: firstly and surprisingly, for Glencore and Trafigura, PPE levels or asset intensity is a variable not statistically significant and weakly correlated with the Net income. Secondly, for both Glencore and Trafigura, Impairment losses are a variable statistically significant and highly correlated with Net income. The expected negative correlation between Impairment losses and Glencore's Net income was observed. However, unexpectedly, in the case of Trafigura, a positive correlation was observed between Impairment losses and Net income. This divergent outcome raised the question of the role and impact of Impairment losses on earnings.
This paper's conclusion is that in the case of Glencore, the observed negative correlation reflects a pattern similar to "big bath" behavior which describes a company that registers Impairment losses in a period when its profits are already lower than expected, thus allowing it to improve its future profits. As for Trafigura, the observed positive correlation fits the concept of "income smoothing," which describes a company that, in its desire to maintain steady earnings growth, records Impairment in periods of exceptionally high earnings.
- Language
-
- English
- Classification
- Economics
- Notes
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- Haute école de gestion de Genève
- International Business Management
- hesso:hegge
- Persistent URL
- https://sonar.rero.ch/global/documents/321854
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