With new rules and new markets, African companies are fighting for a bigger stake in the continent’s resource bonanza. At the same time, multinational traders like Glencore are targeting Africa as they seek to control commodity value chains.

For a couple of days in mid-June, as the rest of the world settled down to watch the World Cup, Chad made a rare foray into the global news headlines.

Global opinion is shifting on who should capture what percentage of resource rents

Idris Déby Itno, its dapper deal-making president who had paid a call a month earlier at the Elysée Palace to see France’s President François Hollande, announced that Chad’s capital, N’Djamena, was going to be headquarters for the regional campaign against jihadists in Nigeria, Mali and beyond.

Forces from neighbouring countries and special operation forces from the United States (US), France and Britain have already set up there.

Then, just days after that news broke, it emerged that Chad was spending $1.3bn on Chevron’s stake in its Doba oil concession and pipeline. Chad’s co-investors will be the US’s ExxonMobil and Malaysia’s Petronas.

Not a mega-deal by global standards, but it is around 10% of Chad’s gross domestic product.

The fact that Glencore, the Switzerland-based trading conglomerate, arranged Chad’s loan and purchased Chad-focused oil company Caracal Energy in April, points to big changes in the commodity-trading business.

Outsiders might ask why Glencore, the world’s second-largest commodity trader, is risking over a billion dollars in a war zone.

But for top traders inured to geopolitical crises, the critical questions are about Glencore’s game plan – does it want to be a bank, an oil company, a refiner, a mining company, a pipeline builder, a retailer, just an ever-expanding oil trader or all of the above?

Some are intensely sceptical about the trading companies’ attempts to control the whole value chain: Commodity traders wanting to be mining or oil companies should think it through, says Gary Busch, chief executive of International Bulk Trade, a company specialising in transport logistics in Africa and Asia.

Why would you take on all that political and financial risk where you don’t have the expertise? If you want the oil or minerals, negotiate a longer-term offtake agreement at a competitive price [. ] that works for everyone.

Founded by Marc Rich, the US commodity-trading king who died last June, Glencore is one of the most successful and aggressive trading companies in the world, but it faces ever more competition and political and legal challenges. Under Rich, it kept ahead of the pack by its ruthless acquisition of market intelligence and political relationships.

Rich bypassed international sanctions to sell Russian oil to apartheid South Africa and Iranian oil to Israel, deals that made him billions but earned him international enmity.

Charged with tax evasion and racketeering in the US, he fled to Switzerland in 1983, where he stayed until President Clinton pardoned him in 2000. Glencore was formed in 1994 by a management buyout of Rich’s company, Marc Rich & Co.

Now, ties between Africa’s mainly state-owned resource companies and the commodity conglomerates are fraying. Local companies, backed by their governments, want bigger stakes in production and trading. Cash-strapped governments are looking for ways to boost their revenue from royalties and taxes. That is squeezing the traders’ margins.

Times are changing

Technological and market changes over the next five years will challenge the dominance of players such as Vitol, Glencore, Trafigura, Cargill and Bolloré.

Electronic trading and more intricate derivatives markets in commodity contracts mean greater complexity but also more price transparency. More people have more access to information about the trades.

The geography of global markets is changing, too. The all-powerful terminal markets in New York and London no longer set demand or supply.

Not only are Bombay and Shanghai buying in bigger volumes, but India and China have established their own trading conglomerates, state-owned and private, to compete at every level with the West’s resource and trading behemoths.

Despite the new risks, Glencorechief executive Ivan Glasenberg, who gained his trading nous under the mentorship of Marc Rich, showed no signs of existential doubts when he addressed a couple of hundred shareholders and the wider world via a webcast at the company’s annual general meeting in Zug, near Zürich, in May: We are the only company that has the mining and the marketing and a vast array of assets [. ] grain, oil and mining.

Glencore’s strength, Glasenberg argued, lay in its real diversity – its control of value chains. It finances, it produces, it refines, it markets and it sells. We have it all, he said.

It is clear that commodities trading firms will be affected by increased regulation of the financial sector, and there will be other areas where we can expect to be under greater scrutiny, such as our supply chain

Peter Eigen, the founder of non-governmental organisation (NGO) Transparency International, says that information from trading companies is the missing link in the debates about transparency in the natural resource sector. Many companies in the field say that they benefit from good relations with African governments, but, Eigen says: I wouldn’t call it political connections, I would call it outright corruption.

Organisations such as Kofi Annan’s Africa Progress Panel and Global Witness have questioned Glencore about the ethics, if not the legality, of its business partnership with Dan Gertler, the Israeli mining magnate whose relationship with President Joseph Kabila has given him access to some of the cheapest and highest-quality mining assets in the world, causing substantial losses to the state of the Democratic Republic of Congo.

Gertler and Glencore dismiss the claims, describing the arrangements as standard commercial relations.

This typifies the ambivalent relation between African governments and traders. The Nigerian government, which is alone among major oil producers in selling all its oil via third-party marketers, has kept the traders close.

Now it is using its own home-grown traders, who are every bit as unsentimentally focused on the bottom line as their foreign counterparts. They include companies such as Igho Sanomi’s Taleveras, Tonye Cole’s Sahara Group, Ben Peters’ Aiteo and Walter Wagbatsoma’s Ontario Oil & Gas.

Cement magnate Aliko Dangote’s announcement last September that he was putting $3bn of his company’s money and $3bn raised through Nigerian and international banks into a commercial oil refinery to process over 400,000 barrels per day could change the game. Commercially viable refineries in the region could edge out the trading companies.

Downstream push

South Africa, too, is stepping up its refining capacity for the regional market and traders are changing tactics. Now the talk is of investing in Africa as ‘a destination market.’

Trafigura and Vitol have been buying up service stations in Southern and Eastern Africa from BP, Shell and other international oil companies that are trying to prune their operations.

In parallel with the push downstream by Africa’s oil and gas producers are the efforts spearheaded by Ethiopia’s Eleni Gabre-Madhin, chief executive of Eleni LLC, to modernise the marketing of Africa’s coffee, cocoa and tea through commodity exchanges.

After the success of her operation in Addis Ababa, a new partnership with Lomé-based Ecobank will enable her to establish more regional exchanges.

These exchanges will give farmers access to national and global markets, their products will be weighed and valued and they will be given assayers’ receipts.

In this way, Eleni says, the farmers get access to a much wider market of buyers, on terms that are transparent and in which they have the same information as their counterparts on the buying side. So that gives them the option to negotiate better on prices [and] the knowledge to be able to use the market to their advantage.

The exchanges will promote the development of futures markets in Africa, which, with better warehousing facilities, will give producers more leverage in the market.

All this, says Eleni, will raise more finance for agriculture but will also better connect Africa to international markets. The coffee farmer in Addis or the cocoa farmer in Accra will know what their crops sell for in Delhi, London and Shanghai.

Dangote is making substantial investments in rice and sugar production. His plan is to substitute local production for the $10bn a year that Nigeria spends on importing staple agricultural commodities.

Ultimately, it will be the commercial muscle of businesspeople such as Dangote and Eleni that challenge the big traders because they have the capacity to provide an alternative route to market for the farmers, the mining houses and the oil companies.

Markets more democratic

But, for now, many African officials remain guarded in their public statements about the big trading companies, sometimes protecting them from activist campaigns.

Jean-Louis Billon, Côte d’Ivoire’s trade minister and a former chairman of one of the country’s largest agro-industrial companies, rejects claims that commodity traders can meddle with the prices of agricultural commodities like cocoa and palm oil: Today, I think it is impossible. Twenty years ago, perhaps. Then there was much less transparency in markets. But today, information systems are such that it is difficult to play with the price of a product.

Markets have become more democratic, according to Billon: In the old days [markets] were essentially controlled by the US and Europe. But now there are many new actors, making it much harder for anyone to control commodity prices, like that of cocoa, where African countries produce 70% of global production.

Activists in groups such as the Berne Declaration, a Swiss NGO, argue that commodity traders use their global reach to push their tax bills far lower than they should be.

Commodity traders often try to book losses in their subsidiaries in producer countries and send their profits to tax havens.

According to the NGO, Trafigura headquarters its trading activities in Geneva but uses a Dutch holding company to deposit its global revenues and a company in the tax haven of Curaçao as the end repository for profits. It reckons Trafigura has 40 subsidiaries in tax havens and pays taxes of 6.2% on its global profits.

Andew Gowers, head of corporate affairs at Trafigura, answers: Trafigura complies with the tax legislation – in- cluding that on transfer pricing – in all the countries in which it operates. We do not warehouse profits in tax havens or zero-tax-rate jurisdictions. And our average effective tax rate is actually considerably higher than that of many large multinationals that have been the subject of recent controversy.

In 2013, Trafigura published an annual report for the first time, declaring turnover of $133bn and a net profit of $2.2bn.

The report disaggregated some aspects of Trafigura’s performance by its subsidiaries, but not its profits. It failed to disaggregate profit and loss by country, something that many regulators want to make mandatory.

Andreas Missbach of the Berne Declaration advises African governments wanting to stop tax evasion to focus less on their profits in the country and focus more on volumes.

Concentrate more on royalties than profit taxes and make sure your customs systems are able to monitor the volumes.

Tight-lipped Swiss

Billon says Côte d’Ivoire has its own checks: Our fiscal system for primary products is sufficiently well structured to guarantee the revenues we expected from these products. For cocoa, we know the volumes and we can thus easily calculate the level of revenue that should come from the crop for each campaign.

Billon adds: This does not mean there is no tax evasion. While I don’t think this is a major concern, it is certainly a source of worry.

An estimated 20% of the global commodity trade goes through Switzerland. Missbach says the Swiss government, which has the best information about the finances of the big trading houses, should share this with the tax authorities of countries in which its commodity traders operate.

But it will take international pressure to achieve that, he says: The African Union could lobby Switzerland on this, though I think support from the EU [European Union] and the US would be important too.

Trafigura’s Gowers says: It is clear that commodities trading firms will be affected by increased regulation of the financial sector, and there will be other areas where we can expect to be under greater scrutiny, such as our supply chain. But I don’t think the argument is being seriously made any more that these firms need bespoke regulation because they are too big to fail.

Yet the biggest battle between Africa’s producers and the traders will be, predictably enough, about money and margins.

Over the past 60 years, the share of oil profits captured by producer countries has risen consistently and in some instances now exceeds 95%. For minerals, royalties tend to be 0-6%, rising to around 10% for diamonds and other precious stones.

Botswana’s diamond industry provides a model for African producers. The state collects a 10% royalty from domestic diamond production, imposes a 35% profit tax, owns 50% of the Debswana mining company and 15% of South African diamond company De Beers, which owns the other 50% of Debswana.

Despite the wealth and the political power of the Swiss-based commodity companies, history is on the side of the producers, argues the Berne Declaration’s Missbach: Global opinion is shifting on who should capture what percentage of resource rents. The Guinean government, for instance, is pushing hard on this issue. While it is still a long way from the situation for oil, the trend is definitely moving in the direction of producer countries. ●