Counting the Cost - The giants of commodity trading

hello I'm Kemal santamaría this is counting the cost on al-jazeera your weekly look at the world of business in finance this week a special look at the world of commodities is it an industry beyond the regulators and law are the players speculators cynical manipulators or crucial linchpins in a global trade Switzerland to the world they are the Giants of commodity trading but can they shake off the tag of modern-day slave masters it all sounds pretty serious when we put it like that doesn't it but really in the business world it doesn't get more important than this we're talking about the essentials here commodities the raw materials and resources that we simply can't live without because they make up everything around us these are traded all over the globe everything from oil to copper sugar to precious metals grains you get the idea here it is a big deal now these are the hub's where it all happens basically on the map we're talking North America Europe and Asia note these are not the places where the stuff comes from these are where they are traded and collectively we're talking over three trillion US dollars of world trade in commodities but believe it or not the dominant player in all of this is Switzerland and the Lake Geneva region a staggering 25% of world commodity trade goes through that tiny country alone in fact if we just take oil in an example the Lake Geneva region has 35 percent of the market share of oil trading compared to 25% in another major hub London so why has that one region out surpass the others in the commodities business and is it possible to regulate a globalized multi-billion dollar company which operates within it that's the crux of our whole show this week Switzerland the country associated with Great Lakes political neutrality and the Red Cross but now the country can be associated with something else the commodities industry and in Switzerland it is large very large between 1998 and 2010 the Swiss commodities industry increased 15 fold putting the country at the center of a global industry an industry where energy commodities such as oil and gas minerals like and copper and agricultural commodities things at grain and coffee are traded daily to the tune of billions of dollars to be precise at one in four of the world's dollars changes hands through commodity trading and now two out of every three cargo ships transports commodities to the profits to be made are astronomical and Swiss based companies are cashing in take the Swiss based vital group which primarily trades and distributes oil it's turnover for 2011 was 297 billion US dollars and the geneva-based Glencore which trades in just about everything its turnover in 2011 was 186 billion US dollars and the value of that company is set to increase as a thirty six billion dollar merger with the mining giant Xstrata and is its final stages the completed merger would place the company at the very heart of the global commodity industry the scale actual scale are nowadays the commodity business in Switzerland has a volume of 700 to 800 billion dollars that's about a global share of about 20 to 25 percent the main reasons from our perspective why Switzerland has become such powerful hub there's a ingenious mix of tax privileges of a strong financial sector and weak regulation and the irony is that poorer countries who are losing out are often the major commodity producers themselves 59 percent of metals in ores and 64 percent of all oil comes from developing countries increasingly key commodities also come from politically unstable regions of the globe as well as the disparity between producer wealth and trader wealth also been a number of human rights scandals these are forced the normally reclusive commodities companies into this spotlight the most high-profile incident involved the oil trading company Trafigura was based in Geneva but now Singapore in 2007 the company bought cheap low-grade oil from Mexico the toxic waste was eventually passed on to a contractor in Ivory Coast where it was dumped caused the death of 15 people it injured over 30,000 the company paid forty five million dollars in compensation three years ago but then a new investigation by Amnesty International and Greenpeace say - the company should face prosecution in the UK traffickers response is a letter contesting the investigations methods it said we believe the report contains significant inaccuracies and misrepresentations the report oversimplifies difficult legal issues analyzes them based on ill-founded assumptions and draws selective conclusions most of these companies working out a Swiss cent of trading companies trading houses these trading houses often accept high risks as they become virtually could vertically-integrated that means they do mining themselves as Glencore does for instance there are lots of affected communities out there a lot of environmental damage that has been pinpointed in Zambia in the DRC in Colombia and other places greater pressure is being applied on governments to increase transparency and regulate the commodities companies last week for example the European Union Committee on legal affairs approved a set of proposals to make large companies in oil gas and minerals disclose their payments to national governments but applying regulation to highly globalized companies is difficult for example Switzerland is not a member of the EU meaning companies such as Glencore and the VTOL group are outside the remit any of these proposals the multinational companies are so flexible to allocate their workforce wherever it's convenient according to tax privileges and so forth so that's one point the government's and the states are only reacting what the companies are doing so always in back you know the second is that the transparency initiatives sustainability initiatives are only they're non-binding so there is regulators have big problems to really control flows of money control the production says control the whole value creation so over the time the companies are much stronger than the the government so we seeing that sovereignty is really driven by by the compass and not and not the state at the heart of the commodities boom has been an increase in the speculation on commodities derivatives a recent report by the UN conference on Trade and Development states that this type of trading was worth less than 10 billion dollars in 2000 but by April 2011 was up at 450 billion dollars the impact is that the price of commodities are distorted they do not represent only the dynamics of supply and demand physical physical demand and I would say that two major broad categories of impact at the micro level on firms and consumers and also at the macro level about the macroeconomic stability of our country so with the increased speculation the market volatility the human rights issues do countries that Houska modeling companies run a risk of damaging their own reputations I think the human right violations of a couple of companies in the world whether producing whether mining is really harming the reputation of Switzerland for a couple of reasons according to the sustainability index of the Dow Jones the the leaders of the of the come of the industries like Clank or are responsible for a high death toll rate that shows that it's a high-risk business while the Hackford is in in switzerland are doing a nice job in a nice environment the mining workers are really exposed to to critical working conditions and even losing their life so that makes a huge gap between the rich Switzerland and the poor countries I'll commodities companies continue to make billion-dollar profits regulation of the industry is still weak those at the production level continue to be some of the poorest in the world right so hopefully that puts you in the picture as to what we're talking about here I want to bring in the first of our guests to speak to that in londone7 one where he is the executive director of Zambia's center for trade and policy development you know in this world of commodities it's such a big money area and we see all the people who benefit tell me about the flip side in Zambia the way that you know the place where commodities come from a place where commodities come from okay what benefits do you see there or more to the point what benefits do you not see I think is essentially like for most African countries the dilemma is that in spite of the huge natural resource that we see most of the countries including Zambia suffer from the so called resource case where on one hand there is a need for our government and the country indeed to benefit from the foreign direct investment but potentially the multinational companies working in the mining sector can bring on the other hand there's the the need to translate all these huge investment or this huge resource into meaningful benefits for the ordinary people in Zambia however potentially the mining sector in Zambia promises jobs they promise economic benefits for the country in terms of tax revenues however I think none of that has happened to the full satisfaction of the majority so key points are in your opinion where does it break down why does it not happen in the end I think it's a do two different sets of quite complex factors most of them due to the international system of regulations of the way mark national companies conduct their business across borders the weaknesses of most of the African governments to be able to really assert themselves of the necessary capacity and and regulatory oversight to really take charge of these multinational companies that you've been taking about the problem sorry to interrupt you would you go so far as to say you're actually been taken advantage of what do some extent you could say that because I mean this national companies have huge power huge financial huge political power they clearly understand how to work with different countries both in the developed countries and in the less developed countries they literally a window shop they they get the most from from any situation most of our countries mining sectors for example are quite detached from the rest of the economy so if they always one step ahead of any form of regulations circulators need for a much more sort of concerted effort by the international community by own governments in terms of politically are setting themselves having the right kind of foresight in terms of how really it to to manage these industries in the meantime they want and what you know we'll talk more about regulation in a moment in the meantime this is kind of a loaded question but why keep doing business with them if you're saying there are all these loopholes they've got all this power behind them to get away with this sort of thing I mean it was a richer point we've got to find another partner yes unfortunately it's not as simple as that the challenge that most of the governments in Africa faces that they have desperately need of showing to the large masses of people they electorate on one hand they need to produce results they need to make the most out of you know the situation they have to show that or look they're doing something about creating jobs about exploiting making the most of these essential resources on the other hand there's a challenge of really concretely delivering these benefits in the short term as well as having the long term strategy of making these countries less dependent on natural resources you mentioned the word regulation a lot so you should talk about that how ideally how would you see regulation work here because once you get into tax havens and one set of rules for one and not the other and these sorts of things I mean this is one of the issues may be why the regulation isn't so tight because you've got you know different jurisdictions and also saying how do you regulate this industry internationally well the starting point obviously and one of the key issues here is transparency the asymmetry in power the differences in laws legislation makes it even more difficult so we have to really come up with some sort of a multinational framework an international framework of try which I show has certain levels of transparency such that all the different authorities are able to see exactly what is going on not only in their own countries but also across borders that's a fair starting point the second issue is with the fact that countries in Africa can no longer depend on these companies to tell them in terms of what has happened in terms of their production volumes their financial status you really need to to to modify and adapt to the International Accounting Standards the reporting the way these companies report so it's quite clear for authorities to in a very simple way be able to assess whether actually what these companies are contributing is what they ought to 7-1 that's been a pleasure talking you joining us there from a Zambia Centre for trade and policy development thank you you're welcome well let's go to Zurich now for the other side of the argument Martin faster from the zoo commodity association joins us to you know tell us about the the traders side of things thanks for your time tell me first of all about Switzerland's role in the whole commodities the engine which we try to explain to our viewers about how there are hubs for commodity trading away from where the commodities actually are and Switzerland is just such a huge player in it all that there are various reasons for that I think to some degree it is also historically especially if you look at Geneva Geneva's always be a place of trading of commodity trading at least not specifically commodity between kind of a few hundred years ago Germany and Italy France so it was always a trading place and then it really kicked in I would estimate in the early nineteen hundred twenty thirty when banks established in Geneva and as I've been explained at some point also invented the letter of credit then the second move came during the wars when I believe the big inspection companies or one of the biggest inspection company moved from France to to Geneva because the the Swiss political system political environment was more stable than anything else they could find in the neighborhood and so over over the next decades more companies were attracted and nowadays it's just it is a hub as you said ok so you know what I'm going to say next then don't you it's the tax environment I mean it's just it's just a very conducive place to do business because the tax laws favor the businesses well on the tech side I mean it's it's clear it was a very strong argument I would say 30 40 50 years ago but if I look today's situation then companies who are that are not yet in Switzerland or and they're looking to to dislocate somewhere else they they are not coming to Switzerland for tax reasons because they are other places which are more favorable on the tech side they really do come for other reasons although Switzerland is still attractive on the tech side but if you really want to go to the extreme on the tech side you are not coming to Switzerland okay then I want to look at some of the controversies if you like you know a company like Glencore is often popularly spoken about it makes all the big money the top end it gets almost a monopoly on the market and then as we were saying with our guest from Zambia earlier the trickle-down effect is just not there the places where the actual commodities come from they are getting and there's a phrase I could use here but I won't but they are getting taken advantage of well in my position I cannot speak for Glencore but of course and it's not the first time I hear that and here I'm kind of sorry I didn't hear what the person before had to tell me because yes it is the perception that it this way it's hard to say how you want to quantify the know how the risk taking the the financing powers of the companies outside of the places which actually do have the commodities so I was actually very interested to hear from this person what that measures they take because so far I only hear it from that we get alleged of or we the the commodity trading companies get challenged with this transfer pricing to give it prop the proper technical way but I've never been explained what the countries on the other end to okay let me put it a different way singers as you didn't get to hear what our previous guest said the response are built in fact you know let's show a view as a specific case here it's out of Bolivia but to be clear this could be transplanted to any number of other places back in June it was Bolivia's president who nationalized a mine belonging to the Swiss mining giant Glencoe he's trying to end a conflict between the miners and the owners who the miners wanted to take control of the tin mine by force so it's in government hands now but and you'll see in this report from Gabriel Elizondo there is still trouble at other mines issues with human rights and an underage - serious illnesses have a look at this for many miners in Bolivia this is their workplace deep in a silver and zinc mine it's dark and damp one wrong step and they could slip to their death Don an uncovered mineshaft but there are other health risks not immediately apparent that are even more dangerous deep inside these mines there's almost no natural air circulation so it just smells like dust and metals and this is what these miners are breathing day after day hour after hour working in these mines almost none of them wear masks this is Jorge he's been 13 years old and he's been working in these mines since he was 11 I have heard miners get sick with lung disease Jorge's father works here as well as a lifelong miner he knows the dangers in the air he breathes ashamed over in the mine there's a lot of dust sometimes I get bronchitis sometimes my kidneys hurt and I also think it affects my heart every time we come to the mine there's some disease were exposed to mining is the second biggest industry in Bolivia most of the work is done by independent miners with little access to protective gear like masks that would help them avoid the health risks at the local hospital we find many miners suffering from silicosis a lung disease caused by inhaling dust particles that result in breathing problems Nikolaus Cruz has been mining for 15 years he's so sick he could barely talk at home my hands and lips were telling black because of lack of oxygen that is why I came back to the hospital my lungs are wasted silicosis has no cure Eduardo Coppa is in the advanced stages Boras fake wounds if ever there was a dry dust when I worked as a driller in the mine and that just entered my lungs my lungs are full of minerals now I cannot breathe anymore in potosi one doctor tells me 60% of all patients are sick miners what I've seen in the hospital is miners die between 45 and 50 years old we have also seen cases in very young people 2530 years old who are very sick it's very worrisome back at the mine or his father is hoping his son doesn't have to work here much longer because every day spent in the mine is another day of killing his lungs so Madan how much responsibility actually falls to the trading companies and it could be any trading company as I was saying before it's not just this one in Bolivia to make sure that everything goes right at ground level but the people aren't exploited and that they actually get their fair share on the social responsibility to all the people I talk that's not let's say it's not a why or should we or shouldn't we it's more the question to what degree or or how to define that because they are also there their extreme questions or demands from one side and then of course the the other side and so I think there nobody questions the fact that there is a responsibility it's the question how to best follow that or implement it and then on the trading side before the restraining there is extraction or production it's clear trading extraction extraction and production is linked and so trading cannot deny in my view some responsibility on what's happened it's happening on the ground but the first in line to get to with the best leverage probably or the extractive and the production companies okay then I guess this ties in with you of regulation in there is a very strong school of thought that this isn't tightly regulated enough that it's actually difficult to regulate because of different jurisdictions different countries different tax laws all these things which factor into a geographically wide industry does they need to be more regulation um I guess everybody understand and I'm sort of reluctant and on the regulation commodity production or the entire value chain of commodity is in my view very complex may be comparable to the banks but banks are highly regulated for a long time amongst the regulator's for on the banking side I would very much hope there are experts and know precisely how Bank works on the commodity side I fear this is not the case and so if we are now talking about introducing regulation on the commodity side then I my fear is that such regulation are more driven by pressure groups and the politician on a re-election campaign then actually doing some fair regulation that really is also to the benefit of the industry and as we discussed before maybe the countries where the commodities do come from and it's Martin faster from the Zook commodity Association in Zurich thank you so much for your time and that is it for this week's special thanks to our producer Samuel hunt we put this show together his last with us unfortunately but we wish him all the best as he heads back home to the UK do drop us a line won't you about this show or if you've got a suggestion for a future one because in a tweet to me at Kemal aje or a business editor at up at Oliver alley emails just fine - we've got that counting the cost of al jazeera dotnet and then while you're online aljazeera.com slash business you can link on to the CTC page from there we put all our episodes up and fall for you to catch up on whatever you'd like but that is it for this edition of counting the cost I'm Kemal santamaría from the whole team thanks for joining us the news on al Jazeera is next

Channel: Al Jazeera English

Views: 48,184

Rating: 4.727891 out of 5

Keywords: 1867045467001, Counting the Cost, mining, glencore, geneva, human rights scandals, Gabriel Elizondo, Evo morales, commodity trading, Swiss commodities industry, Vitol group, commodities industry, countingcost, youtube, switzerland, aljazeera, bolivia

Id: lwYiPGmqmY0

Length: 25min 21sec (1521 seconds)

Published: Sat Sep 29 2012