Commodities - Switzerland's Most Dangerous Business -  - ebook

Commodities - Switzerland's Most Dangerous Business ebook



Today marks the release of the controversial book "Commodities: Switzerland's Most Dangerous Business". The fact-filled and groundbreaking analysis of the industry, as powerful as it is unknown, shows why resource-rich developing countries remain poor while Switzerland-based commodity companies rake in profits in the billions. And it illustrates the gray areas of a business model whose risks are becoming increasingly apparent. Unnoticed by the public and politicians, Switzerland has become the world's most important commodities hub. Trade in oil, gas, coal, metals and agricultural products - particularly via deals made in Geneva and Zug - has grown by an incredible 1,500 percent since 1998, according to BD investigations. The result: Seven of the twelve corporations with the highest turnover in Switzerland trade in, and/or mine, commodities. Switzerland has become a global commodity hub thanks to its mix of tax privileges, a strong financial sector, weak regulation and lax embargo policy. The Swiss commodities business is dangerous for developing countries that are blessed with natural resources but that suffer from weak governance. The business is life-threatening for all those who must live amid the filth and toxins of the mines and facilities. The extensive misery of entire countries and the fairytale wealth of a few Swiss top traders are causally related. The book "Commodities: Switzerland's Most Dangerous Business" shows how. The richly-illustrated reference work offers a portrait of the key firms and people behind the discreet deals, provides insight into the social and ecological consequences for the producing countries, analyzes the practices and repercussions of tax avoidance and speculation, and offers proposals for achieving more justice in a multi-billion-dollar business that affects everyone.

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ISBN 978-3-905801-50-7ISBN 978-3-905801-51-4 (E-BOOK)2011, ZURICH








ISBN 978-2-8290-0413-12011, LAUSANNE


BERNE DECLARATION (BD) AUTHOR TEAM(in alphabetical order)




Berne Declaration (BD) is an independent non-governmental organization formed to combat the root causes of poverty by promoting more equitable and sustainable relations between Switzerland and the developing world. We are committed to global justice and address issues of trade policy, commodity production and trade, the politics of food, finance and fair trade. As part of a worldwide network of human rights groups, environmental and development organizations, the BD promotes a more equitable and humane route to global development.

To this end, we carry out investigative research, run public campaigns to raise awareness and undertake successful advocacy work in Switzerland and on the international stage. Founded in 1968, Berne Declaration (BD) today has a staff of 22 in its Zurich and Lausanne offices, and boasts a membership of 22’000 individuals, who finance over 80 per cent the organization.


A generous bequest enabled Berne Declaration (BD) to publish this book.

Berne Declaration (BD) would like to thank its colleagues at Revenue Watch (RWI), in particular Karin Lissakers and Alexandra Gillies, for their generous support for this English edition.

Finally, the publishers would like to thank Getty Images and Keystone for their kind cooperation.



Commodity Hub Switzerland: Crucial for more Transparency


Welcome to Switzerland, the commodity carousel: “Warning: risk of dizziness!”


The nature and importance of commodities in world trade


Tools and Mechanisms


Home of the traders: Switzerland’s rise to a commodity hub

05 ZUG

Central Swiss idyll: appointment in Rich country


“This is Baghdad, just without war.”


Big, bigger, Glencore: discreet commodity giant at the crossroads


Mining made in Switzerland: Xstrata in the “Super Cycle”


Swiss Goldfinger: frighteningly beautiful conflict metal


‘Crude’ business idea: Trafigura’s waste odyssey


Geneva, the oil Mecca: the “Jet d’Eau” gushes black gold


Soft commodities: the blooming after-harvest business


The other casino: high-risk speculation


‘Transfer pricing’ & Co: tax avoidance as a business principle


Corruption and conflict zones: from ‘Kazakhgate’ to ‘Oil for Food’

15.1 Sudan and Congo: danger pay for for opportunists

15.2 ‘Kazakhgate’ or the art of corruption

15.3 Uzbek child labour for the global cotton boom

15.4 The UN in Iraq: ‘Oil for Food’ means‘Cash for Saddam’


“Commodity trading involves considerable risks for Switzerland”: Professor Mark Pieth in conversation


Unregal ‘royalties’: resource curse and distribution issue


Ideas and initiatives: shedding light on the dark deals


What now? Implications and demands







Karin LissakersPresident, Revenue Watch Institute

‘Commodities: Switzerland’s Most Dangerous Business’ by Berne Declaration (BD) sheds light on the role of Swiss companies in the natural resource sector and commodity trading in particular, areas which have hitherto escaped close scrutiny and understanding.

Aside from a few high profile scandals such as the Iraq Oil-for-Food prosecutions, traders have largely operated under the radar with limited external understanding of their business practices. However, this appears to be changing, thanks in part to the public listing of Glencore, rising commodity prices, and penetrating research such as this book.

‘Commodities’ sheds light on several aspects of this vast, powerful and global business. Firstly it provides a primer on how commodity trading works. The early chapters situate trading within the broader natural resource sector and global economy, and trace the emergence of Switzerland as the hub of trader activity. It explains the relationship between paper and physical trading, and breaks down the stages through which deals are made. Such explanations are difficult to glean from trade publications and press reports, and will be valuable to audiences not steeped in industry affairs. What stands out from this review is the size of the transactions in question and the scale of Swiss involvement. For example, Swiss companies conduct 35 per cent of global oil trading; Glencore alone trades volumes that top 25 per cent of total world trade in several minerals, including zinc, copper, lead and thermal coal; and Geneva-based companies sell up to 50 per cent of Kazakh and 75 per cent of Russian oil.

Second, the book illustrates the influential role played by Swiss companies in many resource rich countries. The companies discussed in the book – Glencore, Gunvor, Trafigura, Vitol and others – engage in high value deals that directly impact the economic prospects of many nations. The book provides snapshots of the activities of Swiss companies in countries including Zambia, Democratic Republic of Congo, Equatorial Guinea, Kazakhstan and Uzbekistan. The authors describe how some trading companies exhibit higher thresholds for political risk than many of the larger upstream companies. With their access to financing and logistical prowess, traders can offer valuable services to such countries by helping their raw materials reach the global market. However, it also means that Swiss traders are operating in environments that exhibit the weak governance associated with the ‘resource curse’. Weak institutions and limited state accountability characterize these scenarios, and render non-transparent transactions more susceptible to manipulation than in other kinds of environments.

Along these lines, a third objective fulfilled by the book is to flag several governance risks associated with trading. The book takes a first step towards this goal by offering several cautionary tales of instances where trading activities appear to have contributed to harmful outcomes for producing countries. In some cases, the accounts describe close relations between companies and political elites, such as those of Glencore and Gunvor in Russia. In others, they illustrate the high political risk threshold that underlies business decisions such as Glencore’s potential takeover of ENRC, a mining company whose Kazakh and Congolese operations have attracted controversy in the past. Still others, such as Trafigura’s offload of toxic materials in Cote d’Ivoire, suggest how weak regulatory environments can sometimes offer attractive business opportunities. These anecdotes provide data points which are not yet connected, but they certainly make a strong case for further study.

Finally, the authors call for greater transparency. By the time this recommendation is made, the reader is well convinced that the activities of trading companies – be they Swiss or otherwise – would benefit from greater oversight and accountability. Their size alone legitimizes this recommendation. Furthermore, these companies often engage in high value transactions with governments or state-owned companies. In such cases, they are buying access to public resources, and the sale proceeds enter government budgets. For example, Energy Intelligence reported in 2011 that Swiss traders Vitol, Trafigura and Glencore received contracts to lift a combined 240,000 barrels per day from the Nigerian government. At current prices, the sale of this much crude would generate over 10.5 billion US dollar in annual revenues. The conduct of these high value sales is of great public importance, and deserves transparent treatment.

Transparency is one of the few available mechanisms for monitoring the sale of public assets. For most oil producers in particular, transactions with traders are essential as this is how they monetize their very large inkind revenues. Around 70 per cent of Nigeria’s oil revenues come from the sale of the government’s share of oil (over 1 million barrels per day) to various off-takers, mostly traders. Unless the price, volume, date, and other information about these sales are known, the public cannot assess whether it is getting a good deal for its resources. Along with these basic transparency requirements, further measures would be needed to discourage tax evasion – a costly practice that is discussed in chapter 14. Regulatory weakness puts developing countries at particular risk of these abuses, resulting in the loss of sorely needed public revenues.

The movement to promote transparency and good governance in the natural resource sector has made important advances over the last decade. This campaign is motivated in part by the recognition that resources can play a crucial role in development. Far greater than foreign aid in size, resource revenues can provide the financing needed to build infrastructure and expand social services in many of the world’s neediest countries. This only happens when producing countries receive a fair deal in the extraction and sale of the resources, and spend the revenues in ways that benefit the public.

Transparency can help achieve these outcomes. But often transparency is needed most where it is least likely to emerge. Some home governments are helping to advance this objective. As described in chapter 18, the 2010 US Wall Street Reform Act (the ‘Dodd-Frank Act’) requires all US listed extractive sector companies to publish how much they pay to foreign governments, and to report this information for each individual project. The European Commission has made a similar proposal currently under consideration by EU member states. However, even if these efforts move forward successfully, a number of companies, including several profiled in this book, will be excluded because they are based in other such as Switzerland.

This book sheds light on a segment of the natural resource sector that has important implications for many producing countries. It should help to build the case for why greater openness in commodity trading offers potential benefits to citizens in resource rich countries worldwide.

Commodities are the lifeblood in the veins of the global economy and are of commensurate strategic importance. No wonder, then, that


increasingly scarce natural resources have become an ever-growing political issue in recent years.



Geneva, Grand Hotel Kempinski, end of March 2011. While the world stares spellbound at the slow-motion reactor catastrophe at the Fukushima nuclear power plant, the commodity business meets for its annual rendezvous, the ‘Trading Forum’, on the shores of beautiful Lake Geneva. In his talk, oil trader and Mercuria co-owner Daniel Jaeggi responds to this burning issue and reflects on what a global nuclear phase-out might well yield for him and the others present. Although only five per cent of the world’s energy comes from nuclear power, that nevertheless corresponds to 610 million tonnes of oil annually, or 15 per cent of global output. “I just leave you with that,” Jaeggi closes with a smile.

Where others see only disaster, the commodity trader sees an ‘opportunity’, his chance for new, large and, above all, profitable business. Successful ‘opportunity hunters’ have transformed Switzerland into a centre for commodity traders and made it a world leader, and all in just a few decades. As one of the very few top traders who is actually Swiss, Jaeggi is also the exception that proves the rule. In almost all cases it has been non-Swiss – managers as well as companies – who have made this small, landlocked country into the largest global commodity hub.

Yet this amazing success story is based on something deep-rooted in the Swiss character, namely political opportunism. Consistently standing on the sidelines, looking away and claiming not to know, even refusing to join the UN until 2002, are all actions which have been defended under the cloak of ‘neutrality.’ These have brought Swiss-based companies a large number of questionable but all the more lucrative business opportunities. The rise of the commodity trading centres of Zug and Geneva was also facilitated by their exceedingly moderate tax regimes and a societal tendency towards a great deal of confidentiality and little regulation and control. In short, Switzerland as a commodity hub, although by no means planned, is much more than mere coincidence.

The commodity market in Switzerland is large – astronomically large. And it has grown explosively: between 1998 and 2010, net receipts in this sector increased fifteen-fold. According to the trade newspaper Handelszeitung, the twelve largest companies in Switzerland include five commodity businesses (according to research by Berne Declaration (BD), there are in fact seven). Despite its significance and hazardous nature, virtually nothing is known about this secretive business, which in 2008 contributed roughly as much to the country’s GDP as the traditional mechanical engineering sector. And in this regard, even the initial flotation of industry leader Glencore in May 2011, billed as a “watershed moment for the entire commodities industry” (Financial Times), will probably not change anything. This book is therefore a pioneer work and attempts to capture the swiftly-turning Swiss commodity carousel within a single book.

Commodities are the lifeblood of the global economy and are of commensurate strategic importance. No wonder, then, that increasingly scarce natural resources have become an ever-growing political issue in recent years. The key terms in this drama are oil price boom, food crisis, evictions, population displacement, security of supply, price speculation, CO2 emissions, land grabs and conflicts over the Arctic. Given such a diversity of topics already, there are some the next 400 pages do not cover. For example, the commodities that are consumed by industry and private individuals within Switzerland itself. In comparison with the transit trade – the business of the Swiss commodity sector – in which the goods never arrive in Switzerland at all, domestic consumption is entirely insignificant. It’s not about famous brands such as Nestlé, Shell or Starbucks, either. They are involved in commodity trading, but are primarily major customers of the real traders and are therefore not included. In addition, the controversial question of how a country today ensures politically that it obtains all the raw materials that its economy and people need is also not answered here.

The subject of this book is rather all Swiss companies, including the ‘corporate immigrants’ with their central operations in Switzerland, that are active in either commodity trading (Mercuria, for example), the extraction of raw materials (Xstrata, for example) or both (Glencore, for example). We have analysed all the main commodity groups: energy sources (especially crude oil and its derivatives), ores and metals, and agricultural products (‘soft commodities’). The world’s largest independent oil trader Vitol operates out of Geneva, Glencore in Zug is the dominant commodity colossus, with its main focus on ores and metals, and the four most important agricultural trading firms all have prominent trading offices in Switzerland.

Our focus is necessarily on such industry leaders. Due to limited space, the niche players, who are encountered mainly around Lake Geneva, but occasionally also in other cantons, are mentioned only in passing. To really bring light into the darkness of the ‘black box’ of commodity trading, we examine its wider contexts and general business practices across the companies. From its historical origins, and continuing via the complex tax tricks and speculative instruments to some specific places of action (and consequences), we show everything that is important for an understanding of this multi-layered commercial sector.

What has motivated us to undertake this research project is a fundamental contradiction. It might be a development-policy truism but this makes it no less pressing: resource-rich countries are and often remain very poor – not despite, but precisely because of their natural resources. A prime example of this ‘resource curse’ is the Congo, while Zambia is another and we report from both countries. Nevertheless, this book is not a chronicle of the global scandals of the Swiss commodity traders. Why not? Because our main interest is in the other side – our side – of this ‘accursed’ equation. Here, the same commodities are making some trading businesses and their owners rich beyond measure. The managers of Glencore roughly tripled their wealth at a stroke by bringing their company to the stock exchange in 2011. The widespread poverty of entire countries and the wealth of some top traders are directly linked. This book demonstrates how this is the case.

On the whole, the commodites business as practised in Switzerland today is dangerous for all countries in the southern hemisphere that are blessed with natural resources but at the same time suffer from weak or corrupt governments. This is particularly the case for those men, women and children who live in the dirt and dust of the mines and production facilities. Mining, crude-oil production and large-scale industrial farming harm the living conditions of millions of people by using land and polluting water supplies and the air.

But the trading companies’ business model, which frequently exploits grey areas, is also dangerous for Switzerland. Corruption, aggressive tax avoidance, speculation mania and human-rights violations pose enormous risks for reputations and, as in the case of bank secrecy, constitute the country’s “next exposed flank” (Tages-Anzeiger). Switzerland is not only a tax haven, but also lacks transparency and regulation – and it attracts commodity trading as a dunghill attracts flies. The commodity businesses between Lake Zug and Lake Geneva still enjoy free rein, but some countries such as Bolivia are defending themselves and demanding fairer commodity prices, the United States is imposing a duty of transparency on the commodity business, and the EU wants to reduce foodstuffs speculation. In other words, the world will not simply a spectator at this so-called ‘locational advantage’ swindle forever.

“Improved accountability and control [of the commodity business] could potentially change living conditions, economies and political systems around the world,” says the investors’ guru George Soros. While Eva Joly, the MEP and courageous campaigner against white-collar crime, is convinced that in 20 years’ time humanity will classify the current distribution of wealth in the commodity business in much the same way that we regard slavery today. We therefore share the motto of U.S. Federal Judge Louis Brandeis who acted against corruption and bank power 100 years ago and knew even then that “sunlight is the best disinfectant”. So if this book lets some sunlight into the Swiss commodity hub, it will have achieved its goal.

PS: Since the German edition of this book went to press, Glencore and Xstrata have announced their intention to merge. If this goes through, the ensuing company will be the fourth largest mining company and at the same time the most profitable commodity trading company in the world. Naturally, it will be headquartered in Zug.


In the words of a Geneva-based oil trader: “My job is to bring physical goods from a place where the people don’t need them to a place where they are needed.” However, like many of his colleagues, he is confusing need with spending power.



We cannot function without raw materials. The natural resources of our planet are the material basis of our economies and societies: they fuel prosperity and growth. We are consuming more and more, and so our need for natural resources is ever increasing. More raw materials have been consumed since World War II than in the entire history of mankind.1

These fuels of our civilisation often come from developing countries: 59 per cent of metals and ores (as much as 71 per cent of copper), 63 per cent of coal and 64 per cent of oil.2 Increasingly, they come from politically unstable countries, as shown in FIG. 1. These are states which have no effective environmental or social legislation and are often shaped by war and conflict. The lives and health of the people who live around the mines, quarries and production facilities are thus exposed to great danger.

FIG. 1



So that they can be exchanged easily, heavily traded raw materials are standardised in size and quality, after which they are referred to as ‘commodities’. Commodities are usually divided into three categories. Energy commodities, ores and metals (also known as ‘mineral commodities’), and agricultural goods (‘soft commodities’). Energy commodities are a relatively simple category, comprising mainly crude oil and oil products, natural gas and coal. Mineral commodities are much more diverse, dominated by the metal commodities such as iron, non-ferrous metals such as zinc, and precious metals. Finally, there is the agricultural sector, including a wealth of foodstuffs such as grains, ingredients for drinks (e.g. coffee and cocoa), versatile materials such as sugar and oil, and fibres for textile production TAB. 1. In the trade the term ‘commodities’ is used rather loosely. On all the markets there are materials which, strictly speaking, are already intermediate products. As far as metals are concerned, aggregates (ores, e.g. bauxite) and the intermediate products obtained from them (alumina) and lastly the pure products (aluminium) are all traded as ‘commodities’. Besides iron, the metals which are especially important to industry (industrial metals) include many non-ferrous metals. TAB. 2. Since Switzerland does not play a major role in the trade in rare earths, which are central to the electronics industry, these are ignored here.

TAB. 1


TAB. 2


Be it cotton or lead, all these very different commodities have one thing in common: since the turn of the century they have shot up in price. This fact alone explains why commodities are such a relevant and controversial issue today. Although prices dipped sharply in 2008 following the financial crisis, metals and agricultural goods have long since surpassed their previous highs FIG. 2.


Whereas some parts of the earth are rich in mineral deposits, others are almost entirely dependent on imports. A good example illustrating just how much the distribution of raw materials and their consumption differ worldwide is oil. In 2010 every human being in the world consumed five barrels of oil on average FIG. 3. Whereas the Middle East can produce 43 barrels per person per year, thereby generating huge surpluses, in Asia merely one barrel per capita is extracted from the ground at present. Trading redresses this global imbalance.

It is this function that gives commodity trading its public identity. Daniel Jaeggi, Vice-President and Head of Global Trading of Geneva-based oil trader Mercuria, puts it this way: “My job is to bring physical goods from a place where the people don’t need them to a place where they are needed.”3 However, like many of his colleagues, he is confusing need with spending power. It can hardly be due to a lack of need that in Africa only one out of the (modest) four barrels of oil produced per capita is actually consumed there, and the rest have to be sold. By way of comparison: the average person in North America consumes all of the 14 barrels produced there and then imports eight more from other regions (among them Africa).

FIG. 2


FIG. 3



Although some of the raw materials are consumed directly in their countries of origin, that a sizeable share invariably reaches the global market is beyond question. Today, this process is dominated by ‘commodity trading’, where commodities make up around a quarter of the total world trade volume FIG. 4.

Of even greater significance than the value of commodities in world trade terms is their importance in weight. Commodities are obviously much cheaper per tonne than finished products. Since 80 to 90 per cent of world trade is seaborne, the statistics for international maritime cargo transport afford interesting insights.4 About 70 per cent of the ships carry commodities. These carriers can include oil tankers and bulk vessels with metals, coal or wheat on board FIG. 5. In contrast, the variety of sea-going containers, which are mainly used to transport end products and symbolise global world trade, account for a mere 14 per cent of world trade in terms of weight. So when it comes to the transport of bulk materials, commodities trading actually accounts for roughly two-thirds of world trade.

‘Oil is king’: In terms of its value ‘black gold’ accounts for almost exactly half of all commodity exports. Taking oil, natural gas and coal together, the share of energy commodities in total commodity exports is just short of 60 per cent FIG. 6. The remainder are exports of mineral (20%) and agricultural commodities (20%).

FIG. 4



FIG. 5



FIG. 6




Given their global dominance it is hardly surprising that fossil fuels also monopolise the Swiss commodity trading hub. TAB. 3 gives an overview of the main commodities traded and those Swiss-based companies that conduct the majority of this trade, and in turn are covered in this book.

TAB. 3


Important commodity trading hubs are located in Asia, Europe and North America FIG. 7. The trading hub of Amsterdam has Europe’s largest port, Rotterdam, at its disposal, while Houston has huge oil refineries and storage facilities, Chicago and Hong Kong have important commodity exchanges. Switzerland, on the other hand, has nothing that would suggest this small, landlocked country was destined to become one of the main hubs of the commodity business, but this is what has happened. The Canton of Zug has traditionally been important but key players are also located in the Cantons of Zurich and Lucerne. Nevertheless, the most dynamic area at the moment is clearly Geneva, which leads the league of global commodity hubs.

FIG. 7


According to GTSA, the industry organisation Geneva Trading and Shipping Association CHAP. 11, Geneva has not only replaced London as the most important oil trading city, but in grain and coffee trading the industry heavyweights are also now located on the shores of Lake Geneva CHAP. 12. FIG. 8 illustrates the shares of trade transacted here.

To what extent these GTSA figures are for lobbying and location-marketing purposes or are based on sound data, is difficult to assess.

FIG. 8


The other commodity arenas, especially Zug, are not even included here. Particularly in the case of metals and coal, they provide significant market shares for Swiss traders.


One thing is certain: the commodity trading handled by Switzerland far outstrips Swiss domestic consumption. For example, if the recorded annual trade volume of oil were to remain within its borders, national consumption would be covered for the next 75 years. Even if all the lorries on the Gotthard route were only transporting oil, only five per cent of the oil traded here in Switzerland could be brought over the Alps. But the logistical limits are of no concern to the Swiss commodity traders as they practice a very specific business model, so-called transit trade (also known as ‘merchanting’). Contracts may be concluded, deliveries scheduled and ships chartered from Swiss offices, but the actual goods – except in the special case of gold CHAP. 9 – never touch Swiss soil. From an African mine, for example, the raw materials are dispatched via land and sea routes directly into a Chinese smelter.

In this way, the flow of goods conveniently eludes the official statistics of the Swiss Federal Customs Administration – one reason for the notorious lack of transparency in the business. Nevertheless, data can be retrieved by another route because the Swiss National Bank (SNB) measures the transit trade as an export of services. Transit trade is defined as all transactions in which Swiss companies buy goods abroad and then sell them directly and unaltered to customers abroad (so crude oil that is refined before it is sold on is not recorded). For the most part (94 per cent in 2009) Swiss transit trade is commodity trade.6

The SNB’s data may not provide a complete and exact picture, but they do give a good approximation, which brings something astonishing to light. When illustrated in a graph, it is clear that Swiss transit trade since 1998 has shown a steep upward curve. The SNB puts this almost exponential increase down primarily to the influx of commodity trading companies. In addition, the already established businesses have grown massively. Previously ignored for the most part, these data verify the huge growth of the commodity trading business in Switzerland FIG. 9.

FIG. 9



FIG. 10



The information provided by the Swiss National Bank also sheds light on the sectors in which these companies make their sales FIG. 10.7 The energy sector is by far the strongest player. Its proportion in Switzerland is even slightly larger than in the whole of world trade.

Another word on economic relevance: in 2008 commodity trading contributed roughly the same amount to the gross domestic product (GDP) of Switzeland as the engineering industry, namely around two per cent. But the latter employed about 95,000 people, while the figure was probably not even a tenth of that in the commodity trading sector. Since then commodity trading has continued to increase and by 2010 was already contributing over three per cent to GDP. The business thus employs relatively few people, but in return per capita sales are all the higher. The reason for the latter is that this business has traditionally made relatively low gross margins of just a few per cent, achieving its high profits mainly through enormous volumes. This is reflected in the sales figures: for the whole industry in 2009 these were 480 billion Swiss francs just for transit trade.8 To this has to be added the transactions not captured in the SNB statistics. In media reports for the Geneva region annual sales of 700 to 800 billion are quoted.9 In terms of world trade in commodities, which is a colossal business of 3,000 billion Swiss francs, the companies operating in Switzerland have a share of at least 15 to 25 per cent already and the trend points towards a significant increase in this share.


Mankind is consuming more and more resources, most of which are traded internationally as commodities. Just how much commodity trading dominates world trade is illustrated by the fact that one in four dollars now changes hands there. And two out of every three cargo ships now transport commodities. The revenues from this multi-billion business more than trebled in value between 1998 and 2009, driven by rising commodity prices.10 In Switzerland the market increased as much as fifteen-fold during roughly the same period. Today the global arenas of this business are located around Switzerland’s Lake Geneva and Lake Zug – albeit behind closed doors.

A trader enjoys telling the story of the unfortunate long-distance truck drivers who painstakingly transported a tanker full of Kazakh oil through Afghanistan. When they set off oil prices were at the peak of the price hike.


By the time they reached their destination a week later the same barrels of oil were worth only half the amount and their journey was a financial disaster.



Commodity trading is a complex structure of interlocking processes and interconnected players and encompasses very different phenomena. A preliminary distinction can be made between domestic trade and world trade FIG. 1. Taking crude oil as an example, total world trade volume coresponds to just under half of global output. In contrast, for coal it equals only an eighth since China alone produces and consumes almost half. However, if Shell Nigeria delivers oil to Shell Switzerland for example, this counts as intra-group trade. According to expert estimates this type of trading is extremely important. Governments also negotiate many commodity deals between one another directly, although they do involve leading export companies if necessary. Such deals include so-called ‘barter trades’, based on an offsetting transaction or an exchange of goods, for example oil for cashew nuts or armaments. Essentially, this permits contracting parties to trade whatever they chose to.

Quantitatively far more important is the ‘free commodity market’. On this market commodities can reach their end users in industry in two ways: either they are sold on the commodity exchanges or they are ‘sold directly’ by a commodity trading company. This is the primary business sphere of the trading companies operating in Switzerland and therefore the focus of this book.

FIG. 1


Whatever route is used to bring commodities to their buyers and regardless of whether it concerns a cargo of coffee, copper or crude oil, physical commodity trading involves the transport of freight, usually by ship. Hence, the trading companies are invariably also logistics companies. Their core business involves buying a commodity, shipping it from A to B and selling it at a higher price in order to cover their business costs and make a profit.

Direct deals between commodity traders and industrial customers comprise either deals with long-term purchase agreements, the traditional type of commodity trading, or deals on the spot market. The term ‘spot’ comes from the phrase “on the spot”. A spot market refers to all the sales which are made when prices are fluctuating rapidly and which have short delivery deadlines. According to Platts, a renowned data services provider on the commodity market, even today long-term deals outnumber spot deals by nine to one. Estimates for the oil market indicate a roughly 30 per cent share for the spot market. For natural gas, which is liquefied for sea transport, the figure is said to be 20 per cent of production volume.


Another part of commodity trading takes place on the exchanges. This is where major consumers and major producers buy, for example, wheat, crude oil or aluminium directly or via financial intermediaries at a price that is valid at the moment the transaction occurs at a certain reference site. The three major trading centres for crude oil are the NYMEX (New York Mercantile Exchange), the ICE Futures (Intercontinental Exchange) in London and the market in Singapore where the barrels (standard 159 litres barrels) from the region around Dubai are traded. Each marketplace focuses on its own particular type of oil. Thus so-called ‘Texas Light Sweet’ is bought and sold on the NYMEX. The price of this standard type is set in Cushing, a small town in Oklahoma, where most of the large US oil companies (oil majors) operate huge, and in terms of energy policy strategic, oil storage facilities. Similarly, what is traditionally known as ‘Brent’ crude oil from the North Sea is traded on the ICE and ‘Dubai Light’ in Singapore. The main players in these markets are the American majors, all operating through their trading arms and subsidiaries.

Other global commodity exchanges are the LME (London Metal Exchange) for metals, or the London Bullion Market for gold and silver. As well as oil, metals are also traded on the NYMEX. Similarly, transactions in gas, coal and electricity also take place on the ICE. Agricultural products are traded on the EURONEXT in Europe. However, this sector is dominated by the Chicago Mercantile Exchange, which specialises in grain on the one hand, but is also the place where all kinds of goods, everything from concentrated orange juice to the legendary ‘pork bellies’, are traded.


Over time these exchanges have developed into the material and monetary ventricles of the global circulatory system of commodities. Hence the spot prices originating there are still regarded as reference values although on today’s commodity exchanges (or specialised derivatives exchanges) it is no longer physical trading but paper trading that dominates in terms of value. According to estimates some 10 to 15 times more ‘paper barrels’ than ‘wet barrels’ (physical oil) are traded on the oil market. And in 2006 nickel was bought and sold thirty times more often for paper money than for real money. The most important instruments of paper trading are shown in TAB. 1.

TAB. 1


Futures are indispensable instruments, which commodity traders use as safeguards against sharp price fluctuations. A trader from Vitol enjoys telling the story of the unfortunate long-distance truck drivers who painstakingly transported a tanker full of Kazakh oil through Afghanistan. They set off in 2008 when oil prices were at the peak of the price hike and the price of a barrel was 140 dollars. By the time they reached their destination a week later, the same barrels of oil were worth only half the amount and their journey was a financial disaster. If price fluctuations of such magnitude befall an entire super tanker shipment, it can mean bankruptcy for a smaller trading company. To minimise this risk, traders carry out ‘hedge’ transactions. ‘Hedging’ means literally encircling with a hedge (the term hedge funds has the same linguistic roots, but hedge funds are something quite different, namely unregulated investment funds). Hedging in order to safeguard prices means that a trader makes a futures deal to offset the actual transaction. The trader wins both ways, either on the real deal (for example if prices rise) or on the futures deal (if prices fall). In this way the trader is trying to keep the overall profit from both transactions within a certain range.

In the case of paper trading there are two groups of players, which differ from one another in principle. On the one hand, there are the buyers and sellers of physical commodities (‘commercial actors’), whose main aim is to use hedging as a safeguard against price fluctuations. On the other, there are various financial players such as banks or hedge funds (‘non-commercial actors’), who are only interested in the profits they can make by speculating on the commodity futures markets. In conceptual terms, the distinction between these two sets of market participants is clear and simple. In practice, however, a future used as a hedge is no different from a speculative future. What makes the difference is solely the motivation of the players. Worse still, the transition from safeguarding to speculating is fluid. For example, Glencore writes about oil deals being safeguarded by ‘paper transactions’, which might involve some speculation (‘taking increasing exposures’).1 Be that as it may, one thing is certain: a major part of commodity futures trading is pure financial speculation. Nor is there any disputing the fact that in recent years the structure of the commodity markets has changed dramatically under the increased influence of the financial players. This transformation has sparked off a heated debate on the effect of speculation on the volatility of commodity prices CHAP. 13.


The most important ‘commodity’ the trading companies require for their transactions is the money to finance them. Operations such as these are capital-intensive in the extreme: a shipment of oil by tanker for example requires raising tens or even hundreds of millions of dollars. If the trading companies intend to finance their operations themselves, they need large funds of their own and a great deal of liquidity. The largest among them can obtain these funds on the capital market (issuing bonds), directly from the banks via credit lines or by issuing shares.

In certain cases commodity traders can conclude individual transactions through a third party. Financially strong buyers such as the six crude-oil multinationals can finance the operations themselves as customers. They do so by performing a role traditionally reserved for the banks, that is, by providing traders, who take on the role of middlemen, with credit lines. The traders then get the capital they require for the actual transactions, without having to provide bank guarantees (open accounts) – the standard scenario for deals with the oil majors.

However, in all other cases individual transactions require involving the banks. Generally, financial institutions grant these types of temporary loans in the form of documentary credits or letters of credit. A letter of credit is a type of bank credit granted to a trader in exchange for a lien against real goods FIG. 2. Normally, the quantity and quality of these goods are confirmed in the delivery or transport documents, which are usually issued by an inspection and certification company. The shipment acts as the bank’s security – in effect, the bank becomes the temporary owner of the goods. On the due date of the transaction the trading company receives the money from the buyer, with which it repays the loan plus interest.

Designing and using financing instruments for commodity deals, above all transactions against letters of credit, has been a Geneva speciality for a long time CHAP. 4. It is expertise like this that enabled the trading region on the southern shores of Lake Geneva to develop in the first place. Meanwhile, the ‘commodity trade finance’ business continues to boom. At Crédit Agricole, for example, the number of employees working in this sector has doubled since 2005.2 In 2009 the Geneva Cantonal Bank announced a healthy 7 per cent increase in its profits in this sector.3 Yet such credit dealings are not without risk. For example, in December 2010 a Geneva bank syndicate under the direction of industry leader BNP Paribas lost 135 million dollars, which had been lent as credit to the Lausanne subsidiary of the Russian trading company RIAS. The banks believed they were guaranteed by several thousand tonnes of wheat in a depot in southern Russia, but this proved to be a fallacy.4 Thus the certification confirming the quality and quantity of the goods, which is used as security in these types of transactions, is crucial. The fact that the world’s leading inspection and certification company, SGS, has its headquarters in Geneva, gives this marketplace another decisive advantage.

FIG. 2


Despite a UN embargo supplies of the ‘black gold’ to the pariah apartheid regime in South Africa continued. This posed no risk if it was done


from Zug since Switzerland boycotted this UN boycott.



The area now occupied by today’s Switzerland has played an important role in internal European trade since the Middle Ages. In the slipstream of the colonial powers some of the Swiss trading houses rose to become important players in world trade in the 19th century. However, none of the traditional, great trading houses lived to see the 21st century and today there is hardly a trace of the historic trading houses left in Switzerland. Hence their legacy cannot offer a convincing explanation for Switzerland’s rise to commodity trading centre.

It was really in the inter-war years that Switzerland’s course was set for the success that came into its own after World War Two. Unashamedly attractive tax rules made some cantons irresistible to the new arrivals and migrant companies, which were crucial to Switzerland’s development into the commodity trading hub it is today.

One of the first of these businesses that are still important today settled in Geneva in 1946. It was not a trading company, however, but one of the key service providers of the new sector. Founded in Rouen in France in 1878, SGS, which offers inspection, verification, testing and certification services, was given the job of monitoring the implementation of the Marshall Plan after World War Two. Having been spared the ravages of the war, Geneva in neutral Switzerland was the ideal location for this.1

In 1956 the first migrant company among the traders, and still a major player today, arrived in Geneva. Attracted by tailor-made tax concessions, the US grain trader, Cargill, opened its European branch there.


Holding companies, i.e. companies that manage holdings in other companies, have been enjoying tax privileges in the rather rural Canton of Zug since 1924. These special rules were extended in the 1930 Tax Law and still apply in essentially the same form today CHAP. 14. The first draft of this law came from the pen of Zurich commercial lawyer, Eugen Keller-Huguenin, who played a crucial role in formulating tax law in the Canton of Zug in the interests of Zurich as a financial centre.2 The new law granted tax privileges to not only holding companies but also domiciled companies, i.e. companies that do not conduct domestic operations. In actual fact, a ‘domiciled company’ was, and still is, merely a euphemism for a brass plate company, which was not permitted either to employ staff nor use office space in Zug. Finally there were also the mixed companies, a Swiss innovation first mentioned in 1930. Although these companies had to conduct most of their business abroad, they were allowed to operate in Switzerland as well.

Holding and domiciled companies were (and still are) exempt from the cantonal tax on profit; at that time they only paid a minimum rate of between 0.05 and 0.15 per cent on their capital. For the mixed companies it became normal administrative practice in the late 1950s to tax domestic profit (no more than 20 per cent of business transactions) at the standard rate, but only a quarter of the profit earned abroad was taxed at all – a cantonal rule, which benefited above all international trading companies also operating in Switzerland. Concerns about this financial policy, which were to prove more than justified later on, were raised in the very first debate in the Zug Cantonal Government. For example, the Catholic, conservative politician and later Federal Councillor, Philipp Etter, feared that “the enactment of the proposed law might attract companies to the Canton of Zug, which will bring the canton more trouble than joy”.3

IN ZURICH’S WAKE AND OTHER BOOM CONDITIONS | Otto Henggeler, as Zug Finance Director from 1919 to 1946, had passionately pushed for tax privileges. But he did not live to see this strategy bring the hoped-for additional revenues to the canton because of the Great Depression, World War II and the post-war economic difficulties. But he did not live to see this strategy bring the hoped-for additional revenues to the canton. Not until the late 1950s did the number of incorporated companies in Zug begin to rise, and then the rise was rapid. Around that time, however, other Swiss cantons began to offer tax privileges similar to those in Zug, so even more incentives were needed to encourage the boom that was occurring. In this connection, Zug’s proximity to Zurich, both geographically and because of Zurich’s active pursuit of its own interests in the formulation of the Zug tax laws, played a central role. In the late 1950s and early 1960s it was mainly commercial lawyers from Zurich’s Bahnhofstrasse who recommended the Zug location to their international clients. In addition, Zurich bankers also opted for the neighbouring canton on the grounds that a shell company in Zug was the ideal vehicle for tax evasion by private individuals.

Added to this was the fact that the standard practice of the tax authorities was extremely helpful to the companies. A politically decreed ‘tax truce’ was deliberately cultivated and further concessions were not ruled out for attractive potential clients. This was perfectly managed by a network of law offices and fiduciary services agencies, which were able to process the formalities in a particularly efficient and ‘client-oriented’ manner. Hans Straub for instance, the Zug Finance Director of the boom years, sat on 82 (!) boards of directors and continued to manage his private law practice in his official office at the same time. His ministerial secretary said later, “At that time the state and private sectors were one and the same thing. I handled business incorporation, documents, work permits and everything else connected with them.”4

After World War II Switzerland was highly attractive for trading companies for another reason; it was one of the few countries whose currency was freely convertible. This meant that an unlimited amount of Swiss francs could be exchanged for other currencies. Moreover, the import and export of capital was not subject to any restrictions or government controls whatsoever, an exception at the time.

FIRST NEW ARRIVALS: THE METAL MEN ARRIVE | Among the first key new arrivals to the shores of Lake Zug was Philipp Brothers in 1956, then the world’s largest trading company for minerals and metals. Philipp Brothers is of paramount importance to the emergence of Switzerland as a commodity hub because their arrival marks the beginning of trading in ‘hard’ commodities – metals and ores. The traditional houses had only traded in ‘soft commodities’, i.e. agricultural commodities. With oil, which Philipp Brothers added to their portfolio in the 1970s and which soon played a pivotal role, they brought together all the commodities that are still important for Switzerland as a commodity trading centre to this day. Despite the epoch-making significance of Philipp Brothers for the most recent economic history of the country, the only book ever written about this company is not available in any Swiss library. This cloak of silence over Philipp Brothers is all the more astonishing when one considers the media interest that their most famous trader, Marc Rich, has attracted for decades.

Philipp Brothers goes back to two German brothers who began trading metals in Hamburg in 1901 and quickly expanded to London and the USA, where New York became the company headquarters. Just how much importance was attributed to the Zug subsidiary can be seen from the fact that Sigmund Jesselson managed the office. His younger brother, Ludwig, was one of the two principal shareholders in the business, then still Chief Financial Officer, shortly afterwards CEO and later Chairman of the Board.5 The shrewd banker, Sigmund Jesselson, was the right man to get the very best out of the new location both financially and as regards tax: “[H]is strength was in tax, legal and financial matters; it was he who made sure that everything was correctly done, legally and accounting-wise.” The Zug subsidiary, slated to become the European headquarters, was soon handling a considerable part of the global business.6

Many commodity traders, who became successful when working independently, learned their trade at Philipp Brothers (later Phibro, after various mergers). The best known is Marc Rich and his partner, Pincus Green, with Green always greatly overshadowed by Rich. Philipp Brothers had already done many of the things in Zug, which Rich, Green and their company later repeated. For example, they brought the right people on board: Hans Hürlimann, a member of the Zug Cantonal Government and later Federal Councillor, was a director of Philipp Brothers, and the Zug Federal Attorney, Rudolf Mosimann, became a director of Marc Rich + Co. AG. When Rich was indicted in the USA, Mosimann had to resign – but as a federal attorney, note, not as a director of the company.


Marc Rich, American of a German-Jewish refugee family, began working for Philipp Brothers in New York in 1954, after giving up his marketing studies. Like all beginners, he started in the transport department but very soon worked his way up. In 1967, the then 32-year old Rich was appointed manager of the Madrid branch of Philipp Brothers. Although the managers of the foreign subsidiaries were known as the ‘prodigal sons’ inside the company, according to A. Craig Copetas, Rich’s first biographer, the job had one enormous advantage: direct access to the European nerve centre of Philipp Brothers in Zug, Switzerland.7

Following on from his successes in the emerging oil trade, Rich wanted more than his annual salary of 100,000 dollars. In 1974 he demanded for himself and Pincus Green a bonus of 500,000 dollars each.8