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At times like these the physical trading and risk management activities of specialist companies such as Trafigura become more relevant than ever.

Christophe Salmon, Group Chief Financial Officer

An exceptional performance in volatile markets

Trafigura Group recorded a healthy profit for the first half of its 2020 financial year, 1 October 2019 to 31 March 2020, led by an exceptionally strong performance in physical oil trading in the volatile markets that characterised the period. Net profit for the period rose 27 percent to USD542 million from USD426 million a year earlier.

Group revenue for the period was slightly down from the same period of the previous year at USD82,960 million, reflecting lower average commodity prices. Gross profit was USD3,126 million, compared to USD1,472 million, while gross profit margin for the period was 3.8 percent compared to 1.7 percent a year ago. Both core trading divisions performed well. Our Metals and Minerals division maintained a robust profitability, trading higher volumes in refined metals and bulk minerals, while Oil and Petroleum Products turned in its strongest first-half profit performance on record. The company maintained a strong financial position, enabling us to provide vital services to the market in the face of geopolitical turbulence and the COVID-19 crisis. At the same time, the negative effects of the pandemic on global demand led to impairments in the value of some of our fixed assets.

Like-for-like comparisons between this reporting period and the first half of 2019 are complicated by the fact that this year’s results incorporate for the first time the new IFRS 16 reporting requirement on lease arrangements (see Note 4, page 15). All the figures in this statement, unless otherwise indicated, include the effect of IFRS 16, the detail of which is set out in the interim condensed consolidated financial statements. The net impact of this reporting requirement resulted in a reduced profit for the year by USD31 million from what it would have been in the absence of IFRS 16, and an increased gross profit by USD481 million, as well as a USD2,730 million increase in our total assets.

EBITDA for the period was a record USD2,411 million which, excluding the impact of IFRS 16 on the first half of this financial year, equated to USD1,926 million, compared to USD1,112 million in the first half of 2019.

Strong trading performance

The exceptionally strong performance in oil trading came in the context of significant volatility and dislocations in the global market for crude oil and refined products. In the October-December 2019 quarter, political events in the Middle East and the US-China trade conflict had already created heightened volatility in oil and other commodity markets. Then in March 2020, the shock to global oil demand resulting from the COVID-19 pandemic, combined with a jump in supply (caused by price wars between major producing countries), drove prices sharply down. Faced with an imminent shortage of storage capacity in Cushing, Oklahoma, on 20 April 2020, the US WTI benchmark plunged into negative territory for the first time on record.

At times like these, the physical trading and risk management activities of specialist companies such as Trafigura’s become more relevant than ever. Our core competence lies in understanding the global supply chain in great detail, in having highly skilled trading teams and in managing infrastructure such as oil storage facilities, pipelines and freight capacity. During this period, our market intelligence on the impact of COVID-19 and of the decisions by OPEC and other oil producers on demand and supply, enabled us to act efficiently and effectively. This superior market understanding, combined with our physical infrastructure and our supply chain management capacity, were key in balancing the oil market during these unprecedented times.

As the largest exporter of US crude oil, for example, Trafigura had ample pipeline, tankage and freight capacity to play its part in channeling the supply glut that caused negative prices domestically to foreign markets where prices were higher and storage capacity was available. Opportunities for such geographical arbitrage were amplified by the uneven impact of the pandemic in regions, while the introduction of IMO 2020 regulation on marine fuel created additional volatility in the markets for fuel oil and condensates. All these factors subsequently increased the need for our services and significantly boosted profit margins in oil trading as well as in our Shipping and Chartering operations.

Other business highlights

Beyond the trading performance, other highlights in this half year included:

  • The successful integration of zinc and lead refining company Nyrstar, following the company’s financial restructuring and absorption into the Trafigura financial statements in 2019. Nyrstar made a positive contribution of USD370 million to Trafigura’s gross profit and USD72 million on the Group’s EBITDA for the first time, showing the benefits of the turnaround plan being implemented since its consolidation within the Group last year. However, as expected as part of the company’s recovery plan, Nyrstar recorded a loss of USD137 million, which is fully reflected in Trafigura’s
    profit for the period.
  • A continuation of our disciplined approach to valuation of fixed assets. An assessment of the negative impact of the COVID-19 pandemic on global energy demand and increased global crude oil supplies causing refinery margins to reach record lows led to an impairment of USD287 million in the value of our stake in the Nayara Energy oil refining operation. At the same time, the value of our holding in the downstream company Puma
    Energy, which is being restructured having reported a loss for its 2019 financial year, was USD1,452 million on 31 March 2020, USD293 million lower than as at 30 September 2019.
  • A satisfactory start to operations of our new joint venture with ship-owners Frontline Ltd. and Golden Ocean Group Ltd., TFG Marine, which aims to build significant share in a consolidating global bunker fuel market.
  • A smooth transition of large parts of our operations to home-based working as the pandemic forced the reduction in use of office facilities. This underlined the benefits of the significant investment the Group has made in IT infrastructure around the world in recent years.
  • Ample access to liquidity and rigorous financial control, including the simultaneous refinancing of two core credit facilities and the issue of notes with long-dated maturities in March 2020 at the height of the COVID-19 pandemic. As at 31 March 2020, we had access to bank credit lines totalling USD61 billion with significant available headroom. Our leverage, as measured by the ratio of adjusted debt to net equity, was 1.04x, within our stated guidance of around 1x.

Income, expenditure and balance sheet

Of total Group first-half year revenue of USD82,960 million (2019: USD86,297 million), oil trading accounted for USD52,248 million (USD57,986 million), or 63 percent, while metals and minerals trading revenue was USD30,712 million (USD28,311 million), or 37 percent of the total. With regard to the total gross profit of USD3,126 million, oil trading contributed USD2,128 million (2019: USD1,035 million) or 68 percent, and metals and minerals contributed USD998 million (2019: USD437 million) or 32 percent. This increase of the gross profit in the first half of 2020 compared to the same period in 2019 includes the effects of the consolidation of Nyrstar (USD370 million) and the IFRS 16 implementation which led to lower cost of sales (USD481 million).

The result from operating activities was USD1,275 million, compared to USD894 million a year ago. General and administrative expenses were USD1,453 million, against USD510 million, an increase largely resulting from the effect of reporting under IFRS 16 (USD450 million) and the consolidation of Nyrstar (USD404 million), which mostly related to staff and depreciation costs.

The Statement of Income shows a loss of USD398 million under “other income/expenses” that includes Nayara Energy impairments of USD287 million and foreign exchange losses equating to USD69 million. Net financing costs increased to USD432 million from USD316 million, again largely because of the effect of IFRS 16 (USD56 million) and Nyrstar (USD57 million).

Share of profit/loss of equity-accounted investees included USD150 million losses relating to our investment in Puma Energy.

As at 31 March 2020, total assets stood at USD54,416 million, compared to USD54,151 million on 30 September 2019. Fixed and non-current assets were USD12,528 million, compared to USD10,777 million. Once again, the difference was largely accounted for by the effect under IFRS 16 of booking leasing arrangements as “right of use” assets. For the same reason, noncurrent liabilities rose to USD11,802 million from USD9,968 million on 30 September 2019.

Current assets fell slightly to USD41,886 million from USD43,372 million, principally reflecting a shrinkage in inventories (to USD11,550 million from USD13,435 million) and receivables due to lower commodity prices. Prepayments rose, with current prepayments (with maturities of one year or less) up to USD4,039 million by 31 March 2020 from USD3,454 million six months earlier, and non-current (longer-term) prepayments at USD768 million from USD679 million. There was no change in the credit parameters used to govern such facilities. Trafigura lays off a substantial portion of such credit risks through bank syndication and other arrangements.

In terms of operational leverage, loans and borrowings were barely changed from six months earlier, giving an adjusted debt-to-equity ratio of 1.04x, as stated above. We assess the Group’s financial leverage by calculating a ratio of adjusted net debt to equity. Adjusted net debt corresponds to the company’s total non-current and current debt less cash, fully-hedged and readily marketable inventories, non-recourse debt related to the Group’s securitisation programme and the non-recourse portion of loans from third parties. Total Group equity grew by USD173 million to USD6,977 million as at March 2020, lower than the USD542 million profit for the six-month period mainly due to losses recorded in other comprehensive income related to associates (USD208 million representing the Group’s share of their other comprehensive income) and negative fair value movements on cash flow hedges (USD199 million), mostly relating to hedging of price exposure on future purchases and sales of commodities.

Liquidity and financing

Trafigura maintained a wide access to liquidity throughout the half-year with credit lines of USD61 billion from a network of around 140 financial institutions. The majority of our day-to-day trading activity is financed through uncommitted, self-liquidating trade finance facilities, while we use corporate credit facilities to finance other short-term liquidity requirements, such as margin calls. This funding model gives us the necessary flexibility to cope with periods of enhanced price volatility as utilisation of the trade finance facilities increases or decreases to reflect the volumes traded and underlying prices. Trafigura also maintains an active programme of capital markets debt to secure longer-term finance in support of our investments. During the six months ended 31 March 2020, the Group completed a number of important transactions. In October 2019, Trafigura refinanced its Asian Revolving Credit Facility (RCF) and Term Loan Facilities (TLF) at USD1,505 million-equivalent with the support of 27 banks.

The transaction comprised a 365-day US dollar revolving credit facility, a one-year Chinese yuan renminbi term loan facility and a three-year US dollar term loan facility. This facility was upsized by USD130 million-equivalent post-closing via the accordion feature. In March 2020, Trafigura simultaneously refinanced two core credit facilities and issued notes with longdated maturities. The company refinanced its flagship 365-day  European multi-currency syndicated Revolving Credit Facility (ERCF) at USD1,895 million. The 365-day ERCF initially launched at USD1,500 million and closed substantially oversubscribed, allowing the facility to be upsized. In addition, the company decided to exercise the second extension option available on the three-year tranche of its 2018 ERCF, thereby extending the facility by 365 days and maintaining a three-year tenor. Those
tranches were subsequently upsized by USD135 million in aggregate via the accordion feature.

In a separate transaction, Trafigura returned for the fifth time to the Japanese domestic syndicated bank loan market and raised JPY76.8 billion (USD720 million equivalent at spot rate) via a JPY denominated term loan. In addition to the three-year tranche, which Trafigura has refinanced every two years since 2012, Trafigura introduced an inaugural five-year tranche. Twenty Japanese financial institutions supported the Samurai Loan, demonstrating the continued interest of domestic lenders in Trafigura’s credit. Five new institutions joined the syndicate, while the majority of existing lenders continued to participate and increased their amount invested.

Finally, Trafigura Funding SA, a dedicated funding vehicle of the company, issued USD203 million of notes in the US Private Placement (USPP) market with tenors of five, seven and ten years. For its fifth issuance in the USPP market, Trafigura achieved its tightest ever all-in financing level. Proceeds were used to refinance USD51.5 million of maturing USPP notes and to support the refinancing of Trafigura’s EUR550 million bond repaid in April 2020.

Cash flow

After adjusting profit before tax for non-cash items, the operating cash flow before working capital changes for the first half of the year rose to USD2,345 million on a like-for-like basis excluding the impact of IFRS 16. Including the IFRS 16 impact, the total was USD1,850 million, compared to USD1,079 million for the same period in 2019. Trafigura believes its financial performance is best assessed on the basis of operating cash flow before working capital changes, as the level of working capital is primarily determined by prevailing commodity prices and price variations are financed through the Group’s self-liquidating finance lines. Net cash from operating activities was USD1,036 million, including the USD439 million impact of IFRS 16.

Investing activities showed a net outflow of USD171 million, including USD153 million of net investments in property, plant and equipment, of which USD96 million is related to sustaining capital expenditure of the Nyrstar industrial facilities. Financing activities showed a net outflow of USD415 million. The overall balance of cash and cash equivalents stood at USD6,717 million as of 31 March 2020.

Outlook

The turbulent and uncertain market conditions described in this Interim Report continue to prevail, as governments work to bring the COVID-19 pandemic under control and to restart the global economy. But as has been demonstrated during the first half of financial year 2020, Trafigura is a highly resilient company that is providing reliable and valuable services to producers and consumers of vital commodities. Those services were the wellspring of our revenues and profits in this reporting period, and we see every reason to be confident that this will continue to be the case for the second half of our financial year.