Financial review from the Group Chief Financial Officer
Record profits and trading volumes
Trafigura delivered a strong performance in the first half of its 2021 financial year, 1 October 2020 to 31 March 2021, with a record net profit for the period of USD2,095 million, compared to USD542 million for the first half of 2020.
Both our principal trading divisions, Oil and Petroleum Products and Metals and Minerals, showed increased trading volumes, higher margins and larger gross profit. Market conditions, driven in large part by the economic recovery, underlined the need for reliable service providers such as Trafigura with the risk management skills, global network, physical assets and financial capacity to help customers navigate these markets. Gross margin rose to 4.3 percent from 3.8 percent when compared to the same period last year.
Revenue rose 18.6 percent to USD98,369 million from the first half of 2020 as a result of increased traded volumes and higher commodity prices. Gross profit of USD4,275 million was 54 percent higher. The even stronger rise in net profit in part reflected stabilisation of the Group’s industrial assets, which had negatively impacted results in the previous year. EBITDA was USD3,682 million, a 53 percent increase from a year ago.
The period included our announcement of a number of key transactions, including the acquisition of a 10 percent equity stake in Russian oil and gas company Vostok Oil, as well as investments in green hydrogen, battery storage and nickel production projects, indicating the key role that the energy transition together with the technologies and materials needed to support it are now playing in our business.
Another notable feature of the period was a substantial strengthening of the Group’s overall financial position enabling it to handle larger trade flows. We secured access to increased bank liquidity on favourable terms, issued in the public and private EUR debt capital markets, while an increase in retained earnings strengthened Group equity and reduced leverage. This marked an acceleration of the “flight to quality” we have seen in the financial sector’s support for commodities trading in the past few years: even as some banks have withdrawn from providing credit to traders, or reduced their exposure to the sector, the largest and best-capitalised trading firms have been able to benefit from increased bank liquidity. In addition, factors such as strong governance, transparency and sustainability are playing an increasingly important role, with Trafigura seen by financial institutions as an industry leader on these topics.
Exceptional trading performance
This was an exceptional first half for our trading divisions by any standards. The energy markets saw substantial volatility as the global economy started to recover from the effects of the pandemic, as cold weather in the northern hemisphere impacted energy demand and in response to other events such as the temporary closure of the Suez Canal. Meanwhile, non-ferrous concentrates, refined metals and bulk minerals saw increased demand, with copper leading the way due to its role as a key component of the electrical infrastructure that will be needed to enable the transition to a low-carbon economy.
Trafigura’s Oil and Petroleum Products division traded an average of 6.4 million barrels per day in the first half, a 14 percent increase from the average of 5.6 million barrels traded daily in the 2020 fiscal year. The division struck a number of substantial supply agreements with producers and refiners in the period, including the exclusive agreement with the Prax Group, which will enable it to optimise crude supplies to its UK refinery. These transactions indicate that Trafigura is increasingly the trading partner of choice by virtue of its global reach and strong focus on evolving customer requirements.
Volumes handled by the Metals and Minerals division rose seven percent compared to the same six-month period in 2020. Important supply agreements were concluded in the period, including a trading agreement with Enterprise Générale du Cobalt under which Trafigura will provide funding towards the creation of strictly controlled artisanal mining zones to enable responsible sourcing of cobalt from the Democratic Republic of the Congo, and an investment in and off-take agreement for nickel from Prony Resources in New Caledonia.
The Oil and Petroleum Products trading division showed gross profit of USD2,771 million (65 percent of the total), while the contribution from Metals and Minerals was USD1,504 million (35 percent of the total). Trafigura’s newly-founded Power and Renewables trading division is now establishing itself in a range of regional electricity markets. The division made a small loss in the first half, but expects to be profitable over the full year.
Industrial assets improving and new ventures established
Spanish mining joint venture MATSA had a very strong first half, increasing production and benefiting from rising copper prices. Our TFG Marine bunker fuel joint venture with shipowners Frontline Ltd. and Golden Ocean Group Ltd continued to build market share.
Elsewhere, the period saw a continuing turnaround in the performance of industrial assets that form part of the Group. Zinc and lead refining company Nyrstar made further progress with a major capital investment programme aimed at restoring production and profitability. The Burnside terminal on the Mississippi River in Louisiana continued to struggle with a difficult market and saw its value impaired by USD55 million, the only significant impairment recorded in the period.
Downstream company Puma Energy improved its operational performance in challenging operating conditions, in particular for aviation fuel; the value at which it is held in our books did not materially change in the period. After the end of the half-year, however, an agreement was concluded to recapitalise Puma Energy and restructure its share capital which is expected to have the effect of increasing Trafigura’s shareholding in excess of 90 percent once regulatory approvals are received later this year.
At the same time, we continued to invest in projects connected to the energy transition. The Nala Renewables joint venture with IFM Investors announced its first investment, in a EUR30 million battery storage facility at Nyrstar’s Balen site in Belgium, and continued to build up its management team.
Trafigura also committed to invest an initial USD62 million into H2 Energy Holding AG, an innovator in production and distribution of green hydrogen commercial vehicles, establishing a joint venture to expand operations beyond Switzerland and across Europe.
Income, expenditure and balance sheet
Of the total Group first half net revenue of USD98,369 million (H1 2020: USD82,960 million), Oil and Petroleum Products was responsible for USD58,519 million (H1 2020: USD52,248 million) while Metals and Minerals accounted for USD39,850 million (H1 2020: USD30,712 million). The result from operating activities was USD2,865 million (H1 2020: USD1,275 million).
As at 31 March 2021, total assets stood at USD76,751 million, compared to USD56,986 million on 30 September 2020. This increase was almost entirely attributable to a 39 percent rise in current assets — mainly inventories and trade receivables, reflecting increased trading volumes and higher commodity prices — to USD63,769 million from USD45,867 million. Inventories rose due to increased traded volumes and higher commodity prices, with inventory in transit to be delivered representing 38 percent of the total (2020: 30 percent). In accordance with Trafigura policy, 100 percent of these inventories are hedged or pre-sold. Fixed and non-current assets were USD12,980 million, compared to USD11,116 million six months earlier. Prepayments were little changed at USD3,953 million, but the proportion of prepayments on terms of more than one year increased as a result of a debt restructuring agreement with a sovereign counterparty.
Loans and borrowings were significantly higher than a year ago at USD41,754 million (2020: USD32,854 million) as the Group secured increased liquidity to fund higher trading volumes. However, Trafigura’s leverage ratio was much lower as a result of an increase in Group equity and non-recourse debt financing. 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 financial institutions. Total Group equity grew by 27 percent to USD9,894 million from USD7,790 million. Our ratio of adjusted net debt to equity stood at 0.1x. Our target remains to maintain this ratio at around 1x through the cycle.
Liquidity and ﬁnancing
As mentioned above, we secured increased access to liquidity throughout the half-year, with credit lines of USD64 billion from a network of around 140 financial institutions. Despite the increase in loan facilities, net financing costs were 23 percent lower than in the first half of 2020 at USD334 million, owing to the fall in LIBOR in the intervening months.
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 2021, the Group completed a number of important transactions. In October 2020, it announced the closure of its new Asian Syndicated Revolving Credit Facility at USD1.6 billionequivalent. The facility was oversubscribed and upsized from the initial launch amount of USD1.0 billionequivalent, with 24 banks participating in the transaction.
In January 2021, the Group successfully issued a EUR400 million senior bond with a five-year maturity at a price of 3.875 percent, thanks to very strong support from institutional investors and private banks. In February 2021, the Group entered the Schuldschein loan market with an inaugural EUR110 million loan, split between three- and five-year maturities. Likewise this issuance received strong investor demand and as a result was increased from an initial EUR75 million launch amount.
In March 2021, the Group announced the closing of its new 365-day European multi-currency syndicated revolving credit facility (ERCF) totalling USD1.85 billion, as well as the extension and increase of its USD3.65 billion three-year facility. The facilities included the Company’s first sustainability-linked loan structure. The ERCF was initially launched at USD1.5 billion and closed substantially oversubscribed.
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 USD3,712 million from USD2,345 million. 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 used in operating activities (after working capital changes) was USD4,579 million due to the significant increase in inventories and trade receivables, which itself was related to an increase in volumes traded and underlying commodity prices. Net cash used in investing activities was USD2,221 million, driven by the Vostok Oil investment. Net cash generated from financing activities reached USD8,414 million, matching the working capital needs of the period.
The ongoing economic recovery and shifts in supply and demand in commodity markets make for a favourable backdrop for Trafigura’s business in the second half of the year. The energy transition that is now gaining momentum is already having a profound impact on our business — in driving seismic changes in fossil fuel markets as well as fuelling exponential increases in demand for certain non-ferrous metals. These are secular changes, which underline the market need for companies such as Trafigura that can balance supply and demand and manage the risks of change. We are further encouraged by the confidence our customers are placing in us as a counterparty of choice in long-term supply deals.
Whilst we continue to expect strong performance from our Oil and Petroleum Products and Metals and Minerals trading divisions, as well as continued improvements in our operational assets and Power and Renewables division, the second half performance is not expected to match the first half result. Nonetheless, Trafigura’s performance over the past 18 months has set a new benchmark for the company, indicating that it has entered a new phase of growth based on winning longterm customer business in a consolidating market.