Growing customer business and financial liquidity lead to record profit
The 2021 financial year was the best in Trafigura Group’s 28-year history in terms of trading volumes and profit, continuing the strong performance registered in 2020. Revenues increased by 57 percent to USD231,308 million, reflecting higher commodity prices and increased trading volumes as we continued to grow our customer base and expand into new markets. Underlying EBITDA rose 11 percent to USD6.9 billion from USD6.1 billion in 20201. Net profit of USD3.1 billion was nearly double the prior year’s result, despite including a one-off, non-cash accounting adjustment which reduced net profit by USD716 million due to IFRS rules on the treatment of a foreign currency translation reserve following the consolidation of Puma Energy.
In 2021, Trafigura traded an average of seven million barrels of oil and petroleum products per day, a significant 25 percent increase over the prior year. Non-ferrous metals traded volumes grew by nine percent to 22.8 million metric tonnes and bulk minerals by eight percent to a total of 82.7 million metric tonnes.
A flight to quality in the banking sector enabled Trafigura to increase its credit facilities to cope with increased working capital needs due to more traded volumes and a higher commodity price environment, in particular in the second half of the year. The balance-sheet grew by 58 percent during the year to USD90,097 million as at 30 September 2021.
Gross indebtedness increased by 38 percent, driven by the financing needs of our increased inventories and trade receivables; however, our net leverage – as measured by the adjusted debt to Group equity ratio – remained close to zero. This predominantly reflected continued strong cash generation and improved working capital. Thanks to the strong profitability of the year and our measured dividend pay-out policy, Group equity rose by 36 percent to USD10,560 million, the first time that the Group’s equity value has surpassed USD10 billion. This shows once again the strength and resilience of Trafigura’s financing model in enabling business growth, supported by transparent financial communication and our active environmental, social and governance (ESG) programme.
1The Group has changed its income statement presentation from a classification based on the function of expense to a classification based on the nature of expense. This change provides readers of our financial statements with a more transparent and clearer analysis of the financial performance. Also, it prepares the Group for anticipated future IFRS developments. In addition, the Group replaced the gross profit metric with two new financial performance metrics: operating profit before depreciation and amortisation, and underlying EBITDA.
* The Energy segment includes Oil and Petroleum Products and Power and Renewables divisions.
Other highlights of the year included:
- A strong start for our new Power and Renewables division, which generated underlying EBITDA of USD80 million during the year. This was an excellent result for the new division which was only established in 2020 and represents an important strategic diversification of our portfolio to participate in and benefit from the energy transition.
- Sale of our stake in the MATSA polymetallic mining operation in Spain, announced in September 2021 and expected to complete in December, realising a pre-tax gain of USD380 million in the current financial year.
- Successful recapitalisation of Puma Energy and its consolidation into the Trafigura Group. Together with the appointment of new management, this has put Puma Energy on a firmer financial footing and will enable closer alignment between its downstream activities and Trafigura’s oil trading business.
- Continuation of our prudent and disciplined approach to our fixed assets, with a number of impairments recorded to reflect challenging operational performance.
- New investments in resources that will be needed during the energy transition, including an interest in Vostok Oil, a low-cost, low carbon intensity oil and gas resource in Russia, and in nickel and cobalt producer, Prony Resources, in New Caledonia.
Net profit for the year was USD3,075 million, 92 percent higher than USD1,599 million in 2020. Underlying EBITDA rose to USD6,867 million (FY2020: USD6,072 million), reflecting increased profitability across the Group’s divisions. Our Energy segment, which includes our Oil and Petroleum Products and Power and Renewables divisions, contributed USD4,372 million (FY2020: USD4,760 million) to total underlying EBITDA or 64 percent. Metals and Minerals contributed USD2,494 million (FY2020: USD1,310 million), or 36 percent of the total. Operating profit before depreciation and amortisation was USD6,762 million, 14 percent higher than in FY2020.
Net financing costs rose to USD718 million from USD662 million as a result of increased trading activity balanced by lower interest rates from March 2020 as a result of the pandemic. Income tax was USD368 million, compared to USD292 million in FY2020.
Impairments remained substantial, including those to our industrial assets Puma Energy and Nyrstar, and contributed a loss of USD709 million compared to a loss of USD1,568 million in FY2020. The largest adjustments related to Nyrstar’s Australian smelting operations and the Corpus Christi right-of-use asset in the US.
Total assets were USD90,097 million as at 30 September 2021, compared to USD56,986 million a year earlier, principally reflecting increases in inventories, trade receivables and cash. Of the total, current assets rose to USD72,516 million from USD45,867 million, including a rise in inventories to USD29,654 million from USD20,178 million. In trade and other receivables increased to USD24,748 million from USD15,245 million and a higher level of cash balances which rose to USD10,678 million from USD5,757 million. Non-current assets also rose to USD15,014 million from USD11,116 million, mainly driven by Puma Energy’s consolidation and other investments including our acquisition of a 10 percent interest in Vostok Oil.
The powerful trading performance continued to generate strong cash flows, with operating cash flow before working capital changes of USD6,862 million, a further increase on the already very strong result in 2020 of USD6,122 million. Trafigura believes this operating cash flow metric is the most reliable measure of its financial performance, since the level of working capital is predominantly driven by prevailing commodity prices and is financed under the Group’s self-liquidating financing lines. Net cash used in operating activities was lower compared to last year at USD233 million from USD658 million, once again reflecting the company’s strong organic cash flow generation.
Investing activities resulted in a net cash use of USD2,728 million, compared to an outflow of USD265 million in FY2020, partly driven by the Vostok Oil investment. The net cash from financing activities was a net inflow of USD7,882 million, compared to an inflow of USD413 million in FY2020, reflecting wide access to self-liquidating short-term finance lines that match the increased working capital needs. The overall balance of cash and cash equivalents as at 30 September 2021 was USD10,678 million, compared to USD5,757 million a year earlier.
Liquidity and financing
To support the increased levels of activity across the Group in a higher commodity price environment, Trafigura successfully secured an additional USD6 billion of bank financing in FY2021, bringing total credit lines to an unprecedented USD67 billion, provided by some 140 banks globally, excluding Puma Energy.
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 shortterm liquidity requirements, such as margin calls or bridge financing. 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 debt capital markets presence to secure longer-term finance in support of our investments.
In October 2020, we announced the closure of our new Asian Syndicated Revolving Credit Facility at USD1.6 billion equivalent. The facility was oversubscribed and upsized from the initial launch amount of USD1.0 billion equivalent, with 24 banks participating in the transaction.
The Group has been very active in the public debt capital markets during the year with different currencies and formats, and benefitted from very strong support from institutional investors and private banks. In December 2020, the Group re-opened its USD400 million five-year maturity senior bond issued in September 2020 to raise an additional USD100 million. In January 2021, the Group successfully issued a EUR400 million senior bond with a five-year maturity at a price of 3.875 percent. The oversubscription of approximately two times after pricing revision enabled the company to upsize the transaction whilst significantly tightening pricing. This bond was re-opened in March 2021 to reach EUR450 million at the end of the 2021 reporting period, and subsequently completed another tap in October 2021 to reach a total size of EUR500 million. These issuances and re-openings of senior bonds have enabled the Group to strengthen its balance sheet with long-term debt issued at competitive yields.
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) totaling USD1.85 billion, as well as the extension and increase of its USD3.65 billion three-year facility. The facilities included our first sustainability linked loan structure, incorporating KPIs designed to incentivise the Company to meet ambitious targets related to the reduction of greenhouse gas emissions, the further alignment of Trafigura's responsible sourcing programme with international standards for sustainable procurement, and the development of a renewable power portfolio. The ERCF was initially launched at USD1.5 billion and closed substantially oversubscribed.
In April 2021, Trafigura closed a USD204 million US Private Placement across five-, seven- and ten-year tenors. The transaction was Trafigura’s sixth in this market and was timed to refinance a USD98 million US Private Placement maturity and also raised over USD100 million of additional liquidity for the company. The transaction was upsized from an initial USD100 million following strong investor demand, with over half of the total amount raised in the 10-year tranche. The transaction was the largest sustainability-linked financing on record in the US Private Placement market at that time and incorporated the same KPIs as the ERCF.
In July 2021, Trafigura placed USD300 million of notes in the Asset-Backed Securities (ABS) Market. This was Trafigura’s sixth public ABS transaction since the inception of the programme in November 2004. Trafigura Securitisation Finance (TSF) has since become the largest AAA/Aaa publicly-rated securitisation programme of trade receivables in the world. The successful pricing of the notes demonstrated not only the attractiveness of trade receivables as an underlying asset class which is rarely offered in public markets, but also the quality of the structure. Investors were mindful of the strong performance of the programme during the COVID-19 pandemic, proving once again its resilience.
In September 2021, Trafigura raised a USD400 million Perpetual Subordinated Bond at a price of 5.875 percent, the tightest price achieved by Trafigura for a perpetual bond. The bond was structured as a non-call six-year subordinated bond and the issuance set the longest tenure attained by the Group in the public debt capital markets. The proceeds were used to partially repay the Group’s outstanding USD800 million Perpetual Bond issued in 2017, following a tender offer that was launched at the same time. The Bond benefits from an equity treatment under the IFRS accounting standard.
After the financial year-end, in October 2021, Trafigura refinanced its Asian Revolving Credit Facility (RCF) and Term Loan Facilities (TLF) at USD2.4 billion equivalent, with 36 banks participating in the transaction, including eight new lenders. The new facilities comprised of a 365-day USD RCF (USD700 million), a one-year CNH TLF (c. USD890 million equivalent) and a three-year USD TLF (USD810 million). In line with the ERCF from March 2021, Trafigura implemented a sustainability-linked loan structure in those new facilities.
One additional financial task that faced us during the year was that of preparing for the LIBOR transition ahead of the replacement of this long-standing market benchmark with the new Secured Overnight Financing Rate (SOFR). Given the scale of our financing needs and the sheer number of our banking relationships, this was a complex exercise, but we engaged in it proactively and are now well positioned to trade with all of our banks on the basis of the new benchmark.
Trafigura does not hold a corporate public credit rating and does not seek to obtain one. There are a number of reasons for this, including the fact that Trafigura’s strategy has always been to obtain funding from stakeholders that understand its business model, rather than making investment decisions on the basis of a credit rating. In addition, holding a credit rating could cause Trafigura to take more short-term focused decisions in order to maintain a particular credit rating level. This would conflict with the Group’s focus on long-term value creation and maintenance of a strong balance sheet. Trafigura has been highly successful in securing funding without a public credit rating. Financial discipline is inherent to the company’s business and finance model due to its reliance on debt markets for capital and liquidity.
Trafigura’s significant expansion of its sources of financing over the years has been achieved on the basis of the Group maintaining an acceptable and sustainable credit standing, consistent with an investment grade profile. The Group’s financial discipline is reinforced by the financial covenants provided to unsecured lenders in the bank market and is underlined by the strong support we receive from our banking group and investors.
Value at risk
The Value at Risk (VaR) metric is one of the various risk management tools that Trafigura uses to monitor and limit its market risk exposure.
Trafigura uses an integrated VaR model which captures risk, including commodity prices, interest rates, equity prices and currency rates (see further details in Note 40). During 2021, the average 95 percent one-day VaR for derivative positions was USD47.9 million (2020: USD26.4 million), which represented less than one percent of Group equity. This increase in our one-day VaR position reflects the larger size of our trading operations and volatility incurred during the reporting period.
Trafigura is owned by circa 1,000 of its senior employees, who are focused on the long-term success of the business, promoting management depth and stability, and encouraging prudent risk management. The decision as to which employees may become shareholders is discretionary based on individual performance, seniority and expected future contribution to the Group.
Trafigura has significantly built up its shareholders’ equity since its inception in 1993 and the Group retains profits to further increase its capital base. Any discretionary buy-backs are subject to sufficient liquidity being available and to the company remaining compliant with its financial covenants.
Leverage and adjusted debt
As a physical trading group, Trafigura relies on a specific funding model. As a result, it is not appropriate to apply the same financial analysis framework as for typical industrial companies.
When analysing Trafigura’s credit metrics, banks and investors have historically considered financial leverage after excluding some specific balance sheet items (e.g., inventories and non-recourse debt such as our securitisation programmes), resulting in the use of adjusted debt as an overall leverage metric. Adjusted debt corresponds to the company’s total non-current and current debt less cash, fully hedged readily marketable inventories (including purchased and pre-paid inventories which are being released), debt related to the Group’s receivables securitisation programmes and the non-recourse portion of loans from third parties. This metric is a better measure of the Group’s financial leverage than a simple gross debt metric.
In particular, the following adjustments are made:
- The receivables securitisation programmes are taken out on the basis that they are entirely distinct legal entities from Trafigura with no recourse to the Group and are only consolidated into the financial statements in accordance with the Group’s accounting rules.
- Cash and short-term deposits are deducted from debt.
- Pre-sold or hedged stock, including purchased and pre-paid inventories which are being released, are deducted from debt. This reflects the great liquidity of the stock and the ease at which it could be converted to cash. As noted above, Trafigura’s policy is to have 100 percent of stock hedged or pre-sold at all times.
- Non-recourse invoice discounting or specific portion of loans (for example, non-recourse portions of bank lines used to extend prepayments to counterparties) are deducted from debt.
As at 30 September 2021, the ratio of adjusted debt to Group equity stood at -0.21x (minus 0.21x), down from 0.35x at 30 September 2020. This reduction principally reflected the exceptionally strong retained earnings during the year, as well as cash generation and improvement of working capital, and despite the consolidation of the Puma Energy financial debts.
Whilst the ratio of adjusted debt to Group equity was particularly strong this year, our intention is to maintain this ratio to a level of 1x. Any upwards fluctuation of this ratio to 1x in the future should not be considered as a sign of Trafigura relaxing its disciplined effort to maintain a solid credit standing.
The Company’s adjusted debt to equity ratio at the end of the reporting period is calculated as follows:
Trafigura operates in a multitude of jurisdictions and adheres to applicable local and international tax law, including legislation on transfer pricing, in the countries in which it operates. The Group’s tax policy is to pay appropriate tax according to work carried out in each jurisdiction, as determined by a functional analysis of operations using standard measures wherever possible, underpinned by reports prepared to fulfil local transfer pricing requirements.
The Group’s effective tax rate – the average rate at which consolidated pre-tax profits are taxed – varies from year to year according to circumstances, and in FY2021 it was 11 percent (or USD368 million) compared to 15 percent (or USD292 million) in FY2020. The change to the effective tax rate is a consequence of a change in the mix of taxable profits and losses generated in the various countries within which the Group operates.
Trafigura Group results for 2020 and 2021 show a comprehensive reset of our customer base, profitability and financial strength, largely owing to the company’s success in establishing itself as partner of choice to help clients navigate the turbulent markets created by the COVID-19 pandemic. While the worst economic effects of the virus may have receded and the global economy is now in a strong recovery mode, we expect the volatile conditions of the past two years to continue, not least because of the unpredictable dynamics of the climate transition. One of these dynamics is a persistent mismatch between growing demand for energy and industrial raw materials on the one hand, and supply constraints including due to chronic under-investment on the other. As a result, we expect the services that Trafigura provides in matching supply with demand efficiently and responsibly to continue to be in high demand, and the customer relationships established during these difficult years to continue to bear fruit. With our equity base reinforced and financial liquidity assured, the Group is well positioned for further growth.
Group Chief Financial Officer