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Behind the $100 Billion Commodity Empire That Few Know

By Andy Hoffman and Chanyaporn Chanjaroen
March 07, 2014 7:01 AM EST 64 Comments
Mercuria, named for the Roman god of trade, is targeting a JPMorgan business that includes energy trading and storage assets in North America, where a boom in shale oil and natural gas has transformed the flow of commodities worldwide.
Photographer: Andrew Burton/Getty Images
Mercuria, named for the Roman god of trade, is targeting a JPMorgan business that includes energy trading and storage assets in North America, where a boom in shale oil and natural gas has transformed the flow of commodities worldwide.

In less than a decade, Marco Dunand and Daniel Jaeggi have turned a 10-person company supplying oil to a pair of Polish refineries into the world’s fourth-largest commodity trader with revenue topping $100 billion last year.

Now Dunand, 52, and Jaeggi, 53, are executing a plan to propel Geneva-based Mercuria Energy Group Ltd. nearer to the top independent traders, Glencore Xstrata Plc, Trafigura Beheer BV and Vitol Group. After entering exclusive talks last month to buy JPMorgan Chase & Co.’s $3.3 billion commodities unit, Dunand and Jaeggi will probably announce a deal within the next week, according to two people with knowledge of the situation.

“This gives them a strong opportunity for growth and puts them close to the top players in the league,” said Roland Rechtsteiner, a partner at management consultant Oliver Wyman, who’s published a series of reports on the industry written with Trafigura co-founder Graham Sharp. “Scale is going to be more important than ever.”

Mercuria, named for the Roman god of trade, is targeting a JPMorgan business that includes energy trading and storage assets in North America, where a boom in shale oil and natural gas has transformed the flow of commodities worldwide. The unit has generated $750 million in annual operating profit before compensation costs, according to people who have seen documents circulated in relation to the sale.

Asset Shift

Banks including JPMorgan and Morgan Stanley are exiting or reducing their commodities businesses as regulators crack down on risk. Revenues for the 10 largest investment-bank commodity businesses fell to $4.5 billion in 2013 from $14 billion in 2008, according to London-based analytics company Coalition.

Independent traders including Mercuria are filling the void. Owning businesses that produce, store, transport or process raw materials can provide an advantage in trading at a time when expanding populations have pushed global commodity demand to a record.

A deal with JPMorgan would further challenge Dunand and Jaeggi, who each own 15 percent of Mercuria’s equity, to integrate the operations into a company that is already growing rapidly. Benoit Lioud, a Mercuria spokesman, declined to comment on talks with JPMorgan.

From 2011 to 2013, Mercuria hired 570 people, including key executives from investment banks as it expanded beyond energy. That took the headcount to 1,200 from about 10 in 2004.

Goldman Vets

The hires include Houston-based Shameek Konar, a former managing director with Goldman Sachs Group Inc. who is chief investment officer overseeing Mercuria’s corporate development, including the JPMorgan negotiations. Victoria Attwood Scott, Mercuria’s head of compliance, also joined from Goldman Sachs.

Roger Jones, the former head of commodities at Barclays Plc who has spent more than a quarter-century trading, was hired in 2012 to head its non-oil business and join the board.

Commodities other than oil now represent more than 50 percent of revenue, which totaled $98 billion in 2012 and generated $343 million in profit, according to financial statements seen by Bloomberg.

“What really makes them different is their growth,” said Olivier Jakob, managing director of Petromatrix GmbH in Zug, Switzerland. “They have grown at a very fast pace in the oil markets, and now they are expanding into other commodities.”

Oil Trading

Mercuria traded 182 million metric tons of oil or oil equivalent in 2012, according to its website. Vitol, the largest independent oil trader, handled 261 million and Trafigura traded 102.8 million tons of oil and petroleum products. Brent crude rose 3.5 percent that year in a fourth annual advance. It slipped 0.3 percent in 2013 and is down 2.6 percent this year at about $108 a barrel.

With more trading companies trying to gain an edge by owning businesses that produce, store or process commodities, Mercuria followed suit. It now has stakes in a coal mine in Indonesia, oil and gas fields in Argentina, oil storage in China and a biodiesel plant in Germany. In June, it invested $50 million in a Romanian gas producer.

The JPMorgan unit employs about 600 and represents a range of assets assembled over decades by firms including Bear Stearns Cos. and RBS Sempra, which the bank bought during an acquisition binge beginning in 2008.

JPMorgan Assets

They include gas and power trading on both sides of the Atlantic, physical assets spanning 40 locations in North America, an oil-trading book with a supply and offtake contract with the largest refinery on the U.S. East Coast, 6 million barrels of storage leases in the Canadian oil sands, and Henry Bath & Sons Ltd., a 220-year-old metal-warehouse operator based in Liverpool, England.

JPMorgan’s power-generating assets, which include stakes in three U.S. plants, won’t be included in a sale to Mercuria, according to three people close to the talks.

It hasn’t been determined whether Blythe Masters, who has led the JPMorgan unit since 2006 and orchestrated the buying spree, would join Mercuria, a senior executive at Mercuria said.

The cost of running JPMorgan’s commodity business is too high because it comes with the expensive front-office staff and infrastructure an investment bank needs, said Oral Dawe, the former head of JPMorgan’s Asia-Pacific commodity business who now runs an investment-advisory company in Singapore.

“Mercuria will dramatically reduce it,” he said. JPMorgan’s Canadian and U.S. operations will prove most valuable to Mercuria, according to Dawe.

Professional Paths

Dunand and Jaeggi first met studying economics at the University of Geneva in the late 1970s. Their friendship was galvanized a few years later working for grain trader Cargill Inc. and sharing an apartment while on a training course in Minneapolis.

Mercuria’s corporate strategy and culture have reflected the professional paths of its founders, who spent the bulk of their early careers at investment banks.

They left Cargill in 1987 for Goldman Sachs’s J. Aron unit in London. They stayed until 1994, then joined Phibro for a five-year stint when it was controlled by Salomon Brothers.

“That’s the setting where we learned the trade,” Dunand said in an interview with Swiss newspaper Neue Zuercher Zeitung published in January. “There were two schools for the commodity trade: the Marc Rich school with Glencore and Trafigura, which is obviously successful, then there’s the investment bank school, which has more of a risk approach.”

Sempra, Mercuria

That experience defined the trading strategies of Dunand and Jaeggi who moved from Phibro to start Sempra’s European and Asian trading business in 1999 before founding Mercuria in 2004.

Without a commanding position in any region or commodity, the firm has sought out bottlenecks and imbalances in niche markets and positioned itself to make money trading derivatives using insights gained from its physical trading. In its early days it profited by opening a trade route shipping Russian crude to China from Gdansk, Poland.

Mercuria also differs in tone. At its headquarters on Geneva’s poshest shopping street, traders and executives wear open-collared shirts, sweaters and jeans, a sharp contrast to the shirt-and-tie policies at more established firms.

Dunand is the more outgoing of the two founders and often serves as the firm’s public face, dealing with customers and developing corporate strategy. Jaeggi, the head of trading, operates more in the background, conceiving trading positions.

“They see a business opportunity and they grab it with both hands without making a song and dance about it,” said Russell Newton, a partner with St. Helier-based hedge fund Global Advisors (Jersey) Ltd., who has known Dunand and Jaeggi for about 25 years. “They are better together than they are on their own. There’s a great deal of trust between them.”

Stake Sale

The talks with JPMorgan forced Mercuria to put another deal on hold. Mercuria was nearing the sale of an equity stake of 10 percent to 20 percent to Chinese sovereign wealth fund State Development & Investment Co., according to two people familiar with the matter. The discussions with SDIC were halted once Mercuria neared the JPMorgan business, one of the people said.

Dunand said in January the sale of an equity stake could raise $500 million to $1 billion. That figure is likely to change because of the addition of JPMorgan’s assets.

Just 10 years old, Mercuria’s ascent has outpaced its competitors. Vitol was founded in 1966; Glencore in 1974; Trafigura started in 1993; and Gunvor, the fifth-largest independent trader controlled by billionaires Torbjorn Tornqvist and Gennady Timchenko, was founded in 2000.

Global Advisors’ Newton said Dunand and Jaeggi’s ability to react to shifting markets means Mercuria will probably thrive in an unpredictable industry littered with failures.

“Certain musicians, they have had a few hits and sort of faded away. But there are people like David Bowie or Paul Weller who sense that the market is moving and change with it. They’ve remained successful for decades,” he said.

“That’s more like Marco and Daniel.”

To contact the reporters on this story: Andy Hoffman in Geneva at ahoffman31@bloomberg.net; Chanyaporn Chanjaroen in Singapore at cchanjaroen@bloomberg.net

To contact the editors responsible for this story: Will Kennedy at wkennedy3@bloomberg.net Amanda Jordan

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