đ
Why is Switzerland important in the commodity trading sector? - YouTube
Channel: SWI swissinfo.ch - English
[1]
What do the clothes we wear, the coffee we sip
and the petrol in our cars have in common?
[7]
Theyâve all reached us
thanks to commodity trading.
[10]
But despite our lives being so dependent
on it, the business is rather cryptic.
[15]
And tiny landlocked Switzerland is a big player
in the global commodity trading business.
[22]
What is commodity trading exactly
and why is Switzerland a leader?
[27]
First, letâs look at what is considered
a commodity, and at how these are traded,
[32]
namely the players involved.
[35]
Then at how Switzerland came to play
an important role in the business,
[39]
historically and financially.
[42]
Finally, weâll see why commodity trading
can be considered a controversial and
[47]
opaque business, and what Switzerland
is doing to regulate the sector.
[53]
A commodity is a tangible substance or
product that can be traded, bought or sold.
[59]
Most commodities are raw materials, basic
resources, agricultural or mining products.
[65]
Gold, coal, gas, livestock, sugar,
rice, and cotton are all commodities.
[73]
Wool is a commodity;
a scarf is not.
[77]
Cocoa beans are a
commodity, chocolate isnât.
[81]
Depending on their origin, these products
are divided into soft commodities
[86]
â which can be grown â and hard
commodities â which are mined â
[90]
that include energy commodities like
electricity, gas, coal and oil.
[97]
Commodity trading, simply put, is
the activity of buying and selling.
[102]
Contrary to âshoppingâ, âtradingâ involves
buying and selling goods possibly before
[107]
they are even produced,
and in large quantities.
[111]
Trading can either happen physically,
involving a visual inspection of
[116]
the traded goods, or in
derivative markets.
[119]
In the latter case there isnât any visual
inspection, and the trade happens
[124]
through paperwork thanks to
agreed standards.
[128]
Commodities are traded through
Futures and Forwards contracts.
[132]
In Forwards contracts the buyer and seller
agree on a fixed price for a commodity
[137]
at a certain point in time.
[140]
For example, an agreement to pay
$100/ton of palm oil in six months
[145]
for a total of 10 tons of palm oil.
[149]
Futures are like forward contracts, but the
prices fluctuate daily and are not fixed.
[156]
Commodity trading organises the
worldwide flow of goods,
[160]
from the producers to the
manufacturers.
[163]
Thatâs how a chocolate factory gets its
sugar, cocoa beans and milk.
[168]
However, trading commodities is
also referred to as âinvestingâ.
[173]
In the physical market, commodity traders
seek raw materials to manufacture goods,
[178]
or to sell them to manufacturers.
[181]
But trading in the derivative market can be
used as a way to make a profit
[185]
off of the buy-sell transactions.
[189]
Besides trading companies, whose expertise
is in sourcing, transport, logistics,
[194]
financial instruments and risk management,
several other providers are involved
[199]
in physical commodity trading.
[201]
Certification and inspection companies are
responsible for setting and verifying
[206]
the standards for the trade and checking
that these are met upon delivery.
[211]
Specialised banks provide the necessary
capital to trading companies and
[216]
support them in assessing the
investmentsâ risks.
[219]
Insurance companies safeguard traders
against unexpected disruptions of
[224]
supply chains due to events such as a
pandemic, a war, or natural disasters.
[231]
Shipping companies bring the traded goods
from the producer to the manufacturer.
[236]
The Mediterranean Shipping Company (MSC),
the second-largest container shipper and
[241]
the third-biggest cruise ship operator,
has its headquarters in Switzerland.
[246]
Other actors are involved in the derivative
section of the trade: pension funds, banks
[251]
and hedge funds invest their money in
commodities, influencing their prices.
[256]
Companies doing physical commodity trading
can also invest in the derivative market
[260]
to hedge against risks
to their business.
[263]
Switzerlandâs involvement in commodity
trading can be traced back to the
[267]
15th century, when its ideal central location
had merchants from all over Europe
[273]
meeting on its city squares
to exchange goods.
[277]
The importance of Switzerland grew as
family-owned businesses developed:
[281]
the Volkart Brothers near Zurich and the Nestlé
and André families in the canton of Vaud
[286]
established themselves on the global trade
market at the end of the 19th century.
[292]
The development of international
organisations in Geneva not long after that
[297]
helped strengthen Switzerlandâs
neutral and international profile.
[301]
This served the country well after the
Second World War and during the Cold War.
[306]
The small Alpine nation was the place to be
to trade with East Asian countries,
[311]
and to work with modern infrastructure.
[315]
Between the 1960s and the 1990s, cotton
merchants from Egypt, Russian oil traders
[321]
and Italian metal traders set up
offices in Geneva, Zug, and Lugano.
[327]
These are still considered the major
commodity trading hubs in Switzerland.
[332]
Low corporate taxes, skilled labour, high
quality of life and the strong financial
[337]
sector contributed to the countryâs continued
attractiveness for trading companies.
[343]
Today, Switzerland is home to about 900
companies involved in commodity trading,
[349]
including giants such as Glencore, Vale,
Cargill, Vitol and Trafigura,
[355]
which are among the worldâs
biggest traders.
[359]
There are also many small and medium-sized
businesses, with as few as two employees.
[364]
The firms employ about 10,000 people
[367]
and contributed nearly 4% of
the country's GDP in 2019.
[373]
By comparison, the pharmaceutical
sector contributes 5.4% of the GDP.
[380]
Landlocked Switzerland accounts for
22% of global commodities shipping.
[386]
More specifically, Swiss-based commodity
trading companies handle 65% of the worldâs
[391]
cotton, 60% of metal and grains,
55% of coffee, 45% of sugar,
[399]
40% of all oil, and 35% of cocoa.
[404]
Almost none of these raw commodities
actually enter countryâs borders;
[408]
they are just traded in Switzerland.
[412]
Swiss-based banks are among the most
important lenders to the commodity trading
[416]
business: in 2016 they
provided CHF62 billions.
[423]
However, following a recent series of
bankruptcies and frauds in the oil trade,
[428]
several major banks have announced
closed or reduced their commodity
[432]
trading finance departments.
[435]
Outside of Europe, the United States,
Hong Kong, Singapore and several offshore
[440]
locations such as Panama and the Cayman
Islands are among Switzerlandâs
[444]
biggest competitors as a
commodities trading hub.
[449]
Commodity trading is often criticised
for its role in facilitating corruption,
[454]
environmental damage and
human rights violations.
[458]
Because of the partially virtual aspect of
the trade, and the numerous intermediaries
[462]
involved, one of the main challenges in
this fundamental business is
[466]
knowing how and where raw
materials are obtained.
[471]
For example, demand for cheap food means
that commodities like palm oil and soy
[476]
are constantly at the heart of the
debate around deforestation.
[481]
In some places, farmers clear patches of
tropical forest to produce these commodities.
[487]
Child labour is a known issue on cocoa
plantations, and several big companies are
[492]
trying to monitor the situation to certify
their chocolate as âchild-labour freeâ.
[498]
Finally, lots of raw materials are sourced
in politically unstable countries
[502]
which opens opportunities
for corruption.
[506]
This can lead to what is called
the âresource curseâ
[509]
where only the elite few profit from a
nationâs resource bounty.
[514]
These concerns are often attributed to
the commodity trading sector as a whole.
[520]
Because of the many intermediaries
involved, responsibility has been
[523]
very hard to pin down. Are investors
looking to make a quick buck
[528]
from commodity trading as
complicit as big commodity firms
[532]
that buy and sell tonnes of gold,
cocoa and oil?
[535]
What is the responsibility of
countries like Switzerland,
[538]
where these traders operate?
[541]
Despite its leading position in the sector,
Switzerland has been slow in getting to
[545]
grips with commodity traders and
the controversies surrounding them.
[550]
It was not until 2015 that the government
adopted a corporate social responsibility
[555]
plan to guide the conduct
of companies abroad.
[559]
More specific guidelines for the commodity
industry were not proposed until 2018.
[565]
This included a set of 16 recommendations
to help minimise the risks posed
[570]
by the Swiss commodity sector.
[573]
An interdepartmental platform on
commodities was created to evaluate
[577]
if the recommendations were
being implemented.
[580]
But no binding regulations for the industry
have been imposed by the government,
[585]
which has acknowledged the need to be
competitive to avoid losing business
[589]
to Dubai, Singapore or London.
[592]
So far, its most far-reaching measure
has been supporting the drafting
[596]
and implementation of specific
standards and initiatives
[599]
for the commodity trading sector.
[603]
It will take more than one countryâs
efforts to reform the commodity sector.
[608]
A patchwork of international agreements
and standards such as the UN Guiding
[612]
Principles on Business and Human Rights or
specific industry efforts like the
[617]
Better Gold Initiative are trying
to change the status quo.
[622]
But because itâs such an important player
in this global business,
[625]
activists say that Switzerland should take
on more responsibility
[629]
and set an example on good governance.
[633]
In 2020, Swiss voters launched but narrowly
rejected a peopleâs initiative
[638]
to make Switzerland-based multinationals
legally accountable
[641]
for their business practices abroad.
[644]
The vote showed that citizens and
consumers are increasingly ready to demand
[648]
accountability and transparency
in the commodity trading sector.
[653]
A once-opaque operation that flew under the
radar is gradually being forced to become
[658]
more transparent and accountable due to
stricter laws, regulations,
[663]
NGO advocacy and consumer awareness.
[667]
It remains to be seen whether
Switzerland will help lead the change.
Most Recent Videos:
You can go back to the homepage right here: Homepage