Europe crisis sparks risk aversion: Trafigura

Europe's sovereign debt crisis has sparked an outflow of funds from most assets, including commodities and energy, as risk aversion grips investors, said the world's third-largest independent oil trader Trafigura.

While the recent decline in crude has brought prices more in line with demand-supply fundamentals, it would take longer than expected for physical fuel demand to recover, Trafigura Chief Financial Officer Pierre Lorinet told the Reuters Energy Summit.

"What the sovereign debt crisis in Europe is doing is scaring away a lot of financial flows from assets, of which commodities is just one of them," Lorinet said.

"Risk aversion is growing."

European Union finance ministers have agreed on an emergency loan package, that with IMF support, could reach 750 billion euros ($1 trillion), to prevent a sovereign debt crisis spreading through the euro zone.

"What's been driving commodity prices over the last six to 12 months is financial flows, rather than underlying fundamentals," Lorinet said. "With liquidity being taken away, you see prices starting to realign with supply and demand."

US crude has fallen around 20 per cent from its 19-month high of $87.15 reached on May 3, hit by nagging worries that the contagion effect from the euro zone crisis could hurt the health of the global economy and oil demand.

And contrary to most market expectations, the recovery in physical oil demand will last longer, he added.

"People are realising you can't have one of the worst crises in the last hundred years, come out of it suddenly, and everything is fine," Lorinet said.

"It should not be a surprise that a pick-up in consumption will take longer than what most people expect, and there would be medium-term sluggishness in the physical market."

Earlier this month, the International Energy Agency (IEA) trimmed its 2010 global oil demand growth forecast by 50,000 barrels per day (bpd) in its monthly report. It still expects a 1.62 million bpd increase in demand this year.

Short-term crude floating storage levels continued to rise to 81 million barrels in April, from 65 million barrels in March, reflecting a substantial glut, IEA data showed.

Netherlands-based Trafigura Beheer BV posted 2009 sales of $47 billion. It trades over 2 million barrels of crude and oil products daily, as well as base metals, iron ore and coal.

The company continues to eye acquisitions to beef up its base metals business and secure supplies for its trading operations.

It bought metals warehousing firm NEMS Ltd in March and a 39 percent stake in Toronto-listed copper producer Anvil Mining Ltd last December. It also purchased a 15 percent stake in a crude oil exploration block in the Philippines last October.

"Our investments are opportunistic and focused on guaranteeing a stable supply for our trading book," Lorinet said. "We invest in assets where there are proven reserves and a short-to-medium time frame between our involvement in a project and production.

"We have no intention of being a significant operator of assets in the long term, as we are first and foremost a trading operation," he said, but asserted that the company was not exploring any particular opportunity at this point in time.

Trafigura will grow its newer businesses of coal and iron ore trading before it embarks on acquisitions for those, he added.

The company's mining, logistic and other physical assets could be spun off in a public listing a few years later, if conditions are right, Lorinet said.

"One avenue that we can explore in the future is the listing of our industrial assets. There's no intention today and there's no decision. It's just an option, a possibility," he said.

"But we do not feel that our physical trading business suits a publicly listed model."

The firm is already diversifying its sources of funding, moving from securitisation to revolving credit facilities and a debut bond issue.

In March, Trafigura issued a five-year 400 million euro bond, after securing an increased $2.3 billion loan to refinance its existing European credit facility.

Lorinet said the sentiment in Asian credit markets was holding up much better than in Europe, and the firm plans to tap regional credit markets later this year to refinance its Asian credit facility.

"Clearly, there is uncertainty in the global credit markets, but the Asian market is still pretty buoyant, and there is more appetite for lending here versus Europe."

Lorinet added there was no reason to expect a contagion effect in regional credit markets at this stage, although this was difficult to predict with any certainty.

"For the commodity sector, most of the bank loans are secured by underlying trading flows, and if there were any issues in the credit markets, the bond market would be affected first, and then clean corporate lines, much sooner than transactionally secured financing, which is the bulk of what we have."

"A non-rated bond issue would be difficult to launch at the moment due to current market conditions," he said, adding the firm had managed to catch the window of opportunity with its debut bond. "We were in the right place at the right time."