Niels H. Lindegaard: Asset-Backed Trading - How to Build a Team

Asset-backed trading (ABT), long dominated by energy majors and utilities, is attracting new market entrants. In this Q&A from our sister company, Enco Insights, the former CEO of Maersk Oil Trading, Niels H. Lindegaard, explores the advantages of ABT and how to build a team. 

This article was originally published in the Q3 Market Review. You can read a full version of this Q&A on the Enco website.

Enco Insights: Have you seen the type of player in asset-backed trading change?

Niels H. Lindegaard: Yes - the players have changed recently and, I think, permanently. Early on they were producers and trading houses, then national oil companies and utilities — all of them people whose business was already the commodity itself. 

What is new is that the enquiries about entering ABT increasingly come from companies that produce none of it. After all, some of the largest commodity exposures in the world sit on the other side of the trade – such as shipping lines, steelmakers, fertiliser producers, airlines – where billions are spent each year through procurement. The resulting trading opportunities are prompting more of these organisations to explore how to increase the value of their core activities, and how to develop their own ABT teams.

Enco: What does the expansion of ABT mean for talent?

Niels: Early in a career, the scarce skill is not trading. It is understanding how a physical cargo moves and everything that can go wrong with it. The best traders I hired could read a surveyor’s report and had done a stock reconciliation themselves. At the top, the scarce skill is someone who can hold a board’s confidence while explaining a mark-to-market loss with an offsetting physical gain elsewhere in the accounts.

Enco: How can senior leadership use advisory boards well, and what are the pitfalls?

Niels: For the company’s own board the value is calibration, and it runs in two phases:

• Before anything is built: Here, an experienced outsider can tell you which parts of a strategy do not survive contact with how these markets actually behave and, just as usefully, what not to do. That feeds directly into the execution decisions, which is where most of the money is lost or saved.
• Once you are building: At this point, the adviser can tell you whether a number is alarming or routine. A board that has never traded has no reference points for either question.

Enco: For a company whose only relationship with a commodity is that it buys an enormous amount of it, what is the real case for moving into trading?

Niels: Almost none of it is about trading profit. There are four objectives and the P&L is evidence they are working, rather than the reason to start:

1. Cost: A consumer buying delivered product pays a stack of intermediary margins: the local supplier, storage operator, blender, refiner, ocean freight. Every layer earns a margin on your volume. You either keep paying it or move horizontally into it and earn it yourself.
2. Quality: Take the example of off-specification marine fuel – a regular and expensive global problem that can damage ships’ engines. The best defence is controlling each step – which cargo, which tank, which blend, which barge. For any specification-critical input, quality control is supply chain control.
3. Resilience: If supply is disrupted, prices spike and product can be unavailable. Controlled storage and logistics are insurance against that - and unlike most insurance, they earn their keep in the years when nothing goes wrong.
4. Intelligence: Procurement tells you today’s price; being in the market daily tells you where it is going - and once you sell to third parties in open competition, you have a performance measure nobody inside the company can argue with.