Leonid Bershidsky wites:  Marc Rich commodity trader extraordinaire, once gave this advice to an employee: “As a trader you often walk on the blade. Be careful and don’t step off.” Glencore, the world’s biggest commodity trading company, which Rich founded, now seems to be falling off the edge, its business model in question. 

A Glencore director said “we are under hedge fund attack but don’t know why.”

 The immediate explanation was probably a report from the financial company Investec, which said that if commodity prices remained at the current lows, almost all of Glencore’s equity value “could evaporate.” And something similar could happen to Anglo American, another mining giant, the report said.

It’s easy to see how these findings set in motion a sell-off. Yet Glencore already was on a downward trajectory — it has lost more than three quarters of its value since April. I

Relatively few commodity trading houses are publicly traded. They were usually set up by crafty individuals such as the late Marc Rich to look for arbitrage opportunities in commodity markets. These opportunities arise when it makes more sense for the end user to buy from a trader a bundle of services — transportation, warehousing, sometimes processing — in addition to the commodity itself rather than buying the commodity from the producer and dealing with the logistics separately. 

Many commodity deals are just bets on price moves, without any involvement with physical commodities. Yet industries obtain energy and raw materials through physical trades, and this is what companies such as Glencore do best, keeping logistical costs as low as possible, buying when and where it makes more sense, moving vast quantities of oil, iron ore or wheat efficiently around the world. These companies have expertise dealing with unsavory regimes that produce raw materials — they were among the first big investors in the former Soviet Union — and they also master the most sophisticated aspects of marine transport management or hedging. They can even serve as banks.

This versatility usually offers protection against problems in specific markets, and traders usually hedge against commodity price fluctuations. 

The profitability of traditional commodity merchandising depends primarily on margins between purchase and sale prices, and the volume of transactions. 

In other words, when trade volumes rise, so do trading houses’ margins, and vice versa. Margins swelled during the recent commodities super-cycle, with China driving growth.  The trading companies reaped $250 billion in profit in the preceding decade, more than Goldman Sachs, JPMorgan Chase and Morgan Stanley combined. 

Now, China is slowing and so is global trade. That means a drop in profitability for the traders. Bunge’s net income per share fell to 50 cents in the second quarter of this year, from $1.71 in the year-earlier quarter. 

Glencore’s merger with Xstrata, completed in 2013, made the company one of the world’s biggest mining operations, and that probably compounded its problems. 

Big traders, most of which made similar upstream investments during the boom, are being squeezed from all sides. 

Trading houses cannot shed only the risky parts of their business because these days, all parts are vulnerable as demand plummets in commodity markets. It’s too soon to say whether some of them will be wiped out by a crisis like the one that killed off a number of U.S. energy traders, including Enron, in 2002, but the conditions are challenging. Not even Rich, with his limitless capacity to walk the edge of the blade, could escape unscathed.

Marc Rich knew how to court politicians