Volatility, The War In Ukraine And The Battle For Commodities Trading Talent

As 2022 began, the global economy appeared to be on a predictable course. With businesses reopening, labor tightening, and prices rising, many central banks around the world were poised to begin unwinding the fiscal and monetary support they dialed up during the COVID-19 pandemic.

The war in Ukraine, after one month, seems certain to have a COVID-level impact on the world economy, particularly in commodities trading. It’s taken a human toll of tragic proportions, driven energy and food prices higher, and created uncertainty around the world.

For those who are most negative on the market right now, the refrain is: Assets are still expensive relative to historical valuations; inflation is high and still rising; and central banks will need to raise rates to bring monetary policy back in line with the broader economy,” says Andrew Sheets, Morgan Stanley Chief Cross-Asset Strategist. “And yet, these concerns appear very different depending on where you look in the world.”

The immediate focus is on disruption to Black Sea trade, which includes millions of barrels of oil a day and about a quarter of the world’s grain exports. While Russian raw materials were initially exempted from sanctions, the threat of a severe dislocation to flows will increase as the conflict escalates.

The potential for disruption stems from Russia’s huge importance for commodity markets. It is the world’s biggest exporter of natural gas, and the second-largest exporter of oil. It supplies nearly a tenth of the world’s aluminum and copper, and produces a range of other metals, including 43% of the world’s palladium, a component of catalytic converters. It is also the largest exporter of wheat.

Roland Morris, Portfolio Manager and Strategist at the investment firm Van Eck says “Now that the Russia-Ukraine war is looking like the worst possible case, markets are reflecting the rising commodity supply risks. Ukraine and Russia together are critical supply sources for several very important commodities. Europe depends on Russia for the majority of its natural gas and crude oil imports, which flow by pipeline mostly through Ukraine. Together, Russia and Ukraine are the major suppliers of wheat, sunflower oil and fertilizers to Europe and the Middle East. Additionally, the record prices in Europe for natural gas and electricity are shutting down fertilizer and aluminum production. Russia is also a very important producer of aluminum, nickel and palladium. All of these commodities were in short supply before the war, and in the near term, we believe there is no easy fix to the supply shortages.”

How does this impact commodities trading firms? In a previous blog post, we examined the crucial need for funds and trading houses to have top people in their data processing functions. The impact of the current crisis will increase the amount of data to be processed and evaluated, exacerbating this need. In addition, it will demand ways of thinking that have not necessarily been a critical skill set for traders and trading executives in the past.

In 1967, the Maltese psychologist Edward de Bono coined the term lateral thinking. According to de Bono, lateral thinking deliberately distances itself from the standard perception of creativity as “vertical” logic, the classic method for problem solving. A person uses lateral thinking to move from a set of known ideas to new ideas. Lateral thinking will often produce solutions whereby the problem appears as “obvious” in hindsight. Lateral thinking will often identify problems that previously went unnoticed, or it will solve simple problems that have a huge potential. An article in Forbes in 2020 called lateral thinking “The most valuable skill in difficult times.”

The Forbes article quotes Adam Tilson of Alternative Finance that the key to lateral thinking is to not let received wisdom stand in the way—and to find sources of support who are also prepared to innovate. In doing so, leaders “are often able to access radically different solutions and much more flexibility than they might at first believe.”

From the point of view of recruiting and hiring, this will require a new approach. While there are no standardized tests for lateral thinking, recruiters can learn to assess it by asking candidates to solve problems that require “thinking outside the box. “ Many such questions can be found by searching on the Internet for “lateral thinking tests.” One such test can be found on YouTube.

There is no data on what percentage of the population are talented lateral thinkers, but clearly some people are better at it than others, and it is clear that this skill will be in great demand during and after the current crisis, both in hiring for the trading floor and for the executive suite.

In today’s business environment trading companies can ill-afford to ignore anything that could give them a competitive edge. Finding  exceptional commodities talent, including top-notch lateral thinkers, can be a difficult process, and outsourcing the search for and vetting of candidates is likely to save the company considerable time, produce the best results, and have the greatest probability of success. An effective recruiting partner will know how to identify the right combination of skill and experience to find the top candidates.

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