Just 11 years old, the Swiss-based firm is hoping that its hybrid business model -- of offering cargoes, storage, blending and risk management solutions -- would give them an edge to grow trading volumes in Asia including China, which has recently allowed teapot refiners to import crudes and process them.
"The main standout in Asia is the liberalization of the oil markets in China," Raj T. Chawla, Mercuria's chief operating officer for Asia, told Platts in an interview Thursday.
"Earlier the option was limited to sell crude to only three to four oil majors in China. Now, with independent refiners coming in, that provides the opportunity on feedstock imports, crack hedging and eventually on exports of refined products out of China by those teapots," he added.
In a major step towards deregulating the oil sector, Beijing earlier this year unveiled plans to allow teapot refiners -- small independent refiners not affiliated with the major Chinese state-owned oil companies -- to process imported crudes.
It has also given some of these refiners the right to import their own crude without having to through state-owned trading companies.
China has so far granted seven teapot refiners the right to process imported grades. The total volume allocated to these refiners for this year stands at around 33 million mt (242 million barrels).
"We expect China teapot crude import quotas to double next year and that will give us opportunities to grow our business even further," Chawla added. "Over time, you will see product exports out of those teapots from China."
And as China gears up to launch its first crude oil futures contract, Chawla said there were enough reasons for the contract to be a potential success as the dynamics of oil trading was changing in China.
"If you look at it, the size of the contract will be one-tenth of the size of WTI. That will provide some retail investor attraction. Secondly, the fairly quick liberalization of the oil trade in China will provide support to the contract as foreign participants will have more options to sell crudes to more buyers, instead of only the oil majors," he added.
In addition, there was potential arbitrage trading opportunities versus the Middle Eastern sour crude contract, he added.
CHANGING BUNKER DYNAMICS
Mercuria, through its wholly owned subsidiary Minerva Bunkers founded nine months ago, is aggressively building a fuel oil and marine bunker business, which Chawla said would be a complementary add-on in Asia -- the region that accounts for 60% of the company's global bunkering volumes.
"In this short span, we have executed on a platform that has already dealt with over 300 customers. Our model is unique in the sense that we are providing a one-stop solution on trading, storage, blending and risk management solutions," he said, adding that the company is now active in all major bunker ports around the world, with 40 specialists globally.
While explaining the dynamics of the bunker market, Chawla said it had changed quite a bit in recent years, and more changes are yet to come.
Flat prices have come down 50% in the last couple of years. The unwinding of OW Bunker has structurally changed the market.
In addition, emission regulations are being implemented in Europe, and by 2020, there would be a de-emphasis on high sulfur fuel oil and a shift to low sulfur fuel oil and marine gasoil, he added.
By the end of the year, Chawla said that he expected Minerva's bunker volumes to be about 2.5 million mt.
TRADING AND RISK
In just a decade, the founders of Mercuria -- ex-Goldman Sachs traders Marco Dunand and Daniel Jaeggi -- have built the company from initially supplying oil to a few Polish refiners in 2004, to the world's fourth-largest independent commodity trading company, behind Vitol, Glencore and Trafigura, with revenues of $106 billion in 2014.
Hailing from banks themselves, the founders believed in providing a one-stop solution -- both trading and financial. So when the opportunity came up, the company snapped up JPMorgan's physical commodity business last year, along with which it acquired the bank's high-profile talent.
As banks are increasingly pulling out of the physical commodity trading business because of various regulatory issues, Mercuria, with plentiful banking expertise, sees a window of opportunity to step in and offer some of the risk functions to counterparties, said Chawla, who was the managing director and head of commodities at JPMorgan for China, before his current role.
"We have also acquired top tier banking talent. That helps us in the hybridization of our business model -- marrying physical flows with risk management solutions for counterparties," he added.
And by acquiring JPMorgan's business, it has given Mercuria the opportunity to establish a footprint in power and gas segments in Europe and North America.
Chawla said in addition to crude and fuel oil, the firm would push its coal business, despite weak demand from China and India.
"But if you look at coal in Asia, compared with Europe where demand is on a structural decline, Asian demand will still hold up. We remain committed to the coal business despite the current flat to backwardated term structure as we have a long-term franchise view," he added.
STRATEGIC ASSETS
Last month, Mercuria made inroads into the West African downstream oil sector by aligning with Forte Oil, a Nigerian company active in the downstream and retail fuels sector.
It is examining a potential investment of up to $200 million or a 20 percent stake, Chawla said. On potential future asset-buying opportunities, Chawla said Mercuria would remain asset light but was open to strategic opportunities.
"We will use our balance sheet in an opportunistic way -- whether on the debt side or equity side -- to participate in assets that provide us trading optionality. It could be a production facility, storage or logistics. We would only invest if there is a commodity trading angle to it," he added.
In Asia, Mercuria recently opened offices in Seoul and Tokyo to grow the bunkering business, but Chawla said those offices eventually would broaden their coverage over a period of time.
Commenting on the price outlook for oil, Chawla said that all factors were still pointing toward a bearish market in the short term because of the oversupply situation. "But one has to look at it whether the geopolitical risk has been properly priced in."
