How Do Physical Commodity Traders Make Money?
How Do Physical Commodity Traders Make Money?
Short answer: by owning the logistics and the risk better than the next guy. Traders buy, store, ship, and sell real barrels, tonnes, and bushels. The P&L comes from price spreads, timing the curve, moving the product cleanly, and locking margins with hedges. Giants like Mercuria, Glencore, and Trafigura do this at global scale. Smaller desks (two to five people) win by knowing a niche cold and getting financed fast.
Where the Margin Comes From
| Driver | What it means | How traders capture it |
|---|---|---|
| Location (basis) spread | Different prices by region/port | Source in surplus region, sell into deficit; charter the route that clears fastest |
| Time spread(contango/backwardation) | Curve shape pays you to store or to move now | Store in contango (sell futures); sell prompt in backwardation (buy futures) |
| Quality/grade optionality | Blending or upgrading to match spec premiums | Blend metals/grades; optimize sulfur/octane; pocket the spec premium |
| Freight & logistics | Tonne-mile costs and congestion create arbitrage | Time-charter vs voyage, re-route, co-load, swap laycans, avoid demurrage |
| Financing & hedging | Funding and price risk management shape net margin | UPAS LCs, trade loans, repo on inventory; hedge futures/swaps/options to lock the spread |
Big Houses vs Small Desks
- Majors: own/lease tanks, terminals, and fleets; control optionality and get sharper pricing from banks and shipowners.
- Smaller firms: win on speed and niche knowledge—local producers, quirky specs, fast documents. The trade still needs clean credit lines and hedging access.
Anatomy of a Physical Trade (Fast Flow)
- Market & source: spot a basis or time spread; line up supplier volume and spec.
- Finance & hedge: LC/UPAS or trade loan; lock futures/swaps so the gross spread is protected.
- Ship & store: charter, insure, nominate terminal; watch laytime and losses.
- Deliver & settle: match docs to the LC; release cargo; unwind hedges; count the spread.
Financing Stack That Keeps Trades Moving
| Instrument | What it funds | Typical advance / tenor | When to use |
|---|---|---|---|
| Commercial LC / Confirmed LC | Supplier payment vs compliant docs | N/A funding; adds bank credit & document control | Seller wants bank risk; country risk needs confirmation |
| UPAS LC(Usance Payable At Sight) | Sight cash to seller; tenor to buyer | 30–180 days buyer tenor | You need time to sell/process; seller wants immediate pay |
| Transactional trade loan/ import loan | Cargo cost, freight, taxes/duties | 30–180 days; rate = benchmark + spread | Back-to-back with sale or short inventory turn |
| Inventory repo/ stock finance | Stored product under CMA/tank control | 60%–85% of landed value; rolling | Contango/storage play or steady program |
| Receivables discounting/ forfaiting | Post-delivery invoices | 70%–95% of face; 30–180 days | Offtaker creditworthy; you want cash in sooner |
Risk & Controls (what keeps you in business)
| Risk | Control you want in place |
|---|---|
| Flat price & basis risk | Futures/swaps options; define hedge ratio and stop-outs |
| Credit & performance | LCs/confirmations, credit insurance, performance bonds, prepayment security |
| Ops & logistics | CMA/warehouse control, laytime tracking, quality & quantity inspection, loss allowances |
| FX & rates | Forwards/swaps; match currency of costs and sales; UPAS for tenor |
| Sanctions & ESG | KYC, restricted party checks, vessel/port screening, documentation that matches the LC |
Two Quick P&L Examples
- Buy $650/ton CIF; contango pays $18/ton over 90 days.
- Storage + losses + finance + ops = $11/ton.
- Hedge: sell futures; after 90 days, lift hedge and sell physical.
- Gross spread ≈ $18 − $11 = $7/ton before tax.
- Buy $2,420/mt in surplus port; freight $45/mt; insurance/fees $8/mt.
- Forward sale at destination: $2,495/mt; hedge flat price via LME swap.
- Spread ≈ $2,495 − ($2,420 + 45 + 8) = $22/mt minus hedge carry and FX.
FAQ
Do I need a full hedge on every trade
No. Hedge to protect the margin you’re targeting. Leave only the risk you’re paid to take.
Can a small team really compete with the majors
Yes—by owning a niche, moving faster, and fixing documents and credit early. The majors don’t chase every small spread.
What kills P&L most often
Demurrage, unhedged basis, and document failures under LCs. All avoidable with discipline.
Best financing for fast-turn trades
UPAS LC or short trade loans. For storage plays, inventory repo with tight controls.
Do I need confirmation on every LC
No. Add it when the seller won’t take issuing bank/country risk or the contract requires it.
How We Help Traders Win
- Scope the trade and lock in the right funding: LC/UPAS, trade loans, inventory repo, receivables discounting.
- Draft LC wording that won’t blow up at presentation; set confirmation when needed.
- Hedge setup with clear ratios and reporting so the spread stays yours.
- Controls: CMA/warehouse, assignment of proceeds, insurance, and audit trail.
Have a spread you can’t pass up?
Send the spec, route, volumes, and target dates. We’ll map the funding, hedges, and controls so the trade clears and the margin sticks.
Talk to Commodity FinanceInformational only. Any financing depends on credit approval, KYC/AML, sanctions checks, and executed documentation. Pricing, advance rates, and hedging costs vary by commodity, corridor, and counterparties.
Get Started With Us
Submit Your Deal & Receive a Proposal Within 1-3 Working Days
Submit your deal using our secure intake form, and receive a quote within 1-3 business days. Existing clients can connect with their relationship manager through our secure web portal.
All submissions are
promptly reviewed, and all communications are conducted through the intake form or the client portal for a seamless and secure process.
Thank you for considering working with us. A nominal fee of US$500 is required upon completion of each form. This fee covers the time and effort we invest in reviewing your submission and crafting a thorough proposal. We receive numerous inquiries and prioritize those that carry this fee, ensuring serious applicants receive prompt attention.
Trade Finance
Tap into solutions like letters of credit, bank guarantees, and payment facilitation. We address the challenge of global transaction risk through structured strategies that foster cross-border growth. Complete the form to unlock streamlined funding aligned with your commercial objectives.
Submit a RequestProject Finance
Access non-recourse funding for infrastructure, renewable energy, or other capital-intensive ventures. We mitigate capital constraints by isolating project assets and focusing on risk management. Provide your details to receive a structure that drives growth and maximizes returns.
Submit a RequestAcquisitions
Secure financing for business or real estate acquisitions. We ease transaction hurdles by reviewing cash flow, synergy opportunities, and exit plans. Complete the form for a customized proposal that supports your strategic investment objectives.
Submit a RequestFor Banks
Financely assists banks facing Basel III pressures by distributing trade finance deals and providing collateral for letters of credit. We reduce capital burdens while preserving client relationships and fostering service expansion. Submit your request to optimize your trade finance offerings.
Submit a RequestOnce we receive your submission, our team will review your information to determine feasibility. If eligible, you will receive a proposal or term sheet within 1–3 business days. Visit our FAQ and Procedure pages for more information.
Disclaimer: Financely provides financing based on due diligence and feasibility. Approval is not guaranteed, and past performance does not predict future outcomes. All terms are subject to review. Financely primarily assists with structuring and distribution. Qualified parties carry out the project if the client approves the proposal.
