The global commodity trading business is one of the most lucrative and lasting ventures ever known to mankind. All through history, nations, kingdoms, states, and more have had to trade resources across their borders in exchange for goods and services. This goes on till today all across the world with physical commodities been imported and exported out of every country.
The need for nations to constantly trade commodities is fueled by the fact that no single country is absolute. No one owns all the resources they need to fuel their industries, and as such, continue to trade with other nations to supplement their shortcomings.
The lasting demand of every country for resources that lie far beyond their shores is what gives international trade or global commodity trading its great value, and in the process, has created thousands of millionaires and billionaires around the world.
So What Is Physical Commodity Trading About?
Commodity trading is the trading of soft and hard commodities ranging from agricultural products to mineral resources. Agricultural products are largely called soft commodities and mineral resources are largely called hard commodities.
What Then Is The Commodity Trading Brokerage Business About?
The commodity brokerage business is the facilitation of the buying and selling of physical commodities between a seller and a buyer. The commodity could be agricultural products, solid minerals, or oil and gas products, with crude oil brokerage being the most lucrative amongst the lot.
People who carry out commodity trading brokerage are called commodity brokers. They’re the key in the mix of the transaction and do everything to ensure that both the buyer and the seller can successfully come to an agreement to trade, after which the broker gets paid a commission for their services for as long as the trade relationship lasts between the buyer and the seller.
How Do You Become A Commodity Broker?
Becoming a successful commodity broker largely depends on your ability to find the right seller, the right buyer, and being able to make the deal happen. It also involves being able to know the right type of commodity to trade in, and what to stay away from.
Some are far more profitable than others and knowing which commodity is most realistic for you to close a lucrative deal on is key to success.
Types Of Hot-Selling Commodities In The International Market
With an immense volume of commodities been traded worldwide between nations, the limits to what a commodity broker can trade is endless. But from these commodities, some are extremely lucrative for commodity brokerage and others are less lucrative.
Some of the most lucrative commodities to broker are:
- Crude oil
- Petroleum coke
- Jet fuel
- Lithium based minerals
- Sesame seeds
- Most metal ores
And much more.
In crude oil brokerage for instance, the minimum purchase value is mostly around 1 million barrels, with most buyers looking to make their first purchase on 2 to 4 million barrels. As a crude oil broker, you could earn $1 per barrel, which would amount to $1,000,000 for every one million barrels shipped. The downside to the crude oil trade is that it is extremely difficult to close a deal because of too many factors that cause buyers and sellers to fall out of negotiations. But when you eventually do close one deal, you’d make a whole lot of money depending on how much you’re been paid per barrel.
The same applies to other commodities. Only that on a large scale you’d earn a commission either per kilogram or per metric tonne. In the case of diesel for instance, you could earn $5 per metric tonne, and if 50,000 metric tonnes are delivered, you would make up to $250,000 dollars per delivery.
There are much more commodities that you could broker, and we’ve highlighted a lot of them in the article here.
How To Find Real Sellers (Exporters) And Buyers (Importers) For Your Commodity Brokerage Business
Before you find buyers for your commodity brokerage business, you need to first get genuine sellers that can actually deliver. To find one, there are a couple of things you need to consider in your search. Some of them are:
- Does the seller have a verifiable permit to export such commodities?
- Does the seller have at least one proof of past performance?
- How open is the seller to negotiations and amendments to his trade procedure?
- Does the seller have a history of paying brokers what they earned?
- How knowledgeable is the seller about the commodity, the industry, and the trade processes?
- Is the seller willing to accept a bank guarantee of payment instead of upfront payment?
If the seller checks out well with the questions, the next step is to find a credible/qualified buyer. To find a qualified buyer, there are somethings that need to check out right with the buyer. Some of them are:
- Has the buyer bought that commodity from anywhere else before?
- Is the buyer willing to share his company profile and history?
- How open is the buyer to negotiations and amendments to his trade procedure?
- Does the buyer have a history of paying brokers what they earned?
- How knowledgeable is the buyer about the commodity, the industry, and trade processes?
- Can the buyer prove to the seller that he has the funds?
- Is the buyer willing to place a bank guarantee of payment before the seller spends so much on purchasing, loading, and shipping the goods?
Usually, when sellers or buyers are reluctant to negotiate their procedures to favour both parties, it means you’re dealing with a broker. Real buyers and sellers are always willing to see what is workable between both parties, but brokers could be rigid and ruin transactions.
Generally, if a seller requests any form of upfront payment, it’s a red flag. Also, if a buyer is unwilling to place a bank guarantee before the seller prepares for shipment, that’s another red flag. Genuine buyers and sellers would be willing to both work with a bank guarantee based on what will be the safest thing for the both of them.
How To Find International Buyers For Your Commodity Brokerage Business
To find international buyers for your commodity brokerage business, here are some things you could do:
- Register with Export Promotion Councils (EPCs)
- Find local buyers who represent foreign countries
- Become active on LinkedIn
- Fill orders from local buyers who export to foreign organisations
- Register on international trade platforms
- Have an international SEO-Ready website
- Do email marketing
- Hire overseas agents on commission basis
- Contact the country’s chamber of commerce
- Participate in trade fairs
- Get import lists from foreign embassies
- Internet marketing.
To read in-depth about each way to find international buyers for your commodity brokerage business, you can check out the article here.
How To Negotiate And Secure Your Commissions In Successful Transactions
Depending on what type of commodity is being traded, the commission structure could vary. Crude oil commission payments, for instance, are paid per barrel. So it could be 25 cents per barrel, 50 cents per barrel, or $1 per barrel depending on what you’re able to negotiate.
For most other commodities, the commission is paid per metric ton. So if you negotiated $5 per metric tonne, you could earn $50,000 if 10,000 metric tonnes of the commodity is sold.
In other instances, commissions could be paid as a percentage of the total product value. This could be 2%, 5%, 7%, and more of the product value.
But knowing what percentage you want isn’t enough. You need to be able to secure your commissions. to do this, you’d need to sign a Master Fee Protection Agreement with the buyer, seller, or both, and ensure it is lodged with their banks. When this agreement is prepared, it should be bound by the laws of the International Chamber of Commerce (ICC), so that if disputes arise and you don’t get paid, you could easily report to the ICC and they’d find the buyer or seller. They could even penalise them if you remain unpaid and the defaulting party may be unable to deal in certain areas.
How To Know If A Commodity Trading Deal Is Done, Before The Product Even Gets Delivered
Most people think a deal is done if a contract is signed. That’s far from it because the contract still is just a piece of paper or digital document that may never come to fruition. However, if a buyer places a bank guarantee of payment and the seller posts a performance bond, the deal could as well be concluded because the seller would lose the value of the performance bond if they don’t deliver, and if they do deliver, the buyer would not be able to stop his bank from paying the seller upon presentation of delivery documents.
The performance bond posted is mostly 2% of the total cargo value. So if crude oil worth $100 million dollars was to be shipped for instance, 2% value of it amounting to $2 million dollars would be posted by the seller’s bank as an indemnity.
In many instances, sellers don’t post performance bonds. But this mainly happens in solid minerals and agricultural trade. But in oil trade, sellers post a 2% performance bond a lot of the time.
What To Do Next After You Close Your First Commodity Brokerage Deal
Once you successfully close your first deal, the next step isn’t to immediately become the seller, but to close more deals, learn a lot more about the trade, and build a strong record that financiers would take as a strong cue to want to fund your venture when you do start up.
About The Author
This is an article written by Stan Edom, the Editor In Chief of Startuptipsdaily.com and the founder of Globexia Limited, a global commodity trading firm that exports solid minerals & agricultural products from Nigeria, and facilitates the global trade of oil & gas commodities.
These article along with others are written to help exporters and importers around the world to have a better understanding of the commodity trading business and to improve their chances of becoming successful in the industry.
If you’ll like to contact Stan Edom for questions or inquiries, you can reach him on +2348080888162 or via email at [email protected].
What are your thoughts on how to start a successful commodity trading brokerage business? Let me know by leaving a comment below.
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