Evaluating the true worth of commodity trading

Glencore's listing came with benefits Keystone

The rapidly expanding commodities trading industry has attracted many headlines in Switzerland in recent years, but the sector’s real contribution to the economy has yet to be fully established.

The basic numbers make for impressive reading: gross profits increased from SFr1.3 billion in 2001 to SFr20 billion ($21 billion) last year. The sector now contributes nearly 3.5 per cent of total economic output in Switzerland, outstripping tourism and mechanical engineering.

Geneva has emerged as arguably the biggest centre of oil trading in the world, companies in Zug have captured a large share of the minerals and metals market while Lugano, Zurich, Lucerne and Winterthur also play a prominent role.

But for years, pressure groups have raised doubts about how much of this income passes through the doors of the multinational companies to pay for national infrastructure and to benefit local communities.

“The commodities industry is by far and away the fastest growing sector in Switzerland, but its domestic impact is largely symbolic,” Oliver Classen, spokesman for the Berne Declaration NGO, told swissinfo.ch.

“The share of profits that trickle down to the Swiss economy is hardly negligible, but is disproportionate to the amount of money that traders are generating and to the contribution of other industries.”

Tax debate

Data on the secretive giants remains limited thanks to private ownership and the secretive tax deals they strike with welcoming cantons. A Swiss government report on the industry, due to be completed by the end of the year, promises to fill in some knowledge gaps but it remains to be seen how much information will be released to the public.

At present only the Swiss National Bank (SNB) keeps tabs on the sector as a whole by measuring the volume of transit trade – goods that are neither produced in Switzerland nor end up in the country or even pass through national borders.

One figure that pops up with regularity is 11 per cent – the average cantonal preferential tax rate for “special status” companies that earn the majority of their profits outside of Switzerland. Firms that do not benefit from such treatment end up paying around 24 per cent in taxes.

The “friendly” tax treatment of some commodities giants – and multinational companies in other industries – has in some cases even gone too far for the Swiss federal authorities. Earlier this year, Brazilian mining mega-firm Vale was taken to court to court to claim back some SFr200 million in unpaid taxes.

Commodity trading firms sometimes feel that they have been unfairly accused of not giving enough back to their host country. The Lugano Commodity Trading Association (LCTA) told swissinfo.ch that according to official statistics, the industry contributed a quarter of all corporate taxes raised by the city in 2009.

Foreign competition

The European Union is also putting pressure on Switzerland to end “uncompetitive” cantonal corporate tax practices that attract so many foreign firms – not just in the commodities trading sector.

If Switzerland bows to such pressure to reconfigure its taxation system then many cantons, most notably Geneva and Vaud, fear they could lose tens of millions in revenues each year.

Switzerland could also end up losing large multinational corporations, and their revenues, warned Marco Passalia, secretary of the LCTA.

“We should not forget that there are strong fiscal incentives from countries such as Singapore and Malaysia to attract these kinds of activities,” he told swisinfo.ch.

If many commodity trading companies are suspected of failing to pay a “full” share of corporate taxes, then the people who work for them are well paid, subject to income tax and spend money in the country.

Trickle down effect

Last year, the billions accrued by Glencore chief executive Ivan Glasenberg – and other top managers – when the commodities giant went public, trickled down to locals in his hometown of Rüschlikon in canton Zurich.

Residents were able to vote in a five per cent reduction in local taxes thanks to the tax windfall that left the community coffers with a surplus of SFr55 million.

Such extreme examples are rare and critics argue that there are not enough workers in the industry to make a great deal of difference to the national economy as a whole. Finding out how many people are employed by commodities traders in Switzerland is nearly as difficult as calculating how much they pay in taxes.

The Geneva Trading and Shipping Association has estimated a workforce of around 5,000 in its locality, with at least half as many people again employed in related sectors such as finance, insurance, inspection and legal services.

The 70-or-so Lugano-based trading firms employ around 1,000 local workers, according to LCTA. The recently formed Zug Commodity Association estimates that the German-speaking area of Switzerland is home to up to 100 firms, but does not yet have workforce data.

As with many issues surrounding the secretive commodities industry, enhanced transparency is the key to understanding what it impact it has on people’s lives. Unless the federal authorities uncover the true picture and publicise their findings, Switzerland risks yet more criticism for being a “transparency oasis”, said Berne Declaration’s Classens

Swiss commodities trading

Swiss towns such as Winterthur, Lucerne and Lausanne have a long tradition of trading in commodities such as cotton or coffee, cashing in on Switzerland’s central European location.
 
The Winterthur-based Volkart Brothers company established a highly successful cotton, coffee and spice trading operation in Sri Lanka and India in 1857. The Union Trading Company of Basel was an early traders of cocoa beans.

After the two world wars, commodities traders started looking more closely at neutral Switzerland whose economy and political structure has survived the conflicts unscathed.
 
The first grain trading houses appeared in Geneva in the 1920s while Switzerland offered a neutral venue for US companies to engage in trade with eastern bloc countries during the Cold war.

Geneva’s popularity as a destination for Middle Eastern travellers gave the city an edge as the oil industry started booming in the region. Oil traders were joined by cotton merchants escaping from Egypt in the 1960s.

Russian oil concerns followed in the 1990s, establishing a commodities industry in Zug and expanding the Geneva centre.