How To Find a Profitable Trade Flow (As a Beginner Physical Commodity Trader)

[00:00:00]Over my career, I started more than four niche commodity trading firm and I was also able to start countless trade flow from scratch. So in this video, I will teach you how to spot potentially interesting physical trade when you are at the beginning of your commodity trading journey. And if you are new to this channel, my name is Damian and I've been involved in physical commodity trading my entire career. And today I run a bunch of businesses related to commodities. And by the way guys, before we jump on the whiteboard, I just want to make clear it was a idea to start so many companies. I should have kept the one that I started when I was 25 years old. That was a massive mistake, but at the time I didn't know better. All right, let's jump on the whiteboard. All right, guys. So, let's try to do a short video because some people complained that my videos were too long. So, this one I'll do a short one. All right, when you start, there's two different situation. You can have something in your brain or you can have nothing in your brain. So you can have an insight about the market. For instance, if you've been a methologist your entire life, you know which type of concentrate, which type of oxide of sulfite works for which type of processing unit. All right, you have insight about the market. You know something and then based on that insight, you can jump in and find an arbitrage. For instance, in my case, when I started my business in Sineagal where we basically import and distribute cooking oil, I knew the business of importing in West Africa because those guys were my clients. I had an insight about the market. I knew the margin, how I knew how to uh distribute better the product and so on. So based on that insight, I found an arbitrage and I jump on it. Friend of the channel, Nick Maza, I don't know if you remember in one of the old video, he explained that he started as a food engineer. He worked for a company called Gotin. I will uh just put the ad here. I don't know if you remember this ad if you are old enough. Ah that was a good time back in the day. So two situation. So you have an insight. All right. You know something about the market that you want to jump in and make money with that arbitrage or you know nothing. You are like Jon Snow. You know nothing. So now the question is how can you find an arbitrage? How can you find an opportunity in any market if you don't have any specific knowledge or you don't have any insight? All right. How can you find an insight?

[00:02:19]So how do you find an insight about a market? It's very easy. It's just written here. All right. So you just have to do this and then you will find an inside. All right. Ciao. [laughter] I'm kidding. All right. So what you need to do again it's very easy. It's not rocket science but people don't do it because you need to get out of your zone of comfort. So people don't do it. But it's easy. You need to speak and you need to meet people with insight. All right? So the insight that they have in their head, they need to share it with you. So then you can assess on your own if it makes sense to jump on this insight or not. Who are the best people with the best insight about the market?

[00:02:56]If I want to have an insight about like fish feed market in Vietnam, who are the best people that I can speak with to give me real insight about that market?

[00:03:05]If I want to have insight about like a subm market of the polymers market. two whom I should speak with to get the best insight possible. All right. So the insight the best insight about the market to whom I need to speak with I need to speak with buyers. I need to speak with buyers.

[00:03:26]Right? This is the only people that I need to speak with. I don't speak with brokers. I don't speak with other traders. I don't speak with factory owners. I don't speak with suppliers. I only speak with buyers. I only speak with people that buy the stuff that you you want to trade. Those are the guys with the best insight. And why? If you speak with a buyer of tuna, okay, the guy is an importer and import a lot of tuna. And if you go and speak with him, say, "Hey guys, I see that you are one of the biggest tuna importer of the region. I want to start my import export business. Is there anything that I can offer to you? Is there anything that I could do that would make sense?" And the biggest tuna can buyer of the region will tell you what he needs. He will say, "Hey, you know what? There is like a little difficulty to source that type of product or this type of tuna can or you know what? I've heard that my friend that do peas in can right is having a difficulty to source it. There's some issues with with his sourcing ability."

[00:04:24]And by telling you so, all right, the buyer is going to indicate that there's an arbitrage here. there's one buyer that has a need that is not fully met by the market and this is the insight that you want. You want a buyer that tells you hey man you know what I'm not getting exactly what I want for the market right now there might be an opportunity is so because obviously you can't be a specialist in tuna can market in a polymer market in fish feed market you can't be so you need to get insight from people that buys from those market because they are the one that will tell you if their need are fully met by the current market condition or not. All right very very important. So that's the first part. The only insight that you need are the insight from the buyers.

[00:05:08]All the other insight are dog dog. Now it's been more than five years that almost seven years that I run the shipping commodity academy and I'm telling you there's a lot of people with with a lot of [ __ ] in their head. And this is not their fault. It's because they get [ __ ] inside from the wrong people.

[00:05:33]If you get [ __ ] inside, all right, you will think that the way you do business is with this shitty inside and you are never going to succeed. And one of the worst place where you can get inside are if you go on LinkedIn on WhatsApp group and you think that you are going to be a crude oil broker, a copper cat brokers, a sugar brokers. All right, then there's a LOI, there's a procedure that you need to be a mandate or whatever [ __ ] is today. All of that are [ __ ] inside. you are never going to make any money. You are probably going to waste your reputation and a lot of time chasing those unicorn guys. All right, so this is [ __ ] inside. And then when you have [ __ ] inside, you have [ __ ] in your head and then you come to the shipping community again me and say, "Hey, Damian, I don't understand why it has not been working. I think I'm doing something wrong." And then we spend hours and hours trying to remove the [ __ ] in your head and trying to teach you how to get great insight to start a business. The best insight that you are going to get in order to find an arbitrage opportunity in the market are the insight from buyers not brokers not mandate not even all the traders you need to speak directly with the buyers then there's another dimension that you need to be aware of so I need to do something and this whiteboard is keep getting dirtier and dirtier all right so there's another demotion that you need to take into account. So most of the commodity market goes through three different stages.

[00:07:08]They all start at stage one. So stage one is when the pricing is done with offtake agreement and long-term contract. So at that stage the market is extremely opaque.

[00:07:24]So at stage one we are off take agreement and on long-term contract. So the price is quite opaque. The reason that we have this at the first stage is because let's say that you want to build a mine. All right. And you are going to build a mine for like some rare earth that is you don't know if you are going to find a customer for it. So what you need is before you put millions and millions to build this mine, you will find an offtake agreement from a big buyers that will say all right man if you build that mine and you uh give me that specification we will purchase it at that price. Well this is an offic but this is how you need to start because otherwise nobody's going to build something for this commodity if they not are not sure that they are going to find a customer afterward. So stage one opaque pricing oftake agreement. Stage two and is when we start to have traders coming in. So there is extra tonage of that commodity.

[00:08:19]We start to have producers that have extra tonage of that commodity and they need to sell it. So this is when we see a spot market appearing.

[00:08:31]Some producer produce more. They don't have enough tech agreement for that. So they are going to sell this to the market. And some traders are going to purchase those extra quantity. And this is when we start to see a spot market.

[00:08:42]And then we have level three. So do you know guys what is level three?

[00:08:49]So this is financialization of the commodity. So I don't know how to spell that but this is when the commodity start to be traded on future market. So now the price is extremely transparent. Everybody knows the price at every second of the day and there's like enough liquidity for people to trade it and then to edge themselves on future market. Here the price is opaque.

[00:09:12]Here the price start to get known by people that trade spot and here everybody knows the price and it's fin completely financialized. Let me use some example before I go back on why it's important for you when you start from scratch. If we take the case of crude oil in 1973 before 1973 was basically produced by the seven sisters and it was oftake agreement. All right. Long oftake agreement with um state or with others big companies. All right. So that was when the crude oil was a cartel. Then we enter in the stage two. So this is when the opaque came on the line and also we had traders that started to trade the spot available quantities. Obviously the most famous traders at that time is Mark Rich the legend want that is the one that started to uh trade is the one that created the spot market. It's not really that he's the one that created it. is just that the market was right at the time where we had extra tonage and so we could move off this off agreement and we can start to have a spot market. Then after that I think I don't know I've asked a bit AI but it was not clear around 1987 we had a future market that was trading like three times or even like 100 times the volume of available crude oil. So this is when we got the full financialization of this commodity. All right. So that the three stage um maybe another couple of example if you want a product like uranium. Uranium is a very interesting product because it really start with offtech agreement.

[00:10:58]Then it started to move to the stage two with little spot market and then Fukushima happened and then we went back to opake oftake agreement. For instance, a product which is right now in stage two and may go to stage three is lithium. All right, lithium where right now there's a lot of extra stage.

[00:11:18]There's a let's say quite living spot market but there's not like a future market a very liquid exchange where you can trade lithium but lithium is slowly moving down to stage three. All right.

[00:11:30]So what you need to understand when you are new to it when you start from scratch and you are entrepreneur you want to set up your own trade flow anything that is financialized you don't want to touch it makes no sense to even go there why because when we are hitting the financialized stage the balance sheet of the commodity trading company is the most important okay maybe with bribery and all [laughter] and all stuff like that but the balance sheet is the most important at that stage so you are going to fight with the biggest company in the world. It makes no sense to try to do anything in stage three unless you are doing it in a niche market. So maybe you do copper uh even copper is not a good example because uh let's say you do nickel in a very difficult country or you have a niche a legal niche let's say that you as you are from that country you have some access to um some product that you can't if you are not from that country or whatsoever. The only way that you would touch anything that is stage three, it's because it's in a niche geography or there is a good reason that makes that the big guys out there don't want to touch what you do. All right? So that's stage three. So as a small trader as a theme firm you want to be in stage one or stage two because obviously even in stage one you know there's always like some very very little spot deal that are possible and so but this is where you want to find the first product that you are going to trade is when you are in stage one or stage two but stage three you just forget. All right. So when you are looking for insight, when you are speaking uh yeah, if I go back to the last uh whiteboard, when you are speaking with buyers, you want to speak with buyers that will give you insight about those two market like very opaque market like the tuna can market. All right? Or uh some like other like market that are not well known that are completely inesting for the big players out there. So you want to be in stage one or stage two. So this is how you start from scratch. First of all, you need an insight. You will get those insights speaking directly with buyers.

[00:13:32]And then you want to make sure that you jump into a product that makes sense for an entrepreneur for a small commodity training firm which is a product stage one or stage two or maybe not even like a community maybe some type of raw material some type of ingredients. Just don't try to do something that are not easily sellable. All right. So it just better that you buy and sell stuff that you can sell uh if something goes bad to someone else. Okay, so I hope that you like this video and if you want to learn more about how to do that, just check the first link below this video and you will end up on the shipping community academy. Ch.