LONDON (Reuters) - Global energy trading businesses are set for a new wave of consolidation as rising interest rates and high oil prices compress already thin profit margins, said Mercuria, one of the world’s biggest oil traders.

A flag with the logo of Mercuria commodity trading house is pictured in Geneva, Switzerland, October 11, 2016. REUTERS/Denis Balibouse

“The overall industry is oversized,” chief executive Marco Dunand told the Reuters Global Commodities Summit.

“In the trading world, if you look typically over the last few years what the return on equity in trading is, it’s not so bad. But if you look at profit compared to turnover it is very small,” he said.

The industry usually operates with a net margin of below 1 percent and during poor years closer to 0.5 percent, which Dunand said leaves very little room for error.

“The net margin compared to turnover is probably one of the lowest you can find in markets... We believe there should be consolidation within the industry.”

Mercuria grew rapidly in recent years by buying trading books and businesses of rivals such as JP Morgan as banks exited commodities trading and some parts of struggling rival Noble Group.

“One way to grow, or at least reduce your cost base, is...consolidation,” said Dunand citing opportunity to reduce expenses such as back and legal offices: “Once you have those in place you don’t have to double in size”.

Also spurring consolidation might be higher oil prices, requiring larger working capital to fund trading operations, as well as increasing interest rates around the world, he said.

Mercuria is still looking to enter the liquefied natural gas (LNG) market, Dunand said, where its rivals such as Gunvor and Trafigura have already carved out a chunk of the increasingly liquid market.

The firm tried to gain exposure to LNG earlier this year when it was part of a failed bid by Harbour Energy to buy Australian gas producer Santos Ltd.

The Swiss-based firm reported a gross profit of $674 million in 2017, down from $716 million in 2016 while traded volumes of crude and refined products rose to 121 million tonnes from 105 million tonnes.

Volumes will go slightly up in 2018 and the trader will have more than 50 percent of its business in gas, power, coal and metals trading and less than 50 percent in oil and products, said Dunand.

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