London - A dramatic rise in the value of the Swiss franc sent costs soaring for the country's commodity trading houses on Thursday, adding to pressures from tax and regulatory uncertainty that has already pushed many abroad.
The Swiss National Bank shocked financial markets on Thursday by scrapping a three-year-old cap on the franc, sending the safe-haven currency soaring against the euro and stocks plunging.
The country's commodities sector comprises about 500 companies that contribute 20 billion Swiss francs ($22.2 billion), or 3.5 percent, of the country's gross domestic product. Trading houses employ between 10,000 and 12,000, according to the Swiss Trading and Shipping Association.
“Your cost base has increased overnight. It was a big surprise,” said Marco Dunand, the head of trading house Mercuria.
Others were less diplomatic.
“It is an absolute nightmare and a source of potential financial stress. What's worse is that you cannot have any contingency planning for this,” a source at a rival trading house said, asking no to be named.
Another trading source said: “Switzerland has always been one of the world's most stable countries. But in the past few years you had tax uncertainty, regulatory uncertainty and now this monetary policy surprise.”
Most Swiss commodities houses trade and earn in dollars but pay base salaries in Swiss francs. Some pay bonuses in dollars, which will probably slightly reduce the impact from the jump in the franc's value.
A lot of traders were attracted to the country in past decades by low tax rates, but those are now being renegotiated and increased under pressure from the European Union.
Few traders disclose information about their staff costs, but the general rule in the industry is that salaries and bonuses represent about two thirds of overall costs.
A trading house with a fairly large financial disclose - Trafigura - said in its latest report that it made a gross profit of $2 billion on revenue of $127.6 billion, with cost of sales at $125.6 billion. General and administrative expenses amounted to as much as $1 billion, or half of gross profit.
A commodities headhunter who operates in Switzerland said that the appreciation of the Swiss franc would ultimately hurt revenues for the country because it will lead to a decline in margins, profits and hence a decline in tax.
“Quite a lot of trading companies will pay in considerably less in the next 12 months,” he said.
“In the long-term it has a fairly significant impact on the non-key functions. Anything that can be out-farmed or outsourced - which is a continuing trend for trading companies anyway - will be accelerated.”
Trafigura has already moved its headquarters to Singapore, while Mercuria has large offices in London after its acquisition of trading units of U.S. bank JPMorgan. Vitol, meanwhile, has large offices in both London and Geneva.
Glencore employs 750 people in its Swiss headquarters but they represent only a small proportion of its overall headcount of about 200,000.
For individual traders, however, Thursday's events were met with enthusiasm, especially in Geneva, with its close proximity to France.
“Most oil traders are paid in Swiss francs and they are celebrating today because Chamonix and Courchevel next door in France have just become 30 percent less expensive,” one trader said. “I'm certainly going to ski in France this year.” - Reuters