Date: 23rd of August 2018.
The above question was asked on Quora's commodities trading topic. Below I've copied my answer for archival purposes.
The original answer can be found by following this link.
These companies own assets such as refineries, mines, ships, and warehouses, and are involved in exploration, production, storage, transportation, and marketing of commodities. Their main aim is to increase production levels of the commodity and efficiently transport it to their customers. Trading to such firms is supplementary and isn’t their main revenue generation mechanism. Producers are mostly physical traders, but they use financial derivatives to hedge their physical positions. Most of these companies fall under heavy regulatory oversight and are predominantly owned/controlled by a government/country. All “Big Oil” companies belong in this category.
Similar to Producers, these companies also own assets. However, instead of producing commodities these companies act as middlemen speculating on global commodity flows and supply and demand. Most of these companies are independent and are less regulated than government-owned Producers. Some of these companies do get involved in production if there is money to be made though on a much smaller scale than Producers. Commodity merchants trade both physical commodities and financial derivatives.
These companies are highly leveraged speculators who trade commodities to make a pure profit without getting involved in the messy physical market. They trade commodities either fundamentally or technically or a combination of both with mid to long-term views. They have a diminished access to information relating to the physical market but they compensate for that with research expertise that looks at commodities from a macro level.
Similar to other asset classes, banks and market makers are there to provide liquidity. They show bids/offers on instruments traded in the commodities market whether it is exchange-traded or OTC (Over the counter). Market makers make their money from the spread/edge. They have to strike the right balance between a tight spread that will attract buyers/sellers and a spread that will compensate them for the risk of making a market in a given instrument, while making sure that they manage their risk exposure (inventory) correctly. Flow is also important; the more clients a market maker has, the more money they can extract from the spread.
The smallest in terms of Assets under management (AUM) and capital deployed, these trading shops are mostly involved in intra-day short-term trading of exchange-traded futures and OTC instruments with the aim of extracting/scalping small profits but at a high rate. These shops fall under a wide technical spectrum, from high-frequency trading shops to more traditional Chicago day trading shops. Some shops perform functions similar to a market maker by providing liquidity in the market except they aren’t obliged to show a two-way market like Banks are.
Some trading houses have operations that might be considered part of a different category in which case I’ve categorized them under the operation they are involved in the most. For example, Citadel has teams that trade commodities from a proprietary perspective, but at the same time look at fundamentals with long-term views, so they can belong to both Hedge Funds and Prop Shops. Similarly, Macquarie is a bank and is traditionally involved in market making, however they do own some assets and hence have some operations that fall under the Commodity Merchant category.
Due to the nature of the business, some of these firms might go out of business by the time you are reading this post. Feel free to get in touch if you believe a company needs to be added or removed from this list.