Commodity trading in banks: go, go, go?

During a visit to the commodities unit of a large investment bank in New York some seven years ago, one was enveloped by a feeling of exuberance on the trading floor. No less than three executives claimed their institution was among the “few banks” with separate units dealing with paper barrels of crude oil, as well as loading and shipping the physical goods onto tankers somewhere offshore. a foreign marine terminal.

Given that the global financial crisis had not set in and the year was 2007, such a claim could well be called a market overstatement of the decade. In fact, most major banks at the time traded derivatives, futures, options, and physical commodities. Fast forward to the second half of 2014, and it’s a completely different scenario.

Punished by problems and scandals elsewhere, lukewarm margins and an onerous regulatory climate, the big banks neither brag about the prowess of their physical commodities trading business nor seem at all keen to hold on to it any longer. Offloading the oil distributor

TransMontaigne
by

Morgan Stanley
in June, at NGL Energy Partners, is the latest example.

Since then, Morgan Stanley had already agreed to sell its oil and gas trading business to Russia.

Rosneft
Last year; the meeting of the two agreements marked the end of the Wall Street Bank’s holdings in crude oil logistics and infrastructure. I don’t count his minority stake in global oil company Heidmar Holdings as much. The bank is not the only one going down the road.

Barclays
announced in April that it was selling off most of its energy, commodities and metals trades.

Other similar movements this year have seen

JPMorgan Chase
sold its physical commodities unit to Swiss trading firm Mercuria, while Standard Bank of South Africa also sold its London unit to Industrial and Commercial

bank of china
. Some, like

UBS
and

German Bank
didn’t care about a sale, choosing instead to cut back their business sharply. In the case of Deutsche Bank, this meant stopping “trading in most commodities”.

There are many reasons, but money is usually a good place to start. According to various data sources, including

Bloomberg
and market intelligence provider Coalition, the pre-crisis commodity trading revenues of the top 10 banks were around US$15 billion in 2007-08. The previous financial year, that figure had fallen below a third of that pre-crisis level, according to an industry source. Coalition estimates that it was more like $4.5 billion.

In any case, paper bets or creative derivatives have always been more comfortable in banks than the banal physical sale and logistics. In a post-crisis world, everyone from policymakers in various jurisdictions to the US Federal Reserve is not very happy that a single entity is managing both the physical and the paper side of commerce. While no industry-wide wrongdoing has been uncovered so far, scrutiny has intensified significantly in virtually all OECD markets.

Then there is the logistics aspect, from ports to security, from shipping to equipment, which is no small feat. To be honest, this has never been the case for banks, but in an era of low margins and pressures on capital adequacy elsewhere in the business, attitudes are changing. And given the choice, most banking players are now opting for the paper side of the commodities sphere.

However, spokespersons for all of the aforementioned banks stressed that they will continue to trade physical goods on behalf of high net worth and corporate clients. To quote a Morgan Stanley spokesperson, “We will be leaner, more customer-focused and better aligned with our global business.”

Despite weak returns, notable exceptions that are staying put include Goldman Sachs. Persistent rumors suggest it could sell off some assets, starting with Metro International Trade Services, a Detroit-based commodity warehousing subsidiary, but the bank says it values ​​its presence in the market. Nevertheless, the consensus within the industry is in favor of a withdrawal from the physical commodities market, far from the sensational exuberance of the pre-crisis period. Ironically, if the bank I visited in 2007 had not divested its commodities arm, the assertion made by those who spoke to me on its behalf would ring true today.