LONDON--The banks' retreat from commodities trading has turned
into a stampede.
On Tuesday, Credit Suisse Group AG became the latest lender to
chop its commodities-trading unit, joining a litany of banks
fleeing a sector that is struggling with a toxic mix of regulatory
scrutiny and tighter margins.
Like many of its peers, the Swiss bank said it would exit from
commodities trading so that it can divert resources to more
profitable parts of its business. Credit Suisse's commodities unit,
which includes metal and energy-trading desks, employs around 80
people. The bank hopes to save $75 million in costs by shutting it
down.
Commodities traders shift raw materials such as oil, gold and
copper around the world, taking advantage of price discrepancies
between different regions, bolstering their trading book with bets
on commodities-related derivatives.
Once an important source of revenues for investment banks, these
units have fallen out of favor. Regulators fret that they expose
banks to potential financial shocks. Meanwhile, stable prices for
oil and other commodities have hampered the profitability of trades
that bet on price moves.
"The bottom line is that banks are being forced to evaluate
returns in investment banking," said Kinner Lakhani, an analyst at
Citigroup. "Commodities trading is a business where some banks
don't have scale and they have typically been loss making."
For the 10 largest investment banks, commodities trading revenue
fell from $2.6 billion in the first quarter of 2012 to $1.8 billion
in the first quarter of this year, according to research consultant
Coalition.
Over the past year, Morgan Stanley, Deutsche Bank AG, Barclays
PLC and J.P. Morgan Chase & Co. have all slimmed parts of their
commodities trading, following in the footsteps of Royal Bank of
Scotland Group PLC and UBS AG which had already wound down their
physical commodities-trading desks.
Barclays said it would stop trading in base metals, energy and
agricultural products, and fold its precious-metals business into
its currency-trading unit. Bank of America Corp. closed its
European power-and-gas sales-and-trading desk, citing slumping
demand. Late last year, Deutsche Bank announced it would sell or
shut down almost all of its global commodities businesses, sparking
about 200 layoffs.
Postcrisis, rules forcing lenders to hold more capital and
preventing them from making bets with their own money have damped
the attractiveness of commodities trading, analysts say. In the
U.S., the Federal Reserve is considering a new capital surcharge,
among other measures, on banks dealing in physical commodities.
Regulators worry that if banks control assets such as power plants
or cargo ships, they could find themselves vulnerable to a number
of new risks.
Fretting about the impact of commodities trading on their
reputation, some banks are taking the initiative. Barclays is
retreating in part from the trading of "soft commodities" such as
coffee. The move was, in part, a concession to mounting criticism
that speculative trading in those commodities contributes to
food-price inflation.
To be sure, some banks are holding firm. Goldman Sachs Group
Inc. remains committed to its commodities business. Brazilian bank
BTG Pactual last year undertook a $300 million-plus expansion plan
to grow its commodities franchise and Australian bank Macquarie is
also expanding in physical commodities.
Meanwhile, commodities traders are taking advantage of the
banks' retreat to expand their footprint. Earlier this year,
Swiss-based Mercuria Energy Group agreed to buy J.P. Morgan's
physical-commodities business for $3.5 billion in a transformative
deal for the energy-focused trader. Others have taken advantage of
the banks' exit to snap up star traders.
National oil companies are also becoming more active traders,
eager to take advantage of the additional profit margin they can
glean by cutting out middlemen when they sell their oil. China's
state-run PetroChina and China International United Petroleum &
Chemicals Co., or Unipec, already have healthy trading operations
of their own. Russia's state-owned oil producer, Rosneft, is in the
process of buying Morgan Stanley's oil-trading unit.
"Those who remain standing when all this is settled will be in a
very strong position," said Ole Hansen, head of commodity strategy
at Saxo Bank. Commodities trading relies heavily on getting the
best intelligence on the market. "Those who maintain a close
interest...will have a lot to win."
Write to Max Colchester at max.colchester@wsj.com and Sarah Kent
at sarah.kent@wsj.com
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