Wall St falls out of love with commodities trading; JPMorgan’s exit signals that the boom is over

August 4, 2013 5:56 pm

Wall St falls out of love with commodities trading

By Gregory Meyer in New York and Jack Farchy in London

Blythe Masters was triumphant. TheJPMorgan Chase executive had just sealed a deal that would propel her bank to the top of Wall Street’s commodities league table. JPMorgan paid $1.7bn and assumed $3.3bn in debt to buy the global oil, gas, coal, power and metals businesses of RBS Sempra Commodities, a trading venture. While JPMorgan was strong in commodity derivatives, Sempra was at root a physical house moving molecules through a storage and warehousing network stretching from Baltimore to Singapore. For Ms Masters, head of global commodities, this exposure was critical.“Just being able to trade financial commodities is a serious limitation because financial commodities represent only a tiny fraction of the reality of the real commodity exposure picture,” she said on the day the deal closed in July 2010. “We need to be active in the underlying physical commodity markets in order to understand and make prices.”

Three years on, her bet is unravelling. JPMorgan last month disclosed it was exploring a sale of the physical commodities business, leaving a rump of precious metals vaults.

The business could attract a range of potential suitors from private equity investors to trading houses.Freepoint Commodities, an energy and metals merchant formed by former Sempra executives in 2011, as well as Macquarie and Deutsche Bank are possible bidders, people familiar with the situation said.

Over the weekend, broker Marex Spectron emerged as a potential bidder for JPMorgan’s warehousing business, Henry Bath. Last week, a senior EDF Trading executive expressed interest in JPMorgan’s physical commodities portfolio, but the division of the French utility later said it was undecided.

The fact that JPMorgan is considering a sale is the clearest sign yet that Wall Street’s commodities trading boom has fizzled out. Coalition, a consultancy, reports that the combined revenues of the top 10 banks in the commodities sector was $6bn last year, down 22 per cent on 2011. Revenues peaked at $14.1bn in 2008, the same year the oil price peaked.

Morgan Stanley is cutting personnel and Barclays has reduced front-office commodities headcount by 18 per cent in the past year. Goldman Sachs is running its commodities business in the face of intense scrutiny from Washington.

JPMorgan said looming new rules and regulations factored into its retreat.

But rivals question if its foray into the physical trade brought a sufficient return on capital for the bank. “They built a business for a much higher revenue number,” said one executive with knowledge of JPMorgan’s strategy. “It was built for a different era.”

The bank did not make Ms Masters available for comment. A person close to the bank said the commodities business exceeded most targets in 2011 and 2012.

JPMorgan has had its share of regulatory concerns. Last month, it agreed to pay $410m to settle allegations it manipulated electricity markets in order to wring profits from ageing power stations. Ominously, the Federal Reserve is also reviewing whether physical commodities are “complementary” to banking.

JPMorgan’s strategy worked, by some measures. The Sempra acquisition almost doubled its list of commodities clients, according to an annual report.

In 2011, when the Libyan civil war made oil prices soar and JPMorgan bought crude from the US strategic petroleum reserve, the bank’s commodities revenues more than doubled from the previous year to hit nearly $1.5bn, industry executives and analysts said. Last year, revenues dropped to about $1.1bn.

The end of a decade-long commodities bull run, triggered in part by shale energy production and slower growth in China, augurs poorly for all the banks.

“In some ways, you should be agnostic to direction. But people tend to do better in commodity markets when they go up, not down,” says a former top Wall Street commodities executive.

Coalition said that of the $6bn in sector revenues last year, $1bn came from physical commodities – although analysts and industry executives say that for JPMorgan the proportion is higher. Physical trading makes up half or more of the bank’s industrial metals business, which is dominated by the assets acquired in the Sempra deal.

A person close to JPMorgan said that of the commodities group’s more than 2,200 clients, 1,800 were likely to stay even if the physical platform was sold.

This would be a different business than the one Ms Masters envisioned in 2010. She said at the time: “The platforms that are big, global, diversified and both financial and physically enabled are competitively much better positioned than those which are not.”