Asian players develop an appetite for risky commodities trading

Asian players develop an appetite for risky commodities trading

Tuesday, 21 January, 2014, 8:49am

Ray Chan and George Chen

Capital-rich Asian firms show interest as Western banks exit sector

While Western financial giants have been exiting the high-risk, high-reward commodities trading business, capital-rich Asian firms, including state-owned banks and brokerages from China, have seized the opportunity to enter the market.Western banks including JPMorgan Chase, the world’s largest by assets, and France’s Natixis have been retreating from the commodities business but have found no shortage of Asian players willing to take their place at the table.

The latest example is China Merchants Securities (CMS), which launched a wholly owned subsidiary in Britain [1] to expand into the global capital and commodities markets, with a focus on derivatives trading.

Wilson Wan, chief executive at CMS (Hong Kong), told the South China Morning Post in a recent interview that he planned to hire local talent in London to staff the firm’s new office there.

“After building our futures positions in precious metals, we will soon kick off a unit for oil futures trading, and our clients will be the three mainland oil majors,” Wan said, referring to Sinopec, PetroChina and CNOOC, the three state-owned leading firms in China’s energy industry.

Earlier this month, JPMorgan surprised the market by announcing a plan to sell its global physical commodity assets.

After building our futures positions in precious metals, we will soon kick off a unit for oil futures trading, and our clients will be the three mainland oil majors

Wilson Wan, CMS (Hong Kong)

Wan said his focus would initially be on commodities futures trading, but he would not rule out the possibility that the firm would seek business opportunities in physical gold in the near future.

Last year’s sharp price declines have fuelled an exuberant demand in China for futures products in precious metals, including platinum, palladium, silver, and gold.

Futures traded on the Shanghai Futures Exchange have helped the country’s jewellers hedge against price volatility in the face of brisk and growing demand from mainland consumers, Wan said.

CMS, the mainland’s No 6 brokerage by assets, is not alone in expanding into the global commodities business, which can be considered a relatively new area for Asian investors.

“Clearly, this is a season of changing hands,” said an executive at a foreign bank who was in talks with several Chinese banks for a possible deal related to the commodities business.

“Western banks are leaving the table more or less because of their own internal capital pressures, but it’s also too early to say whether Chinese banks are really smarter than anyone else in grabbing the opportunity to make big money in future.”

The executive declined to be named as he was not authorised to speak to the media.

Western banks are leaving the table more or less because of their own internal capital pressures, but it’s also too early to say whether Chinese banks are really smarter than anyone else

An executive at a foreign bank

In August, Guangzhou-based GF Securities, one of the mainland’s 10 largest securities firms, acquired the London-based commodities trading unit of French bank Natixis for US$36 million.

In November, Industrial and Commercial Bank of China, the country’s largest lender by market capitalisation, said it planned to acquire the commodities trading platform of South Africa’s Standard Bank in a deal potentially valued at up to US$700 million.

The London-based trading platform of Standard Bank is well known in the industry for its global investments in oil, copper and other raw materials.

Industry executives say such aggressive moves by Chinese players on the global stage of commodities trading are related to the country’s own need for commodities to fuel its economic growth.

China’s hunger for raw materials, including coal, iron ore, and copper, has eased as the country’s growth in economic output started to moderate last year after decades of rapid expansion fuelled by infrastructure spending.

However, despite slowing economic growth, domestic consumer demand for precious metals such as gold has been robust as the government re-engineers the economy to boost the role of household spending.

Hong Kong-headquartered Chow Tai Fook, the world’s largest jewellery chain, announced a 92.3 per cent jump in profit year on year to HK$3.51 billion for the six months to September, helped by the slump in gold prices in April and the subsequent rush to buy gold products.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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