A number of the world’s big banks have either dumped or downsized their commodities trading businesses because of falling returns.
The latest, Barclays, announced last week it will stop the majority of its commodities activities as it ups its focus on electronic trading. The UK bank will continue to trade precious metals.
In March JPMorgan Chase sold off its commodities division to Swiss trading company Mercuria for $3.5 billion and has also retained precious metal trading activities.
While in January South African based Standard Bank also offloaded 60 per cent of its commodities arm to Industrial & Commercial Bank of China [ICBC] for about $765 million. The Chinese bank also has a five-year option to acquire an extra 20 per cent stake in the commodities unit.
In December Deutsche Bank announced tougher regulatory conditions and disappearing profits were also forcing it to exit its commodity trading business. In the same month state-owned Russian oil company Rosneft jumped at the chance to buy Morgan Stanley’s oil trading arm.
UBS also rationalised its commodities activities in 2013, selling off its commodity trading unit to JP Morgan but like many of its banking counterparts retained precious metals and index-based trading capabilities.
The reasons some of the big banks are turning away from physical commodity trading are because returns are meek, margins are relatively small and they can make better use of capital elsewhere. Commodity trading regulations around the world are tightening, too, upping the compliance workload and cost.
Also driving weaker returns are flattening commodity prices and the growth of both end-to-end and specialised commodity trading houses like Glencore Xstrata and Vitol who have the capability to focus only on commodity activities including sourcing, transporting and trading, as well as using assets and capital more efficiently than the banks can.
The weak returns are also weighing on banks’ results. Research firm Coalition published a study in February which showed the commodities revenue of 10 of the biggest banks dropped 18 per cent in 2013.
Not all banks are retreating from commodity trading with Macquarie Bank and Goldman Sachs both still in the business. Macquarie is reportedly expanding its commodity trading capabilities and according to a Bloomberg report three of Goldman Sachs’ top execs started their careers on the commodities desk and are expecting to gain market share as heightened regulatory pressure sends competitors packing.