Credit Suisse to Exit Commodities Trading
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."
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