* Morgan Stanley, Deutsche trim some businesses with poor
* Costs decline as traders become cheaper
* Banks focus on deals with clients
By Dmitry Zhdannikov
LONDON, June 27 An exclusive club of banks that
has long dominated commodities trading is opening up as some big
players shrink, allowing rivals to expand their trading teams in
anticipation of better profits when the global economy picks
Higher costs due to tighter regulations and rapidly
inflating pay for dealers have combined in recent years with an
overcrowded market and low price volatility to undermine
profitability in trading oil and metals.
But some cost pressures are now easing as salaries drop to
more realistic levels, while the banks are no longer trying to
emulate major energy groups or specialist trading houses and are
instead strengthening their services to commodities clients.
Banks such as Citi, which had to retreat during the
financial crisis, are now building up their commodities teams.
The top five established players - Goldman Sachs, Morgan
Stanley, JP Morgan, Barclays and
Deutsche Bank - face a challenge to their supremacy.
Despite a recent exodus of staff to trading houses that pay
more and are regulated less, banks believe commodities can still
generate healthy returns when the regulations become clearer and
markets turn in their favour.
"The gap between top and second tier players has narrowed
significantly, benefiting the banks with a large and diversified
client base and access to balance sheet, and making it a much
more level playing field," said Jose Carlos Cogolludo, managing
director and head of commodities sales at Citi.
After a string of a taxpayer-funded bailouts - including of
Citi - authorities imposed tougher global rules on proprietary
trading, when banks trade with their own money rather than their
clients'. At the same time commodities price volatility, which
allows traders to make much of their profits, has been low.
These factors have led to a drop in banks' annual revenues
from commodities to $7 billion from the peak of $14 billion in
Over the past year, several banks have abandoned sectors
such as EU power and gas, shipping and agriculture, citing poor
returns and a miserable revenue outlook.
Morgan Stanley will cut 30-35 people or 10 percent of staff
from its commodities unit by quitting certain sectors.
Deutsche is estimated to have reduced staff to
225-250 from 325 after a reshuffle last year.
Goldman and JP Morgan have not shrunk their operations
significantly, industry sources say.
But Citi, which had to scale bank its commodities trading
ambitions after its U.S. government bailout, is estimated to
have rebuilt a team of 250 people, comparable in size with some
of its rivals'.
HOSTAGE TO EMPLOYEES
As Deutsche and Morgan Stanley retreated from European power
trading, new players are taking on the challenge, including Bank
of America Merrill Lynch.
"Where other banks have reduced the size and trading book of
their European power, gas and coal operations, Merrill has
remained stable, and they are benefitting from the gap left by
their competitors," a source at the bank said.
Brazil's BTG Pactual wants to start trading commodities from
London and New York, according to industry sources, after hiring
Ricardo Leiman, a former chief of the trading house Noble Group.
"A lot of overcapacity has gone. And costs have gone down
dramatically," said a senior banker, who asked not to be named
as he is not authorised by his employer to speak to the press.
"Traders have become much cheaper. Before we were hostage to
employees calling every six months for a salary increase. Sales
people were massively overpaid too," he added.
Apart from some trimming by major banks, mid-sized players
such as Credit Agricole, UBS and Spanish banks have effectively
closed or drastically slashed commodities units in recent years.
The former head of Deutsche's commodities unit, David
Silbert, is setting up a venture worth $500 million-$1 billion
with U.S. group Riverstone in a rare foray by a private equity
firm into commodities trading.
Silbert says the venture will be relatively risk averse,
with the emphasis on servicing commodities producers' needs
rather than proprietary trading. "There are loads of upstream
producers who need capital. We will be telling them - pay us
back in production, not cash".
Silbert will compete with banks in some respects.
"Ultimately our focus is on facilitating client
transactions," said Mike Bagguley, who heads both the foreign
exchange and commodities trading divisions at Barclays.
Barclays wants to build "a repeatable business of client
flows", he said, aiming to help clients limit their exposure to
market fluctuations or to finance the holding of large stocks of
Typical customers are airlines needing jet fuel, refiners
storing oil products and vehicle makers buying palladium for
catalytic converters. Such deals are, however, much less
profitable than proprietary trading used to be.
"Even with financial margins on flow businesses declining,
there is a steady stream of clients that have lots of activities
they want to achieve," said Bagguley.
Barclays, which has sold carbon trading firm Tricorona and a
shipping unit over the past year, says the savings have allowed
it to invest more in electronic trading technology.
Bagguley says he is hoping to repeat soon a large UK working
capital oil transaction of 2012 by funding similar deals in
energy and metals.
Cogolludo said Citi is expanding its oil, metals, gas and
power and liquefied natural gas teams to do more flow deals.
Some bankers say overcapacity might build up again. "When
there is a client deal in the market, the competition is severe.
Some top U.S. banks, which abandoned businesses such as airline
hedging ages ago because of low margins, are now all forced to
compete," one banker said.
Cogolludo expects the barriers to entering the sector to
remain quite high. "You need to have global footprint, a healthy
balance sheet and the ability to trade physical commodities. It
doesn't mean Citi will accumulate physical assets but you have
to be able to move physical commodities around to complement our
risk management and financing-related product offer," he added.
Banks such as Morgan Stanley and JP Morgan have accumulated
assets such as pipelines and storage facilities over the past
decade to help in their trading. However, the possibility that
U.S. authorities might order banks to sell such assets as part
of a clampdown on non-core activities is prompting many players
to think about how to adjust their models.