Goldman plans cuts in commodities trade as new CEO digs

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Goldman Sachs Group Inc.

SG -1.34%

plans to downsize its commodities trading arm, once a huge money generator and training ground for a generation of executives, including former boss Lloyd Blankfein.

The pullout follows a months-long review under new chief executive David Solomon that showed the commodities sector’s declining profits are not justifying its costs, according to people familiar with the matter. Executives are discussing the withdrawal from trade of iron ore, platinum and other metals, and ordering cost cuts to the sprawling logistics network that handles the transportation and storage of physical goods.

By taking a knife into the business, Mr. Solomon sends a message through the ranks that nothing is sacred. Executives conducted in-depth reviews of every company, looking for more cost-effective ways to spend shareholders’ money. They are expected to present their plans to the bank’s board later this month and brief investors this spring.

CFO Stephen Scherr said last month there was an “active and committed movement to reallocate capital” away from Goldman’s ailing fixed income trading arm and toward priorities such as lending and technological upgrades.

A spokesperson for Goldman said the company had not come to any definitive conclusions regarding its business analyzes.

The decline in raw materials is as symbolic as it is strategic. Goldman has been a major commodity player since its acquisition in 1981 of J. Aron & Co., a coffee and metals trader. Highly profitable in the 1990s and early 2000s, J. Aron produced a line of executives who would later run the business, including Mr. Blankfein and Gary Cohn.

This dynasty ended last year with the rise of Mr. Solomon and his lieutenants, investment bankers who are less emotionally tied to commerce. “Lloyd Blankfein was never going to give up” the commodities sector, said Charles Peabody, equity analyst at Portales Partners.

Investors no longer place as much emphasis on volatile trading as they once did, preferring more predictable income from lending and asset management. Goldman is branching out into consumer lending and corporate cash management and said in January that more than 60% of its revenue is now coming from more recurring sources, up from 48% five years ago.

Commodity trade, meanwhile, is in decline. In 2017, Goldman traders had their worst year on record. They fared a bit better in 2018, but executives believe the company is unlikely to repeat its 2000s heyday, when it contributed as much as 15% of Goldman’s pre-tax profits.

Since then, stricter regulations have caused most banks to withdraw from the market. Morgan Stanley sold a fleet of tankers and cut back on energy trading. JPMorgan Chase & Co. has completely abandoned most physical transactions. Banks’ commodity trading revenues grew from $ 8.3 billion in 2011 to $ 2.5 billion in 2017, according to data firm Coalition, as the company migrated to less regulated companies such as than Glencore PLC.

Goldman, through its subsidiary J. Aron, remained largely behind, a move many onlookers attributed to Mr. Blankfein’s penchant for the company and his belief in its eventual rebound.

Goldman is one of the country’s largest natural gas distributors and a major player in the electricity and oil industries. It is developing a business of green energy solutions for corporate clients while immersing its feet in the emerging liquefied natural gas market.

But the traders were handcuffed. Risk-taking by a metric – the amount of money its commodity traders stood to lose on any given day – has fallen 60% since 2010. A wave of hiring in 2017 meant to attract star traders has failed. failed to trigger a turnaround, and the company co-head of raw materials, Jeremy Taylor, recently left.

Write to Liz Hoffman at [email protected]

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