Wall St falls in love with commodity trading

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Blythe Masters was triumphant. The JPMorgan Chase executive had just struck a deal that would propel her bank to the top of Wall Street’s commodity charts.

JPMorgan paid $1.7 billion and assumed $3.3 billion in debt to buy the global oil, gas, coal, power and metals business of trading firm RBS Sempra Commodities. While JPMorgan was strong in commodity derivatives, Sempra was basically a physical house moving molecules through a storage and warehousing network stretching from Baltimore to Singapore.

For Ms. Masters, head of global commodities, this exposure was essential.

“Just being able to trade financial commodities is a serious limitation, because financial commodities represent only a tiny fraction of the reality of real commodity exposure,” she said on the day of the closing of the deal in July 2010. “We need to be active in the underlying physical commodity markets in order to understand and make prices.

Three years later, his bet is unraveling. JPMorgan revealed last month that it was considering a sell-off from the physical commodities business, leaving a rump of precious metals vaults.

The company could attract a range of potential suitors ranging from private equity investors to trading houses. Freepoint Commodities, an energy and metals trader formed by former Sempra executives in 2011, as well as Macquarie and Deutsche Bank are possible bidders, people familiar with the matter said.

Over the weekend, broker Marex Spectron emerged as a potential bidder for JPMorgan’s warehousing business Henry Bath. Last week, a senior EDF Trading executive expressed interest in JPMorgan’s physical commodities portfolio, but the French utility division later said it was undecided.

The fact that JPMorgan is considering a sell-off is the clearest sign yet that the commodity trading boom on Wall Street has run out of steam. Coalition, a consultancy, reports that the combined revenues of the top 10 commodity banks were $6 billion last year, down 22% from 2011. Revenues peaked at $14.1 billion in 2008, the same year the price of oil peaked.

Morgan Stanley is cutting its workforce and Barclays has cut front-office commodities staff by 18% over the past year. Goldman Sachs runs its commodities business under intense scrutiny from Washington.

JPMorgan said looming new rules and regulations factored into its withdrawal.

But rivals question whether its foray into physical commerce has brought enough return on capital for the bank. “They built a business for much higher revenue,” said an executive with knowledge of JPMorgan’s strategy. “It was built for another era.”

The bank did not make Ms. Masters available for comment. A person close to the bank said the commodities sector exceeded most targets in 2011 and 2012.

JPMorgan has had its share of regulatory concerns. Last month it agreed to pay $410 million to settle allegations that it manipulated power markets to squeeze profits from aging power plants. Worryingly, the Federal Reserve is also examining whether physical commodities are “complementary” to banking services.

JPMorgan’s strategy has worked, in some ways. The acquisition of Sempra nearly doubled its list of commodity customers, according to an annual report.

In 2011, when the Libyan civil war drove up oil prices and JPMorgan bought crude from the U.S. Strategic Petroleum Reserve, the bank’s commodity revenue more than doubled from a year earlier to reach nearly $1.5 billion, industry executives and analysts said. Last year, revenue fell to around $1.1 billion.

The end of a decade of commodity booms, triggered in part by shale energy production and slowing growth in China, bodes ill for all banks.

“In a way, you should be direction agnostic. But people tend to do better in commodity markets when they go up, not when they go down,” says a former senior US executive. Wall Street commodities.

Coalition said of the sector’s $6 billion in revenue last year, $1 billion came from physical commodities – although analysts and industry executives say for JPMorgan the proportion is higher . Physical trading accounts for half or more of the bank’s industrial metals business, which is dominated by assets acquired under the Sempra deal.

A person close to JPMorgan said that of the commodities group’s more than 2,200 customers, 1,800 would likely stay even if the physical platform were sold.

It would be a different venture than Ms Masters envisioned in 2010. She said at the time: “Platforms that are large, global, diverse and both financial and physical are much better positioned competitively than those that are are not.”

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