In the FT’s Commodities Daily report last week, commodities editor Neil Hume made the observation that the commodities trading landscape is changing.
He is referring specifically to the mass exit, wholly or in part, by many of the banks that have dominated the market over the last decade. Declining client interest in a sector that no longer holds the bull narrative of the commodities supercycle is partly to blame, it seems, but growing attention from regulatory authorities is also cited as a threat to the freewheeling ability of the major players to make the money they once did.
Goldman Sachs is sticking it out, and so too is Citi, both major players across multiple activities in the sector, but JPMorgan Chase, Morgan Stanley, Bank of America Merrill Lynch and Barclays are all pulling back exposure or exiting completely.
It raises the question – is this purely a lack of interest from their clients, or is it the likelihood that regulators are going to clip their ability to play the market to their advantage that is prompting such a wholesale move by so many established players?
With the Fed’s lax control, many of the former investment banks were certainly allowed to control large parts of the supply chain while simultaneously trading on their own and on their clients’ behalf, a position that, if not against the disputed letter of the law, was certainly against the spirit of the Gramm-Leach-Blilet Act and earlier legislation.
While many established players are re-thinking their positions, newcomers (mostly from overseas) are looking to move in, which suggests there is still money to be made, but perhaps only for those active in – but not domiciled – in the US?
JPMorgan is selling its physical trading business to Swiss firm Mercuria to the disappointment of another foreign player, Macquarie Group of Australia, which is already a significant player in Asia and wanted to add the JPMorgan book to their existing recent US bolt-on acquisitions.
What This Means for Metal Buyers
Is this a good development for consumers, or does it carry threats that less closely regulated foreign players could potentially disrupt the market more than would be the case with US-based firms?
It probably carries both threats and opportunities as any major change does. The activities of companies like Goldman Sachs in the past can probably be said to have benefited them and their clients more than the market as a whole, particularly when you look at the activities of their base metal warehousing units.
Would a foreign holder of such assets be any worse? Without putting too fine a point on it, it’s hard to see how.
So while the landscape may be changing, it may not be for the worse. Wall Street was never meant to be owner, broker and player of physical commodities, so the move-out, even partially, of so many may not be a bad thing.