JPMorgan Exiting Commodities, Leaving Keys With Mercuria?

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The frontrunner to buy JPMorgan’s commodities trading division is reported to be Geneva-based trader Mercuria.

Never heard of them?

Don’t feel bad; few outside of the trading world probably have – but their rise has been the stuff of Hollywood.

According to Reuters, Mercuria was founded by Marco Dunand and Daniel Jaeggi, who both worked as executives at Goldman Sachs and then at trading house Sempra, which was later bought by JPMorgan from the Royal Bank of Scotland for some $2 billion in 2010.

The pair had already left long before then, but in less than a decade, Dunand and Jaeggi had built Mercuria into one of the world’s largest oil traders, with annual turnover of around $100 billion and 700 traders and 37 offices spread across the globe. Between 2010 and 2012, revenues doubled to $100 billion as underlying earnings reached a record $580 million, according to the FT.

Since then, Mercuria has expanded into new areas such as power, natural gas, coal and base metals. In 2012, it hired Roger Jones, formerly head of commodities at Barclays, to run non-oil operations and has been hiring aggressively from banks and traders to expand its metals expertise.

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No figures have been released yet on the price, but JPMorgan recently valued its physical commodity business at $3.3 billion, with an annual income of $750 million. The bank paid nearly $2 billion to buy the largest part of the business from RBS in 2010 when the troubled British bank divested its successful physical trading business Sempra Commodities.

In the process, JPMorgan acquired Henry Bath & Sons Ltd metals warehousing business, which now has about 80 storage sheds stretching from Rotterdam in the Netherlands to Johor in Malaysia, and has since built a sizable US natural gas and power trading book.

Both Blackstone, the New York private equity group, and Macquarie Bank of Australia were said to be after the bank’s commodities assets, but Mercuria’s success speaks to the rise of the independent trader in the modern commodity markets.

Constrained by regulatory pressure, higher capital requirements and likely restrictions on handling physical cargos, the banks in particular look like they could lose out to the more lightly regulated and dynamic traders based in places like Switzerland and Singapore.

Witness Deutsche Bank. It recently said it would largely exit commodities markets, while Morgan Stanley has agreed to sell part of its global oil business to Rosneft of Russia, according to the FT.

Far from dying out with the silk route or the opium trade, the trader has merely adapted, become more vertically integrated and sophisticated, and continued to thrive.

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