Of all the banks to back out of commodities, Goldman Sachs Group was the least likely and the most profound indication of the effect regulation is having in a changing commodities market landscape.
To a far greater extent than any bank, commodities trading is in Goldman Sachs’ DNA. The firm has been, by far, the largest and longest-playing Wall Street bank in the sector. True, Goldman largely started with the purchase of J Aron but that was back in 1981 and since then J Aron alumni have peppered the senior echelons of the Goldman hierarchy.
Other US banks such as JP Morgan Chase and MorganStanley have been quicker to exit the ownership of supply chain assets such as warehouse operations and commodity trading, so this week’s news reported in Reuters that Goldman Sachs is seeking buyers for Detroit-based Metro International Trade Services came as something of a surprise given their commitment to the sector, if not specifically to the warehousing business.
Goldman claims it has always treated Metro as an arms-length asset and, certainly, it has been a magnificent cash cow for them raking in millions over the four short years the firm has owned it. However, at the same time Metro – along with Pacorini owned by Glencore, Henry Bath formerly owned by JP Morgan Chase, and NEMS owned by Trafigura – have quickly risen to dominate more than half of the London Metal Exchange’s warehouse units and their tactics of allowing unrestricted inflows but restricted outflows of metal has incurred severe criticism, first by the industry but more recently by regulators.
It is the threat of regulatory action that has probably prompted Goldman to follow JP Morgan in exiting the sector. Firms like Glencore and Trafigura, based in overseas jurisdictions probably consider themselves sufficiently immune from US or UK regulatory action to continue to reap rich rewards from their storage units.
Goldman paid $550 million for Metro four years ago and Glencore did even better paying just $209 million for Pacorini a year later, a figure they will have earned back with interest in the interim. Metro is not core to Goldman’s commodities business and the loss of the warehouse unit will be more financial than strategic but some have argued the market information being a major warehouse operator gives you access to is a significant advantage and Goldman will likely look to find ways of maintaining that insight in some way or another.
The new owners, whoever they are, will have to get the load-out queue situation sorted out if they are to weather the regulatory storm that is developing. The largest independent warehouse operator, C Steinweg, has no involvement in commodities trading, brokering or position taking, acting purely as a warehouse operator. The firm’s sheds do not have load out queues and, yet, C Steinweg makes a healthy profit showing the sector has the potential to remain lucrative, providing it is run efficiently.
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