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A Barclays branch in London. (Phil Noble/Reuters)
A Barclays branch in London. (Phil Noble/Reuters)

Barclays to join the commodities exodus Add to ...

Major banks are retreating from the commodities business as profits slump and regulatory headaches multiply, leaving the field wide open for a crop of rapidly growing but lesser-known players.

Barclays PLC is poised to become the latest bank to withdraw from the business. On Tuesday, it will announce a plan to exit or sell large parts of its commodities operation, including trading in energy, base metals and agricultural products, according to Reuters.

The expected announcement by Barclays is part of an overhaul of its investment bank aimed at slashing costs and boosting recent lacklustre profits. A Barclays spokesperson declined to comment.

The move by Barclays is the latest in a pattern. In March, JPMorgan Chase & Co. struck a deal to sell its physical commodities unit for $3.5-billion (U.S.) to Switzerland’s Mercuria Energy Group Ltd. Last year, Deutsche Bank AG jettisoned nearly all of its commodity-trading activities, saying it had found more attractive ways to deploy its capital. Morgan Stanley and Bank of America Corp. have also pared back their involvement in commodities.

Such trading is no longer a reliable or hassle-free source of profit. The revenues for the commodities businesses of the 10 largest investment banks fell from $14.1-billion in 2008 to $4.5-billion last year “with no foreseeable prospect of recovery,” noted a recent report from the Financial Conduct Authority of the U.K., citing figures from research firm Coalition.

At the same time, regulatory scrutiny has intensified. Last year, U.S. lawmakers held a hearing to probe the ways in which banks had expanded their commodities businesses to include the physical storage and transport of such items, sometimes in strikingly large quantities.

“It was somewhat questionable why banks were in [that business] in first place,” said Gerard Cassidy, a Royal Bank of Canada analyst. “When you think of a financial institution, you don’t think of something that literally owns warehouses full of aluminum.”

What was initially an opportunity to profit has turned into a regulatory morass. The U.S. Federal Reserve is now reviewing its rules that govern bank activities with respect to commodities. And global regulators have launched a host of probes into such operations, including the potential manipulation of electricity prices and a daily benchmark for the price of gold.

Faced with such a landscape, JPMorgan chose to exit the physical-commodities space altogether. The company it sold to – Mercuria – was founded by two former Goldman Sachs Group Inc. traders and is making a bid to join the top echelon of commodity trading firms, which includes Vitol Group, Trafigura Beheer BV and Glencore Xstrata PLC.

For Mercuria, JPMorgan’s decision to sell its physical commodities unit was a major opportunity. “With a single move, it gives them a significant increase in their business,” including access to assets and talent, said Roland Rechtsteiner, a partner and commodities expert at management consultancy Oliver Wyman.

“The businesses that the banks are selling right now are helping some form of consolidation in the sector,” said Mr. Rechtsteiner. Trading firms are using the retreat by banks either to enter certain markets or to bulk up their existing operations, he said.

The migration of some commodity trading out of banks and into specialty firms poses a different challenge to regulators. Because they are not financial institutions, such companies do not face the same requirements with respect to disclosures or capital. Such specialist commodity traders have also “tended to locate the bulk of their activities in less transparent jurisdictions,” noted the FCA in its recent report.

Of course, not every bank is withdrawing from the commodities arena. Top executives at Goldman Sachs signalled their commitment to the business in statements last year. However, it too is feeling the regulatory pressure. The firm is reportedly exploring a sale of its metals warehousing arm in the wake of last year’s public scrutiny by lawmakers. The hearings in July, 2013, explored whether Goldman and other players had employed tactics in their storage of aluminum that inflated the price of the metal. Goldman denied such claims.

Last week, two Democratic senators, Elizabeth Warren of Massachusetts and Sherrod Brown of Ohio, sent a letter to the Fed urging it to implement new restrictions. Banks regulated by the Fed “should be prohibited from owning physical assets like warehouses, pipelines, and tankers,” they wrote. “These activities pose significant safety and soundness, legal, and reputational risks to institutions.”

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