The end of the commodities business on Wall Street


"Just being able to trade financial commodities is a serious limitation because financial commodities represent only a tiny fraction of the reality of the real commodity exposure picture…. We need to be active in the underlying physical commodity markets in order to understand and make prices." So said Blythe Masters about 3 years ago, as noted by the Financial Times. The occasion was a then-groundbreaking deal to buy RBS Sempra Commodities, which owned a lot of physical storage space.

This was a groundbreaking move by Wall Street to move much deeper in the commodities machinery, right down to the housing of physical goods. For years, the conventional wisdom held that investment banks ought to jump in.

But now the bloom is off the rose in so many ways. JPMorgan has announced it would exit the physical commodities business, preferring to stick to trading. Goldman Sachs has come under fire for the practices of the Metro metals warehousing unit.

"The fact that JPMorgan is considering a sale is the clearest sign yet that Wall Street's commodities trading boom has fizzled out. Coalition, a consultancy, reports that the combined revenues of the top 10 banks in the commodities sector was $6bn last year, down 22 per cent on 2011. Revenues peaked at $14.1bn in 2008, the same year the oil price peaked," notes the FT.

One issue here is why JPMorgan so quickly decided to exit the business. Some might argue that it had no choice in the face of terrible PR. But others note that the business might not have been as profitable as it hoped for.

All eyes for the moment are on Goldman Sachs. If it decides to sell its Metro unit, which I doubt it will, it will likely be seen as a sure sign that the returns lagged expectations somewhat.

For more:
- here's the article

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