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The ins and outs of banks and commodities
December 18, 2013 - 11:38 GMT
RBC Capital Markets
For commodities traders, it would seem something else is certain apart from death and taxes: banks’ repeated entry into, and exit from, the commodities trading world.
When Benjamin Franklin famously said that the only things that
are certain in life are death and taxes, he clearly
wasn’t thinking about the commodity business.
For commodities traders, it would seem something else is
certain: banks’ repeated entry into, and exit
from, the commodities trading world.
Around the world, for two decades, banks have entered
commodities with great fanfare. And then, many times,
they’ve also exited, sometimes with their tails
between their legs, citing various reasons for their departure.
Catalogue of entrants
History shows that some banking forays into base
metals trading have not lasted.
UBS has perhaps made the most entries to and
exits from base metals in recent years; right now, the bank is
technically in. The Swiss bank traded base metals for three
years from 2005, exited in 2008 and started its current base metals trading phase in 2010.
There were also some obvious casualties from the 2008 economic
crisis, with Merrill Lynch and Bear
Sterns being swallowed up by Bank of
America and JP Morgan respectively,
and Lehman Brothers collapsing.
Fortis Bank, meanwhile, became a LME category
IV member in 2004, then was taken over by BNP Paribas in 2009,
which closed its metals brokerage business in 2010.
Scotia Bank rejoined the LME as a category II member in 2010 after a then
eight-year absence, resuming base metals trading through its
precious metals subsidiary ScotiaMocatta.
HSBC exited base metals in 2005.
Natixis, the French bank, bought LME broker
Sogemin in 2000 but wound down the commodities brokerage
business last year.
Credit Agricole exited commodities last year
but held onto its stake in joint venture brokerage Newedge.
the other equal shareholder in Newedge, is to hold talks to buy
out Credit Agricole, and has beefed up in metals recently after
a change of focus from derivatives, towards financing over the
past few years.
Barclays eventually withdrew from the London Metal Exchange
trading floor in 2012, some time after being forced to
reshuffle its trading team and rationalise its strategy having
made a series of significant financial losses in the ring.
No doubt many of the banks that have exited will be back
– it is cyclical, after all – while some of
those that have entered in an attempt to fill the gap will
struggle, and others will go on to great success.
Nor does this mean that banks are the only financial market
participants in the spotlight. Hedge funds, brokerage firms and
corporates get it wrong and sometimes get fined too.
There is no one-size-fits-all answer to why banks play the
hokey cokey with commodities, and particularly with metals.
Many may exit trading but will continue to offer financing to
their clients. Many of those that exit now will be back again
Clearly the in, out, shake-it-all-about pattern of
banking’s involvement in commodities is set to
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