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The ins and outs of banks and commodities

December 18, 2013 - 11:38 GMT Location: New York

KEYWORDS: Commodities , banks , LME , Goldman Sachs , JP Morgan , Standard Bank , Macquarie , RBC Capital Markets , regulation

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. Société Générale, 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 later.

Clearly the in, out, shake-it-all-about pattern of banking’s involvement in commodities is set to continue. 

Andrea Hotter
Twitter: @andreahotter

All material subject to strictly enforced copyright laws. © Euromoney Institutional Investor PLC.

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