Commodities Boomed, but Not for Street


When commodity prices surged last year, one segment of the market missed out on the action: big Wall Street banks.

Gold, copper and cotton hit record highs in 2010, and investors piled into the market. But Wall Street’s revenue from commodities, generated from helping clients trade and manage their risk, fell by an average of about 40%, according to bankers familiar with the results.

Bloomberg News Gold, copper and cotton hit record highs in 2010, and investors piled into the market. 


The performance wasn’t disclosed in earnings reports by the companies, which usually combine commodities results with currencies and bonds.

At J.P. Morgan Chase & Co., which made an aggressive push into commodities during the past few years, revenue from the business shrank by 43% in 2010 compared with a year earlier, according to people with knowledge of the results. Goldman Sachs Group Inc. said its commodities business suffered “significantly lower results.”

Swiss bank Credit Suisse Group AG, among the few to announce its commodities revenue, last week reported a 42% drop.

The problem: The biggest banks in commodities by revenue, including Morgan Stanley and Barclays PLC, all are focused on the large and liquid energy markets of oil and natural gas. Both had a lackluster 2010. Price swings, which help Wall Street traders make money, were near record lows for oil and gas, while trading levels fell sharply.

In contrast, metals and agriculture saw volatility shoot higher, along with prices, luring traders into those markets.

“If we look at the larger banks in the market, they have not had their greatest year,” said Peter Henry, a senior consultant at Commodity Search Partners Inc., an executive-search firm.

The declines are particularly jarring because the big banks have been building up their commodities desks, seeing them as potentially substantial money-makers. Even though the commodity markets face growing scrutiny from regulators and are likely to be subject to tougher rules, commodities are less-regulated than other markets. Many commodity prices also are volatile, enabling traders to make money on price swings.

In recent years, banks scaled back on proprietary trading, or betting on commodities prices with their own capital. Instead, they are focusing on customer-based businesses, such as hedging, to achieve a stable flow of earnings.

J.P. Morgan reported a 14% drop in fixed-income revenue, to $15 billion in 2010. The New York firm’s commodities revenue declined to about $514 million, less than one-third of the internal target of $1.8 billion, according to a person familiar with the results. A J.P. Morgan spokeswoman declined to comment.

Last year, J.P. Morgan spent almost $2 billion buying commodity-trading operations such as RBS Sempra Commodities, a joint venture between Sempra Energy and Royal Bank of Scotland Group PLC.

Goldman reported a 37% decline in total fixed-income revenue, which includes commodities. Part of that was due to “lower client activity levels,” Goldman said when it reported earnings last month. Goldman blamed concerns over the European sovereign-debt crisis and regulatory uncertainties.

Morgan Stanley said last month that its commodity results reflected “lower levels of client activity and market volatility.” A Morgan Stanley spokeswoman declined to elaborate.

For most of past year, the price of oil, the most actively traded commodity, was trapped in a relatively narrow range from $68 to $92 a barrel. The CBOE Crude Oil Volatility Index, a gauge of the severity of price swings, fell to 25.42 on Dec. 23, the lowest level since May 2007.

That made oil relatively unattractive for hedge funds, which began trading other assets. The relative stability also offered little incentive for oil producers to lock in prices.

As a result, banks got fewer commissions from their clients’ trading businesses.

The lack of activity in energy compressed profit margins, said Craig Shapiro, global head of commodities distribution at Barclays.

“It gets hard for all players to make money,” he said. A Barclays spokesman declined to comment on the bank’s performance.

Some smaller rivals with a focus on emerging countries or niche markets fared better than big Wall Street firms.

Macquarie Group Ltd., for example, is expected to report a revenue increase in its commodities business, according to industry analysts. The Australian bank declined to comment on its results.

“We have a more balanced portfolio of clients,” said Walter Pye, Macquarie’s head of fixed income, currencies and commodities for the Americas. Macquarie is not only one of the world’s largest natural-gas traders, but also has a much larger agricultural business than most other banks.

Many banks are reluctant to run a big agricultural desk, because the market is small with many players scattered in disparate countries.

One poor year is unlikely to deter banks from pursuing their growth strategies in commodities. Rising demand for raw materials from emerging countries and concerns over the falling U.S. dollar are setting the stage for an upward trend for commodities. As prices become more volatile, producers and consumers are likely to keep turning to banks for hedging help.

UBS AG is rebuilding its commodity desk after the Swiss bank virtually exited the business during the financial crisis. Germany’s Deutsche Bank AG is hunting for acquisitions, hoping to beef up the business and ride the commodity boom.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: