As some global banks move out of commodities trading, other players are keen to take advantage of new opportunities, potentially opening up new job prospects
Like a trend that’s suddenly out of fashion, some of the world’s biggest banks are turning away from the commodities business. JPMorgan said in mid-2013 that it was exiting physical commodities trading and has put its related assets up for sale. Deutsche Bank, another top five financial player in commodities, recently said it would cease the trading of energy, agriculture, base metals, coal and iron ore, but retain a limited number of traders in precious metals and financial derivatives.
The shift has opened up new opportunities for other players. For example, Citigroup is reported to be eager to grow its commodities market share and revenues, as are Australia’s Macquarie and Brazil’s BTG Pactual.
Locally, there’s also been much criticism that the high-profile mid-2012 purchase of the London Metal Exchange by Hong Kong Exchanges and Clearing – backed by the Hong Kong government – has led to little or no development in the city’s commodities market.
And then last year, the gold and silver-trading Hong Kong Mercantile Exchange suspended operations after it was forced to hand back its SFC licence in controversial circumstances.
“The dampening in Wall Street’s interest in commodities will not be fully mirrored in Asia or Hong Kong,” says Tommy Ong, executive director and head of wealth management solutions, treasury and markets, at DBS Bank (Hong Kong). “Banks generally will be more conservative globally in increasing capacity in the commodities trading business, creating room for trading houses to gain market share. However, financing will continue to be a major business opportunity, whether it be in project, transaction, or repo financing.”
He says Wall Street’s recent exit from commodities was caused by a combination of reasons. These include enhanced capital and liquidity requirements from Basel III, which have led to the deleveraging and spinning-off of non-core assets, and the US Dodd-Frank Act, which tightened regulation of over-the-counter derivatives and led to higher operating costs for central clearing and stricter reporting and margin requirements.
Meanwhile, the US Volcker Rule has banned banks from proprietary trading in financial and physical commodities, leading to lower trading income, and a period of sustained low volatility in commodity prices. Also, the development of backwardation in some commodity prices led to decreasing demand for hedging.
“I am cautiously optimistic about the development of the local and Asian commodity industry over the long run,” Ong says.
He adds that China seems to be aggressively implementing market reforms in areas such as market-pricing mechanisms for some commodities.
The liberalisation of commodity prices is expected to create demand for hedging against adverse price movements, while the slowdown in fixed-asset investment is merely transitory, he adds.
“China is in the midst of driving consumption growth, and emerging markets in Asia are fighting against mounting current account deficits, hence suppressing commodity demand in the short run,” Ong says.
“But demographic factors and urbanisation will come back into play when economic growth achieves better balance, and commodity market flows will increase steadily. Although equities have performed well in the past few years, commodities should still see increasing importance as an asset class for long-term investors, such as sovereign funds,” he adds.
What do all these developments mean for the regional commodities job market? “It’s not a pretty picture in the jobs market at the moment for financial services in general, and this is likewise for the commodities sector,” says Edward Chen, Asia-Pacific director at financial services recruiter Harbridge Partners.
“While there is much news about many Western banks and brokerage firms considering and, indeed, scaling back their physical commodities businesses, there is also much talk of regional financial players – particularly Chinese banks and brokerages – who are keen to seize the opportunity to enter the market,” says Chen.
“A few Chinese financial services firms have already brought or are in the process of discussing acquisitions of commodities units from Western banks, but it remains too early to say if this will result in a boom in commodities for Chinese banks,” he adds.
Capital-rich, state-backed Chinese firms are keen to grow in this area to satisfy mainland demand for commodities and precious metals. The logical choice for jobseekers with commodities-trading backgrounds would be to join a mainland bank, but cultural, language and remuneration barriers often prevent this.
“We certainly have noticed that we get more inquiries from traders outside of Asia within the commodities and equity derivatives space for job opportunities here in Asia. However, Greater China experience and Asian language requirements is increasingly becoming a barrier for Western commodities sales and trading professionals,” Chen says.
“Another alternative is to join actual physical commodities producers such as the brokerage arms of oil and energy firms,” he says.
Chen says it is becoming increasingly difficult for those from commodities to move outside their specialist areas – especially since the boom years have driven up salaries – and many are unwilling to take a pay-cut in a new role with an unfamiliar firm.
“Some would have their own contacts in smaller players, others get roles in a hedge fund, go to the buy side, or proprietary trading house or, sadly, many just end up leaving the financial services industry altogether,” Chen says.