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Barclays Likely To Join List Of Banks Selling Commodity Assets; Market Impact Small

By Debbie Carlson of Kitco News
Tuesday April 22, 2014 12:21 PM

(Kitco News) - Barclays PLC is likely to announce Tuesday that it will exit or sell much of its commodities business, following a trend that’s seen other major banks leave the space over recent months.

The British bank is expected to unload its agricultural, energy and base metals divisions, according both Reuters and the Financial Times, and the move is part of a shake-up by the investment bank to reduce costs and improve profits.

Despite the exit of a large market participant, analysts forecast only minimal market impact as other firms will step in to fill the void.

If announced, Barclays will join the list of banks like JPMorgan Chase, Deutsche Bank, Bank of America and Morgan Stanley, all which have said they are looking to exit the commodities sector.

Market watchers said the reasons for the banks to leave are two-fold -- shrinking profits and increased regulatory scrutiny.

Last year was a particularly tough year to be bullish on commodities, with many of the markets posting losses. But even over a five-year time span, profits in commodities have diminished. According to a Bloomberg story, in 2013 commodity-related profit for the top 10 banks was around $4.5 billion, compared to a record $14.1 billion in 2008 for the top 10 commodity-trading banks.

And it’s not because there are fewer entities in the commodity markets, said Ken Morrison, editor of online newsletter, Morrison on the Markets. According to the most recent Commodity Futures Trading Commission data, there are about 400 firms trading futures and derivatives, split between the non-commercial and commercial categories, Morrison said, which is about what it was five years ago.

Not only are profits down, but regulatory scrutiny is up. The Federal Reserve last year hinted at possible changes in reserve requirements and that it may review its 2003 exemption on banks to be involved in physical commodity trade. Additionally, market watchers said the accusations of market manipulation in power and energy markets, with the Federal Energy Regulatory Commission levying nearly $1 billion in fines combined at several banks, are just another reason for them to consider leaving.

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In London, regulators are looking at the daily gold fixing price to see if there is manipulation there, as well. Deutsche Bank said last year it was selling its gold-fixing seat.

Patrick Young, executive director, DV Advisors, said banks haven’t necessarily fared well in commodity trading.

“Commodity markets have proven rather a poisoned chalice for banks. Good profits were available in many ways but some have accused the banks of extracting a monopoly rent from their activities whether in metals warehouses or trading itself. Likewise, the generally anti-banker zeitgeist of the age has tended to find them guilty in the court of public opinion of profiteering. Commodities are much more emotional than traditionally opaque banking practice - we all know the price of a coffee, or a tank of gas.

“Banks did little to dispel a populist argument that they were pushing up prices. Despite the fact that long-term commodity prices, particularly of foodstuffs, have been falling for the past century or longer, banks were seen as opportunists bagging vast profits.

“Now, faced with rising challenges to their core business in the form of new model competitors and particularly, a huge swathe of regulations, banks are reconsidering their commodity groups and mostly heading for the exit. Selling such groups can raise funds through spin-offs which can help bolster their balance sheets ahead of Basel III and multiple other requirements for more cash at hand," Young said.

Sean Lusk, director, commercial hedging division at Walsh Trading, said considering that Barclays was involved in both the Libor rigging case and was one of the firms fined by FERC for energy market manipulation, it seems to make sense for them to leave.

“This is just my opinion here from the cheap seats, but if you’re already on the radar screen for that, and now with enhanced regulatory scrutiny, you can see why” they may leave, Lusk said.

So far banks are finding willing buyers for their commodities businesses. In February, Reuters reported that South Africa’s Standard Bank is interested in the Deutsche Bank seat, and JP Morgan Chase just sold its physical commodities business to Mercuria, a Swiss-based trading firm founded by two ex-Goldman Sachs traders for $3.5 billion.

Banks seem to be lowering “their sphere of influence,” Walsh said, as their participation dwindles. He said money invested with the index funds is a much bigger part of the markets now.

Just because banks are leaving the commodity space, that doesn’t mean the chatter about market manipulation will cease, Morrison said.

“It will change the scapegoat, but there will always be a villain when prices are high,” he said.

By Debbie Carlson dcarlson@kitco.com
Follow me on Twitter @dcarlsonkitco



Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

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