The commodity market is continuing it’s boom, which is somewhat of a surprise in light of global recessionary pressures. Prices remain high for most raw materials, while volatility stays low even amidst falling inventory levels. However, these factors have actually harmed the banks that trade commodities.
Bankers believe the sector will make just $7bn-$8bn in gross revenues this year, about half the $15bn generated in 2009 and the worst performance since the collapse of Enron in late 2001. Profits will be even lower, as costs have surged. The bankers expect that JPMorgan Chase (NYSE: JPM) will uncharacteristically suffer the most due to their rapid expansion and costs in the area, while the largest houses including Goldman Sachs (NYSE: GS) and Barclays Capital (NYSE: BCS) will see profits fall but continue to lead the sector.
While oil traders have suffered, metals, bulk minerals and agricultural traders have done well; oil traders such as Vitol, Glencore, Trafigura, Mercuria and Gunvor have had a lackluster year, mostly because of a lack of volatility. Traders increase their profits during volatile period, as their subject matter expertise allows them to capitalize on turbulent markets.
BP is the world’s largest oil trader, and will be shaking up it’s division to counter a drop in profitability and focus on emerging markets is the clearest indication of this. The move, announced in October in an internal e-mail to staff from Paul Reed, head of the division, will trigger job losses. He blamed the tougher operating environment and cited low price volatility because of spare capacity within OPEC and the refining industry, and a global glut in gas. Reed commented “Our size and scale have been a source of competitive advantage, but with it has come some impact on our nimbleness and responsiveness.”
Agricultural traders, however, enjoyed the best conditions. Cargill, Archer Daniels Midland, Bunge and Louis Dreyfus have been the main beneficiaries from the grain shortage, after a severe drought devastated crops in Russia, Ukraine and Kazakhstan, according to industry executives. David Driscoll, food industry analyst at Citigroup (NYSE: C) , says that volatile markets are positive for trading operations, “which typically produce above-average results in these situations”. But volatility can also wrong-foot traders – as happened to ADM, whose profits were down 30 per cent in the three months from July to September, at $345m. “The ban on exports in Russia came a little quicker than we expected,” says John Rice, ADM vice-chairman.
