The
world of energy commodity trading has gone through a rather extensive
reshuffling over the past few months. The key thing to note is that
banks involved in energy have pulled back from the sector while merchant
traders known largely for their secrecy are strengthening their
position.
The most notable deal came last week when Swiss-based merchant firm
Mercuria agreed to buy the entire physical commodity trading business of JPMorgan Chase
for $3.5 billion. Mercuria, which is headquartered in Geneva and is
predominantly a crude and refined products trading shop, has a team of
approximately 1,200 people working in some 37 offices around the globe
and has annual “turnover,” or essentially gross annual revenues of
around $100 billion.
JPMorgan, whose overall size is an
astounding $2.4 trillion in terms of the value of all its assets, had
valued the oil trading portion of the business it sold to Mercuria at
$1.7 billion. It valued its US and European natural gas trading business
at approximately $800 million, its metals business at $500 million and
its electricity and coal trading businesses at approximately $300
million, prior to the sale.
Mercuria therefore agreed to pay $200
million or so above book and will add JPMorgan physical assets, trading
books and contract to its already extensive trading portfolio.
Included
in the deal, apparently, is a trading team in London, New York, Houston
and Singapore that numbers more than 400 people. When JPMorgan bought
the trading operations of RBS Sempra in 2010 for $1.9 billion, it saw
its trading staff balloon to almost 700 people. It spent several years
bringing that staffing level down to a more manageable level.
Now,
Mercuria, founded by Swiss nationals Marco Dunand and Daniel Jaggi in
2004, will begin the task of integrating the various JPMorgan trading
teams with its own teams. Also now under discussion, according to
JPMorgan, is the future role at Mercuria, if any, of Blythe Masters, the
45 year-old British-born global head of JPMorgan’s commodities unit.
Dunand
and Jaggi have both spoken recently, and publicly (at places like
Davos), acknowledging the fact that the merchants’ penchant for secrecy
runs counter to the push by governments to instill far greater trading
transparency. With its deal to buy JPMorgan, Mercuria, for example, will
have to report physical US natural gas sales to the Federal Energy
Regulatory Commission. Its US affiliate already reports its quarterly US
wholesale power sales to FERC.
Mercuria’s vision of its business model is fairly clear. In a recent interview with the newspaper
Neue Zurcher Zeitung,
Dunand offered that there are “two schools” for commodity trading. He
said, “One is the Marc Rich school, with Glencore and Trafigura, which
is obviously successful. And then there is the investment bank school,
which has more of a risk approach.”
Marc Rich, of course, is the
legendary commodities trader who, while working for Philipp Brothers in
the late 1960’s and early 1970’s essentially created the spot market for
crude, thereby breaking the hold over the market that big oil companies
had using long-term supply contracts with supplier countries.
The
key idea behind March Rich-style trading is to have access to your own
logistics, such as shipping and storage, and to strike deals with big
bulk buyers. The merchants are also not subject to Dodd-Frank trading
restrictions, as are the banks.
On the other hand, the investment
bank school of trading implies a far greater dependence on the
financial markets to not only hedge positions but also to hedge
positions for fee-paying clients. When trading for their own book–which
banks will be prohibited from doing when the so-called Volcker rule is
implemented in mid-2015–the investment banks rely heavily upon churn, or
buying and selling and re-buying and re-selling, to generate revenue
from large volumes of trading. This activity also provides markets with
liquidity.
Joining Glencore, Trafigura, and Mercuria as exemplars of the Rich school of commodity trading are Gunvor and Vitol.
On
Monday, the head of Vitol, Ian Taylor, made a comment on the impact of
the banks leaving the energy commodities trading business. He said, “The
withdrawal of some investment banks from commodity related activities
has reduced liquidity in markets such as power.” This is no doubt true,
since the pull-back by the banks has been most pronounced in the
wholesale power trading business due in no small part to tightened
regulations and lower prices and thus dampened price volatility.
It
was Taylor’s next comment, though, that also caught some people’s
attention. He said that the reduced liquidity “created longer-term
opportunities and our footprint in both the US and Europe is growing.”
Taylor
conceded that 2013 was “a very challenging year for many in the
physical energy distribution business.”” He said that “markets remained
extremely competitive with new entrants increasing margin pressure on
certain regional activity.” “While these market conditions aren’t
expected to change overnight, changing supply and demand balances are
generating some new opportunities,” Taylor said.
Meanwhile,
Barclays PLC and Deutsche Bank are understood to be selling their power
trading books, as the big UK and German banks announced they are exiting
the business.
While Citibank has been trying to strengthen its
trading in Europe and the US, Bank of America Merrill Lynch, strong in
the US, has shutdown European natural gas and power trading.
Morgan
Stanley, of course, is in the process of selling its Global Oil
Merchant unit to the Russian oil company Rosneft, for an undisclosed sum
that is nonetheless estimated to be in the range of $400 million.
Roughly 100 Morgan trading executives are expected to go to work for
Rosneft in London and New York, or about a third of Morgan’s entire
global commodity trading team. Rosneft earlier established a trading
unit in Geneva that is headed up by a former Shell trader.
One
question that has popped up is whether there are any future US or
European sanctions in the offing against Rosneft chief Igor Sechin, and
whether such sanctions could hurt the deal with Morgan Stanley. The US
and the EU have already leveled sanctions against individuals in
retaliation for Russian President Vladimir Putin’s move into Crimea.
Sechin is a former chief of staff to Putin and was appointed head of
Rosneft by Putin in 2004.
On March 20 the US sanctioned the
Russian Gennady Timchenko, who was co-founder of Gunvor. The
Geneva-based firm said that the day before the sanctions were announced,
Timchenko sold his shares in the firm to Swedish co-founder Torborn
Tornqvist, who now owns 87% of the 14 year-old company. Gunvor, mainly
an oil and products trader, employs approximately 500 front and back
office trading professionals and 1,100 people at logistical facilities,
has said that revenue in 2012 was roughly $93 billion.
The US
Treasury Department said it imposed the sanctions against Timchenko out
of the belief that Russian president Vladimir Putin had earlier
invested in Gunvor and “may have access to Gunvor funds,” an assertion
that Gunvor denied.
