Commodities trading has followed a number of phases: starting in 2008, the focus has been on oil, then electricity and then metals. In this time, banks have acquired a number of commodity assets and the physical component of their trading balance sheet has swollen to over 20%.
A series of fines by the Federal Energy Regulatory Commission (FERC) prompted banks to drastically reduce their involvement in power markets. There is more: new rules from the London Metals Exchange encourage the sale of metals warehouses owned by banks; and the Fed is reviewing its 2003 ruling that first allowed commercial banks to trade physical commodities.
Thus far, the effect on banks’ earnings has been muted. In fact – and contrary to some analysts’ views – our research shows that Top 10 banks’ commodities revenues reached $4.3bn in 1H13, 9% ahead of 1H12, thanks to demand from APAC, a surge in Brent volumes and the return of some large structural trades.
The earnings outlook is bleak, though we also note most of ‘our’ banks adapted very well to shifts in the market. While we expect some banks will sell (most of?) their physical holdings, commodity trading will likely remain a significant business for others.