Morgan Stanley is cutting jobs in its commodities business, one of the Wall Street’s three biggest, after Chief Executive Officer James Gorman said revenue the past two quarters was among the unit’s worst in 18 years.
The bank is shutting businesses including agricultural products and dry freight, according to an internal memo today from Colin Bryce and Simon Greenshields, co-heads of the unit. Morgan Stanley will cut about 30 to 35 jobs in commodities, or 10 percent of its workforce, according to a person briefed on the matter who asked not to be identified because the information isn’t public.
Gorman said last week that he’s “carefully re-evaluating’’ the proper structure for the commodities unit after holding talks with Qatar’s sovereign-wealth fund last year about selling a stake in the business. The past two quarters have been among the worst for commodities since 1995, he said. The company doesn’t disclose the unit’s revenue in financial reports.
“The overall performance of the business can and will be improved,” Gorman, 54, said on June 12. “We continue to explore strategic structures that may make sense for us.”
Morgan Stanley is also closing its Australian power business and exiting some Eastern European markets for power and gas, according to the memo, a copy of which was obtained by Bloomberg News. Mark Lake, a spokesman for the New York-based bank, confirmed the memo’s contents and declined to comment further. The job cuts were reported earlier today by the Financial Times.
Morgan Stanley is consolidating client coverage in London and Singapore and won’t have commodities employees in Dubai or Shanghai, the person briefed on the moves said.
The 10 largest global investment banks generated $6 billion in revenue from commodities trading last year, according to data from analytics firm Coalition Ltd. That’s less than half the $14 billion they produced in 2008. Morgan Stanley is one of the top three banks in revenue from commodities, according to Coalition.
“Much of this decrease is due to cyclical factors, and we firmly believe that the cycle will turn again in our favor,” Bryce and Greenshields wrote in the memo. “However, the revenue pool has also been impacted by certain secular headwinds -- such as increased regulatory compliance and capital costs.”
The commodities unit sees opportunities in products related to shale gas and North American fertilizer and will move resources to the power and gas business in New York, according to the memo. The business will also increase its retail-products offering for the firm’s wealth-management division, according to the memo.
Morgan Stanley slid 3.7 percent to close at $25.15 in New York. The shares have gained 32 percent this year, outpacing the 16 percent advance of the 82-company Standard & Poor’s 500 Financials Index.
Gorman has set a goal of reducing the capital used by fixed-income and commodities trading by about 60 percent from its peak as he seeks to improve returns. The unit cut its capital usage by about half from the peak through March, according to company reports.
Commodities, which had a return on equity of less than 5 percent last year, was the only one of five fixed-income units for which Gorman didn’t lay out a return-on-equity target in a presentation last week. He said the unit had a historical average ROE of more than 10 percent.
The U.S. Dodd-Frank Act limits the firm’s ability to acquire physical commodities, he said. Morgan Stanley owns electricity-generating facilities in the U.S. and Europe. It also owns TransMontaigne Inc., a fuel distributor based in Denver, and a 49 percent stake in ship operator Heidmar Inc.
Investors pulled a record $23.3 billion from commodity funds this year through May 30 as equities attracted $182 billion, according to EPFR Global, which tracks money flows.
Signs of slowing demand in China and ample supplies after expanded production of many raw materials signal “death bells” this year for the commodities supercycle, a longer-than-average period of rising prices, Citigroup Inc. said last month. Goldman Sachs Group Inc., UBS AG and Credit Suisse Group AG have made similar forecasts.
Commodities tumbled by the most in six weeks today, with gold, crude oil and copper dropping after Federal Reserve Chairman Ben S. Bernanke said the central bank may start tapering bond purchases that have fueled gains in markets globally and a private report showed manufacturing in China shrank at a faster pace.
“Although the recent market environment has created some challenges, both of us remain very constructive with respect to the division’s future prospects,” Bryce and Greenshields wrote. The changes will “help us refocus and capitalize on the new and existing opportunities for growth.”