The biggest banks are employing the fewest commodity traders, salespeople and analysts in at least four years as tighter regulations and the second drop in prices since 2001 spur cutbacks.
Total headcount in commodity units at the 10 largest banks, from Goldman Sachs Group Inc. to Barclays Plc, stood at 2,290 at the end of September, about 4 percent less than at the end of 2012, according to data starting in 2009 from Coalition, the London-based analytics company. Pay for those workers may drop 13 percent on average this year, a fourth straight decline, said Options Group, a recruitment company.
Investors pulled a record $34.1 billion from commodity funds since December and prices tracked by Standard & Poor’s are headed for their first annual drop since 2008. JPMorgan Chase & Co., the biggest U.S. lender by assets, is seeking to sell its physical commodity business and Deutsche Bank AG announced cutbacks today. The Federal Reserve is reviewing banks’ control of raw-material assets and regulators are demanding more reserves to cover losses.
“Commodities revenue has been hit by lower client activity and a lack of volatility, combined with enhanced capital adequacy requirements,” said George Kuznetsov, the head of research at Coalition. “In 2011-12, revenue declined, mainly due to energy products, while 2013 results have been affected by significant outflows from institutional clients.”
Commodity revenue will drop 14 percent to $4.7 billion this year at the biggest banks, which are Goldman Sachs, JPMorgan, Morgan Stanley, Bank of America Corp., Citigroup Inc., BNP Paribas SA, Barclays, Credit Suisse Group AG, Deutsche Bank and UBS AG, according to Coalition.
Officials from all 10 banks tracked by Coalition declined to comment. Its headcount measure is based on estimates for the firms back to 2009 and some may be expanding staff and revenue. Deutsche Bank today said it will exit dedicated energy, agriculture, dry bulk and base metals trading and transfer financial derivatives and precious metals desks to its fixed income and currencies. About 200 people will be affected, said a person familiar with the matter, who asked not to be identified because the matter isn’t public.
The three with the most commodity staff saw a drop on average to 330 employees in the third quarter from 350 at the end of 2012 and 390 in December 2011, said Kuznetsov.
The Standard & Poor’s GSCI gauge of 24 raw materials lost 2.5 percent this year, as rising supply sent prices plunging for commodities including corn, gold and copper. The MSCI All-Country World Index of equities climbed 16 percent, and the Bloomberg Treasury Bond Index declined 2.7 percent.
Gold slumped 27 percent this year, the first drop since 2000 and the biggest in more than three decades, as some investors lost faith in the metal as a store of value after the U.S. economic recovery gained traction. Global holdings in exchange-traded products backed by bullion tumbled 30 percent this year to the lowest since March 2010, erasing more than $68.4 billion from the value of the assets.
The Fed is conducting “a very comprehensive review” that may result in limits on bank ownership and trading of physical commodities, Janet Yellen, nominated to succeed central bank Chairman Ben S. Bernanke, said Nov. 14.
In July, the Fed said it’s reconsidering a 2003 decision to grant some lenders permission to expand into raw materials. The Dodd-Frank Act, which seeks to boost transparency after the 2008 financial crisis, imposed stricter limits on bank capital, proprietary trading and rules for swap dealers. The Commodity Futures Trading Commission published guidance on Nov. 14 that allows its derivative swaps regulation to have global reach.
“It’s hard to say the worst has past,” said Tyler Jackson, a Singapore-based executive director at Options Group. “Many changes have not been fully implemented and there could be more in the future.”
There are some signs of rising revenue this year, including in Asia and from growing demand for raw-material finance. Commodity revenue at the Asian units of the top 10 banks rose to $380 million in the first half, from about $350 million a year earlier, according to Coalition.
Revenue growth at Deutsche Bank’s commodity unit in Asia expanded 10 percent to 20 percent each year since 2010, and the Frankfurt-based bank expects to boost market share in precious metals and commodity financing, Stuart Smith, a managing director in Singapore, said before today’s announcement.
Financing of industrial metals including copper is a key area, said Smith, whose team started a precious-metals vault service, with a capacity for 200 metric tons of gold in Singapore this year.
ABN Amro Group NV started a desk for structured inventory products in Singapore for commodity financing, the bank said in October. The Amsterdam-based company plans a metals-brokerage business in London and Singapore as early as next year.
Grupo BTG Pactual, the Sao Paulo-based investment bank led by billionaire Andre Esteves, will expand its commodity business to 200 people next year from 120 now, Chief Financial Officer Marcelo Kalim said Nov. 6. The bank, which set up a warehouse unit, is working on a bid for JPMorgan’s physical business, a person with direct knowledge of the matter said last month.
“Any headcount additions will be very focused on key areas for next year, so don’t expect a hiring spree,” said Options Group’s Jackson.
JPMorgan, which has sought $3.3 billion for its physical commodities business from prospective buyers, is closing its energy-trading business in Geneva, cutting or relocating about 12 jobs, according to a person with direct knowledge of the matter. The New York-based bank generated the most first-half revenue from commodities among the top 10 financial firms, followed by Goldman Sachs and Morgan Stanley, said Coalition.
Morgan Stanley cut 10 percent of its workforce in the commodity division this year and held negotiations last year with Qatar’s sovereign-wealth fund about selling a stake. The bank is in talks to sell its global oil business to OAO Rosneft, Russia’s largest petroleum producer, a person briefed on discussions said last month. The commodity business posted a return on equity of less than 5 percent in 2012, the lowest among its trading businesses.
At Goldman Sachs, Magid N. Shenouda, the London-based co-head of commodities trading, is leaving after 14 years, according to an internal memo confirmed by the bank Oct. 29. Goldman Sachs has put its uranium-trading unit up for sale and received inquiries from potential buyers for its metals warehouse operator, people briefed on the matter said last month. The New York-based bank said it has no intention of exiting its broader commodities business.
Bank employees in commodities will earn 13 percent less this year on average, compared with a 12 percent increase at equities units and a 6 percent gain for investment bankers and private-wealth managers, according to Options Group in New York. The estimate is based on the top 25 percent of professionals, excluding the highest paid 1 percent.
Financial firms cut 142,643 jobs across their businesses since the end of last year, 33 percent more than the losses in 2012, according to data compiled by Bloomberg.
This year’s drop in commodity prices would be the second in 12 years, halting a rally that saw the GSCI gauge climb as much as fivefold and led to records for raw materials including gold, corn, copper and crude oil. The GSCI advanced 2.1 percent in 2011 and 0.3 percent last year, compared with a jump of 50 percent in 2009.
The commodity super-cycle, or a longer-than-average period of rising prices, is over, according to Glenn Dubin, chairman of New York-based Highbridge Capital Management LLC, which oversees $29 billion in assets and is owned by JPMorgan. The 100-day historical volatility of the GSCI fell in April to the lowest since at least 2003, according to data compiled by Bloomberg.
“Commodities is a cyclical business,” said Coalition’s Kuznetsov. “We don’t expect a full exit in commodities. Banks with a higher focus on institutional clients will scale their businesses back to key products, while larger corporate franchises will continue to be active across a broader set of products.”