Goldman Sachs Group Inc., whose three top executives began their careers at the firm in the commodity-trading unit, is poised to gain market share as pressure from regulators drives competitors to scale back.
Barclays Plc, the U.K.’s second-largest bank, said that it’s exiting commodities businesses other than trading precious metals and derivatives tied to oil, U.S. gas and commodity indexes. In January, the London-based bank cut jobs in the group that traded raw materials and in February shut power-trading desks in the U.S. and Europe.
JPMorgan Chase & Co. last month announced the $3.5 billion sale of its raw-materials trading unit to Mercuria Energy Group Ltd. and Morgan Stanley plans to sell its physical oil business to Russia’s OAO Rosneft. Goldman Sachs, Morgan Stanley, Barclays and JPMorgan were the biggest traders of commodity derivatives among banks, according to a Greenwich Associates survey last year.
“The more banks that exit commodities trading, the less competitive it becomes for the banks which stick with it,” Jeffery Harte, an analyst at Sandler O’Neill & Partners LP, said in a phone interview. Goldman Sachs has “the bigger franchise to be a winner. It now has a much bigger piece of a much smaller pie.”
Politicians and regulators have exerted pressure on banks to cut back their commodities business. The U.S. Federal Reserve said it’s considering new limits on trading and warehousing of physical commodities. Policy makers are seeking comment on ways to restrict ownership and trading of commodities such as oil, gas and aluminum by deposit-taking banks. New global capital requirements have also made it more expensive for banks to hold commodities.
Goldman Sachs Chief Executive Officer Lloyd C. Blankfein, who started his career at the firm in the J. Aron commodities unit, has said his company is committed to the division. President Gary Cohn and Chief Financial Officer Harvey Schwartz also started their Goldman Sachs careers at J. Aron. Goldman Sachs and Morgan Stanley both said last week that revenue from commodities rose in the first quarter.
“Keeping a complete ‘food chain’ of these businesses could continue giving Goldman Sachs informational advantage over competitors, which reduce their presence in certain aspects of the commodities businesses, predominantly physical,” Paul Gulberg, an analyst at Portales Partners LLC in New York, said in an e-mail.
Michael DuVally, a spokesman for Goldman Sachs in New York, declined to make any additional comment on the bank’s plans for its commodities unit.
“Right now it feels like we’re starting to maybe see the beginnings of some marginal benefit of competitors exiting parts of our business that otherwise, quite frankly, they had charged in with excess,” Schwartz told reporters on a conference call last week. “The firms that are announcing exits from commodities, for example, they weren’t in those businesses in the ’90s. We got into commodities in 1981.”
Germany’s Deutsche Bank AG said in December it would exit dedicated energy, agriculture, dry-bulk and industrial-metals trading, cutting about 200 jobs. Bank of America Corp. said in January it would dispose of its European power and gas inventory as opportunities shrink and increasing regulation curbs trading.
Goldman Sachs, which earned the most money from raw materials among the top 10 investment banks in 2012, ranked second last year and Morgan Stanley was third, analytics company Coalition Ltd. said in a report last month. Commodities revenue at the 10 largest banks slumped 18 percent to $4.5 billion in 2013 because of a “depressed client environment” and low volatility, Coalition estimated February.
Barclays has been encouraged to exit and shut some investment-bank activities as investors seek lower compensation at the unit. Revenue from fixed-income, currencies and commodities fell 17 percent to 5.54 billion pounds ($9.32 billion) in 2013, as central banks around the world started to withdraw their stimulus from the market, leading investors to shift to equities away from bonds.