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| Best Global commodities house: JPMorgan | |
| Also nominated: Deutsche Bank and Morgan Stanley |
The energy price spike in 2011 has led banks’ commodities revenues to rebound after the relative oil-price stability of 2010. According to one study, the commodities revenues of a group of 10 of the world’s largest banks increased 55% in the first quarter.
This has also been the year in which JPMorgan secured its place in the commodities firmament. In March, research by US consultant Greenwich Associates found that JPMorgan had overtaken Goldman Sachs and Morgan Stanley as the world’s top energy trader, with 41% of over-the-counter energy trading, measured by client numbers.
The story starts in 2007, when Blythe Masters, formerly CFO of JPMorgan’s investment bank, became the firm’s head of global commodities. At the time, the firm was strong in commodity derivatives. But it lacked physical trading facilities, particularly in energy.
Other banks have been fighting to build bigger commodities businesses: notably Deutsche Bank, which has achieved impressive growth at a relatively low cost. Deutsche’s strength in metals and investor products has served it particularly well.
But there is only so far a bank can grow organically. After the financial crisis JPMorgan found itself with an exceptionally healthy balance sheet. And over the past four years, it has used this resource to snap up rivals’ commodities franchises. “Some of these businesses were for sale because of their owners’ circumstances, even though the commodities units themselves were healthy,” says Masters.
Part of the reason JPMorgan bought Bear Stearns, for example, was because of Bear Stearns’ physical energy business in Houston, Texas. Then it bought Irish carbon offsets firm EcoSecurities. In 2009 JPMorgan bought UBS’s commodities trading businesses in agriculture as well as the Swiss bank’s trading business in Calgary, Canada. The latter added much to the firm’s physical and financial energy trading capability.
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“Some of the businesses we bought were for sale because of their owners’ circumstances, even though the commodities units themselves were healthy” |
In the past year, JPMorgan has integrated commodities joint venture RBS Sempra, the most recent of these purchases, which it clinched for $1.7 billion. JPMorgan’s acquisition of RBS Sempra’s North American power and gas business in the fourth quarter of 2010 almost doubled the bank’s physical and financial power trading books.
JPMorgan has removed duplicate staffing after these acquisitions, and today has about 650 front-office commodities professionals in more than 20 locations. Its oil and refined products business now has more than 1,000 clients. The bank has storage and transport facilities for oil, natural gas, coal, agriculture and metals. It has more than 100 warehouses in 11 countries.
But the firm has done more than just integrate its purchases. During the past 12 months, it launched a commodity-related project finance business alongside its syndicated and leveraged finance division. It launched new electronic trading platforms, for example in the gold spot market, and increased its range of investor products. It expanded coverage of emerging markets: in agriculture in Latin America, metals in China, and elsewhere. It opened a vault in Singapore.
The bank has secured new mandates: for example, entering into a long-term physical supply agreement with a German coal-fired power plant. JPMorgan has structured and executed some of the most sophisticated and innovative transactions in the market.
In North Africa, it acted as lead arranger and underwriter in a syndicated pre-export credit facility backed by crude oil and naphtha cargoes, acting as physical off-taker and tailoring a hedge to regional grades of crude. Compared with a similar previous transaction the deal was bigger, with a longer maturity and lower cost.
In North America, it signed an agreement to be the exclusive physical supplier of crude oil to a refinery for a five-year term. It also secured access to natural gas supplies via a large-volume, 10-year physical sales agreement with a big producer. To monetize assets owned by a large renewable-energy client, it acquired and restructured five wind-power purchase agreements.
It executed a volumetric production payment for an oil and gas producer, including upfront payment of oil for six years with a commitment to purchase incremental barrels, giving the bank an overriding royalty interest in oil assets in the US Midwest.
In the UK, JPMorgan demonstrated logistical expertise in coordinating deliveries of liquefied natural gas, bringing cargo from the Middle East and the US. It also arranged a series of swaps on rubber of varying volumes and maturities to mitigate a North American truck and engine maker’s exposure to Asian agricultural markets.
