Banks get physical in commodities
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Banks get physical in commodities

As banks boost their commodities businesses, better physical trading capacity is increasingly important. But developing physical trading capacity, and doing so in a wider range of commodities, is easier said than done. Dominic O’Neill reports.

TIMES ARE CHANGING in the commodities business. It was once the case, for example, that only one or two global banks were known for their ability to trade in physical commodities. These were Morgan Stanley and, later, Goldman Sachs. If other banks did get involved in the commodities market, most of the time it was through futures and options. The logistical side of the commodities business was left to specialized commodities trading firms and big oil companies such as BP and Shell.

Banks such as Barclays Capital, Deutsche Bank and JPMorgan were previously only known for their capacity in the non-physical commodities market. Now, however, they are developing their ability to trade in physical materials such as oil, coal, iron ore and even agricultural products. The benefits of doing this have become increasingly apparent in an era of scant credit and rapidly changing prices, and when banks’ clients are finding it increasingly important to manage their exposure to price volatility in the commodities markets.

Buying a futures contract might result in physical delivery of the product at the maturity of the contract. This is especially true for precious metals and for European gas and power, which have established delivery networks.

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