March of state companies resets global trading patterns

Fri Dec 27, 2013 10:47am EST
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By Jonathan Leff and Dmitry Zhdannikov

LONDON (Reuters) - As U.S. and European banks drop out of commodity trading, Russian, Chinese and Gulf state firms are filling the gap in an attempt to exert greater control over the pricing of the raw materials on which their economies so heavily depend.

Last week, the Kremlin oil champion Rosneft (ROSN.MM: Quote) bought the oil trading unit of Morgan Stanley (MS.N: Quote), one of the largest and oldest trading desks on Wall Street, as banks reduce exposure to trading.

The state companies are joining trading houses like Glencore (GLEN.L: Quote) and Vitol and large oil firms like BP (BP.L: Quote) and Shell (RDSa.L: Quote) to take advantage of the retreat from trading by banks because of the greater regulation of banking activities that followed the 2008 financial crisis.

It won't be long before such deals are repeated, say executives from major trading houses as they see a new class of rivals challenging their supremacy in connecting buyers and sellers of commodities, predominantly oil.

"The commodity merchant business is in a period of flux at this time and I think that the deck is getting shuffled as to both who the participants will be and how the business is going to be conducted," David Messer, CEO of U.S. merchant Freepoint Commodities, told Reuters last month.

"Banks by and large are moving out of the trading of physical commodities. On the other hand you have new entrants, large state enterprises, Sinopec, Gazprom (GAZP.MM: Quote), Petrobras (PETR4.SA: Quote). These are all entities which are increasing their merchant and trading capabilities."

"I think that the banks will become more of what they used to be, which is financiers, and I think the new participants are going to create competition for streams of commodities that used to be handled exclusively by merchants," said Messer.

Morgan Stanley is not alone in exiting commodities trading. Out of its four biggest rivals, Deutsche Bank (DBKGn.DE: Quote) has already quit, Barclays (BARC.L: Quote) has reduced its trading operation by a fifth, J.P. Morgan (JPM.N: Quote) is selling out and only long-time leader Goldman Sachs (GS.N: Quote) is sticking to its guns.   Continued...

A trader looks at electronic boards at Madrid's stock exchange June 29, 2012. REUTERS/Susana Vera