As per research by London based financial industry analytics firm Coalition, Goldman Sachs Group (GS, Financial) became the top commodities bank for 2014. The second place was held by JP Morgan (JPM, Financial), and Morgan Stanley (MS, Financial) came in third. The survey company, Coalition, is also tracking other internationally acclaimed banks like Bank of America (BAC, Financial), Barclays (LSE:BARC), BNP Paribas (BNPQY, Financial), and Citigroup (C, Financial), to name a few.
Commodity scenario of various banks
The New York-based multinational investment banking firm was able to generate highest revenues from its commodities division as compared to any other bank. This was an achievement considering JP Morgan’s lead in the commodities market was the highest in 2013.
When other players like JP Morgan were in an exit mode from commodities, Goldman Sachs chose to stick to it. The commodity business for JP Morgan was once golden goose as the division made maximum money for them. But it had to sell off its raw-material trading unit to Mercuria Energy Group Ltd. in 2014 for $3.5 billion due to increasing political and regulatory pressure.
Goldman Sachs, however, considered commodity as a ray of hope in their broader fixed income trading business which is going through a bad phase. Coalition stated that the commodities revenue for the top 10 investment banks rose by 9% in 2014, but that might be considered momentary as this was due to the fluctuation in the oil and gas market. Commodity trading fetched around $4.9 billion for many leading banks. This was done through trading, selling derivatives to investors and other activities that aided in a marginal increase in revenue as compared to 2013’s $4.5 billion. In 2008 when the commodity market was booming, the top banks saw revenue earning of $14.1 billion. But due to tougher regulations and higher capital requirements after the 2008 global financial crisis, a mass departure was witnessed by even the topmost banks like Credit Suisse (CS, Financial) from commodity trading in 2014. Goldman Sachs, however, preferred to keep its commodity business despite all odds, and instead sold its metal warehousing unit in 2014 to Reuben Brothers. It also invited bids for its oil-merchandising unit which were won by Russia’s OAO Rosneft.
Commodity and Energy market linkage
The commodities index of Bloomberg consisting of 22 raw materials saw a huge drop of 17% by end of 2014 at a more than five and a half year low due to rise in the energy prices. Energy markets played a big role in generating revenues for top banks in the commodity sector. The mismatch in the oil market led to ever decreasing prices. Brent crude which was $115.71 a barrel last year and dropped to as low as $45.19 in January this year. U.S. has been held responsible for producing over supply leading to surplus scenario globally. This has increased volatility that might trigger the much awaited boom in the commodity industry in 2015, as per some experts.
Conclusion
The ups and downs in the commodity sector have been going on since 2013. Even the top banks haven’t been able to stay away from the fluctuating market. It’s the gut feeling of Goldman Sachs which led it to believe in its commodity share in the market and thus, it ended up making highest revenues from it. The future of commodities is partly dependent on the commodities market, but as a whole, the regulatory policies and market sentiments will play a huge role. Let’s stay tuned to watch out how the scenario looks like by the end of the year with respect to the commodities market.
