JPMorgan decided to sell its multi-billion dollar physical
commodities division last year under rising regulatory and political
pressure to retreat to the bank's core business of lending instead
of speculating in raw materials.
"This week, JPM entered into exclusive talks with Mercuria," one of
the sources familiar with the process told Reuters.
The final deal could take a few months to conclude, one of the
sources said. If agreed, it would catapult Mercuria into the top
tier of trading houses with Glencore Xstrata <GLEN.L>, Vitol and
In recent weeks, Mercuria was competing with Australian bank
Macquarie Group <MQG.AX> and private equity manager Blackstone Group
LP <BX.N> to buy JPMorgan's unit, sources had said.
Private and lightly regulated trading houses have benefited most
from a major retreat by banks from commodities trading over the past
Companies like Glencore and Russian oil major Rosneft <ROSN.MM>
hired whole teams of traders from banks such as Morgan Stanley. <MS.N>
But Mercuria could become the first trading house to absorb an
entire physical division from a bank.
JPMorgan and Mercuria both declined to comment. A spokesman for
Blackstone in London declined to comment. A spokesman for Macquarie
in London did not immediately respond.
Mercuria was founded by Marco Dunand and Daniel Jaeggi, who both
worked as executives at Goldman Sachs and then trading house Sempra,
which was later bought by JPMorgan from the Royal Bank of Scotland <RBS.L>.
In less than a decade, Dunand and Jaeggi have built Mercuria into
one of the world's largest oil traders, with annual turnover of
around $100 billion and 700 traders spread across the globe. But it
is still much smaller than the world's largest trader, Vitol, which
has turnover of $300 billion.
The deal value has yet to be agreed and will depend to a large
extent on the valuation of large stockpiles of oil and metals the
bank holds, one source said.
In documents circulated to potential buyers, JPMorgan valued its
physical commodity business at $3.3 billion, with an annual income
of $750 million. JPMorgan paid nearly $2 billion to buy the largest
part of the business from RBS in 2010.
The sale will allow JPMorgan chief executive Jamie Dimon to close
the book on a public set-back in a business once hailed as an engine
for growth following a dire mix of waning margins, allegations of
market manipulation and unprecedented political pressure over its
role in the supply chain.
The sale will also raise questions about the future for JPMorgan's
commodities chief Blythe Masters, who over the past five years spent
billions of dollars building the biggest physical commodity trading
operation on Wall Street, surpassing in size long-time giants
Goldman Sachs and Morgan Stanley.
JPMorgan has access to a vast global metals trading and warehousing
network, a big U.S. power and gas desk and Canadian oil storage
[to top of second column]
The deal is expected to come with a contract supplying crude oil to
the biggest U.S. East Coast refinery, the Henry Bath & Sons Ltd
metals warehousing business with about 80 storage sheds stretching
from Rotterdam in the Netherlands to Johor in Malaysia, and a
sizeable U.S. natural gas and power trading book.
Mercuria has said it is looking to expand in the United States
like many other traders as a shale oil boom is opening up new ways
to make profits.
"Mercuria have expanded aggressively into new areas of commodity
trading in the last two years, and part of that strategy has been
hiring some of the best traders from the banking world," said Jake
White, head of front-office commodities recruitment at Selby
Jennings in London.
"But taking on a business of the size and prestige of JPMorgan's
physical business is definitely their biggest move yet, and will
undoubtedly propel Mercuria into the top tier of commodity trading
Rising global capital requirements for banks under the Basel III
regulatory framework and new restrictions on proprietary trading
introduced to prevent a repeat of the 2008 financial crisis have
made commodity markets less attractive for many banks.
Commodity income at the world's top 10 investment banks has fallen
from a peak of more than $14 billion in 2008 to just $5.5 billion in
2012, according to London-based consultants Coalition.
For many U.S. banks, it was their prime regulator — the Federal
Reserve — that delivered the heaviest blow, making clear in recent
years that it was increasingly uneasy with Wall Street's expansion
into physical trading of raw materials.
Amid negotiations to resolve a host of other regulatory
investigations, including the "London Whale" credit losses from
derivatives trading in 2012, JPMorgan's Dimon was also stung by a
probe into allegations of U.S. power market manipulation ending in a
record $410 million settlement.
JPMorgan is expected to retain its basic commodity derivatives
trading desk that hedges prices for customers.
While some of the industry's oldest hands such as Goldman Sachs aim
to retain much of their commodities businesses, others are getting
out or adopting different strategies.
Deutsche Bank announced late last year that it was largely exiting
commodities trading, while Morgan Stanley is selling the majority of
its global physical oil trading operation to Russia's Rosneft.
(Reporting by Dmitry Zhdannikov; additional reporting by David Sheppard, Oleg Vukmanovic, Henning
Gloystein and Veronica Brown; editing by Peter Graff)
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