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 Last week, the Kremlin oil champion Rosneft <ROSN.MM> bought the oil
trading unit of Morgan Stanley <MS.N>, 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>
and Vitol and large oil firms like BP <BP.L> and Shell <RDSa.L> 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>, Petrobras <PETR4.SA>. 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> has already quit,
Barclays <BARC.L> has reduced its trading operation by a fifth, J.P.
Morgan <JPM.N> is selling out and only long-time leader Goldman
Sachs <GS.N> is sticking to its guns.
Prior to clinching the deal with Rosneft, Morgan Stanley was in
talks with Qatar and Chinese firms, market sources said. Morgan
Stanley never commented on those talks.
JPM has Grupo BTG Pactual <BPAC3.SA>, a private bank from resources
super-power Brazil, amid contenders, according to sources. JPM is
not commenting on the sale.
Russia's Gazprom <GAZP.MM>, the world's largest gas producer, has
built a substantial gas trading division in London and Sigapore and
the world's top oil exporter, Saudi Aramco, has also began building
a trading operation.
"We will see national oil companies ... beefing up their trading so
it's all set for high competition in a sector that is overcrowded
already," Torbjorn Tornqvist, CEO of trading house Gunvor, told
Reuters last month.
FORMIDABLE FORCES
Consultants Olyver Wyman said last month that even as trading houses
were moving increasingly into the logistics, producers and consumers
were also becoming increasingly aware of trading as profit
generator.
"Energy players are doing this in part because independent traders'
earnings are increasingly calling attention to the fact that
commodity producers could earn potentially billions of dollars more
by broadening their options for delivering commodities to clients,"
Olyver Wyman said in a report.
For Ian Taylor, the head of the world's largest oil trader Vitol
with net profit of $1.7 billion in 2011, it is also clear that a lot
of new entrants will come from Asia as they are trying to pursue
incremental profits.
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In fact, China has already quietly built powerful global trading
desks at state-backed Unipec <0386.HK> and PetroChina <0857.HK>.
"These are formidable forces," said Tornqvist.
"What is important for them is to be in control of the major flows
... They understand that it is a global market and what happens in
one part of the world still is important for them".
Marco Dunand, the head of trading house Mercuria, says that over
time China will become one of the dominant players in setting
benchmark prices for commodities.
"China will develop the commodity market in the same way Europe or
the U.S. have developed with an internal market with arbitrage
opportunities, storage and logistics. And we also believe that over
time, China will open the commodity market to a more competitive
environment," he told a Reuters Summit last month.
TRADERS REINVENT THEMSELVES
The rise of state champions in trading poses new challenges for
trading houses, which alongside Western oil majors like BP or Shell
have dominated the space for decades.
"Fundamentally, the number of barrels that are tradable these days
is shrinking," says Alex Beard, the head of oil at Glencore, as
traders witness China clinching direct deals with producers in
Africa and Latin America.
With trading houses now facing slimmer profit margins, they are
trying new recipes for growth including competing with banks and
majors in providing capital to projects, according to Messer.
Taylor's Vitol recently teamed up with U.S. private equity group
Carlyle to own refineries in Europe at a time when majors are
ditching them due to poor profits.
"This could be the direction the market takes as more major oil
companies are leaving the space. There is room for companies like
Vitol combined with private equity like Carlyle to get into this
space," said Marcel van Poecke, managing director at Carlyle
International Energy Partners.
One competitive advantage that trading houses will keep over
state-backed rivals is the ability to quickly adapt to changes.
"It is a constant model of trying to reinvent yourself, which we
have done for more than 20 years," said Mercuria's Dunand.
Gunvor's Tornqvist goes even further back in history.
"The Iranian revolution created (oil) trading houses and then they
faded away until the next upheaval, until the Gulf War, the collapse
of the Soviet Union and then the resource boom last decade. So we
are in this period where it is realistic to see a moderation in
margins," he says.
(Writing by Dmitry Zhdannikov; editing
by Giles Elgood)
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