While banks gradually exit the once lucrative commodities sector, Goldman Sachs (NYSE:GS) perseveres and, indeed, continues to do well due to two significant advantages. Firstly commodity trading is in its blood. Since its purchase of J Aron in 1981, commodity trading has been at the heart of its diverse range of trading and brokering activities.
Indeed, many of its top executives are from that J Aron acquisition so the management team understand the risks and sees the opportunities better than any other bank. As markets have become depressed, volatility has been subdued. Banks and traders revenues have slumped, not just for Goldman but for all of Wall Street. According to the FT, Coalition, a consultancy, estimates the revenues of the top 10 banks in commodities fell last year to $4.5 billion from a record $14.1 billion in 2008.
Goldman have cut back headcount and concentrated on alternative revenue earners such as trade financing. As the FT points out, commodity finance lubricates the global trade of raw materials. It encompasses everything from short-term lending against international shipment of metal to providing working capital to oil refineries, and Goldman, with its deep understanding of commodities trading is well-suited to serve the market.
The second advantage the bank enjoys is the controversial grandfathering of its commodities trading in the Fed’s regulation of bank holding companies following the financial collapse of 2008. Along with Morgan Stanley (NYSE:MS), Goldman is exempt from restrictions the rest of Wall Street has to endure. As a result, the bank is still widely involved in the whole oil-supply chain, supplying, purchasing and selling Crude Oil and Natural Gas nationwide. In the first quarter of 2014, when cold weather pushed up energy prices, the FT notes, J Aron’s North American physical natural gas sales rose 39% to 6.25 billion cubic feet per day, or almost a tenth of US gas production during the period. Likewise the bank imported more than 100,000 tons of aluminum into the US over the past year.
In the years to come few of the Wall Street banks will remain major players in commodities as the rise of the traders, often offshore traders based in Switzerland or Singapore, come to dominate the scene, but Goldman Sachs will likely be one of the few left standing, continuing to evolve as the rules of engagement change.
by Stuart Burns