Bank shake-out boosts commodity margins

Two women sit in front of Deutsche Bank offices on Park Avenue in New York July 31, 2008.

LONDON (Reuters) - The shake-out in the banking industry from the credit crisis has helped to boost margins in the commodities and energy business, where there are fewer banks competing for business.

"Margins on plain vanilla business have gone to levels not seen in a decade," David Silbert, global head of commodities at Deutsche Bank, told Reuters in an interview this week.

Before the credit crisis, for example, he said there would be 20 banks competing to arrange a three-year jet swap for clients. "Now it's four or five," Silbert told Reuters.

The credit crisis, which has pushed the global economy into recession, has reduced the number of banks active in the commodities arena.

Lehman Brothers filed for bankruptcy protection in September last year, UBS has pulled out of commodities and Merrill Lynch is now part of Bank of America.

Silbert said Deutsche Bank had not seen a decrease in levels of activity in commodities and energy because of the tough economic climate.

"But clients have to use less conventional methods to raise capital. We have the ability to structure deals to provide them with access to funds."

STILL HIRING

Deutsche Bank is in the process of building up its commodities and energy business, where it already has carbon, freight, coal, gas and power, metals, including base metals, precious, iron ore, steel and uranium, oil and refined products and agricultural commodities soya, corn, wheat and sugar.

"We are still hiring and we will continue to grow this year," Silbert said. "On a five- to 10- year time horizon, we are on year two."

The bank, for example, plans to expand its existing financial presence in coal and freight into the physical business.

Goldman Sachs, Morgan Stanley and Barclays are ranked as the three biggest players in commodities, with JP Morgan also making a big push in this area.

OIL PRICE

Silbert sees a recovery in the oil price, which has more than halved from a record peak of above $147 a barrel in July last year.

"It's inevitable if you believe in an end to the crisis, oil prices will rise," he said. "Base metals have found a floor, coal and freight have stabilised, crude demand fall has slowed."

But he said there was still a lot of oil stocks for the market to work through.

"On an 18-month view, the price will go higher," he said. "The (price) curve has flattened, but for the market to go up sharply you need to see a backwardated market."

On the investment side, Silbert sees growth in commodities as an asset class despite huge price swings over the past year.

"Pension funds will still want to allocate to commodities," he said. "These investors are not transient."

Pension funds began to allocate money to commodities in the past few years, because they offered diversification away from equities and bonds.

Silbert expects commodities to benefit from demand for physical assets in the aftermath of the credit crisis.

"Sovereign wealth funds - they are going to allocate to commodities," he said. "If you have say $200 billion (136.5 billion pounds) to invest and your faith in stocks is shaken you are going to be interested in real, hard assets."

(Editing by Sue Thomas)