* Russian, Chinese, Gulf firms fill space left by banks
* Producers could earn more by entering trading
* China seen becoming top player in setting benchmark prices
* Trading houses re-invent themselves, adapting to new cycle
By Jonathan Leff and Dmitry Zhdannikov
LONDON, Dec 27 As U.S. and European banks drop
out of commodity trading, Russian, Chinese and Gulf state firms
are filling the gap in an attempt to exert greater control over
the pricing of the raw materials on which their economies so
Last week, the Kremlin oil champion Rosneft bought
the oil trading unit of Morgan Stanley, 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
and Vitol and large oil firms like BP and Shell
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, Petrobras
. 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 has
already quit, Barclays has reduced its trading
operation by a fifth, J.P. Morgan is selling out and
only long-time leader Goldman Sachs is sticking to its
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, a private bank from
resources super-power Brazil, amid contenders, according to
sources. JPM is not commenting on the sale.
Russia's Gazprom, 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.
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.
In fact, China has already quietly built powerful global
trading desks at state-backed Unipec and PetroChina
. "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
TRADERS RE-INVENT 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
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 re-invent yourself,
which we have done for more than 20 years," said Mercuria's
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.