by Stuart Burns,
We should be careful not to view JPMorgan Chase’s (JPM) decision to divest its physical commodities operations last July as the start of a stampede for the exits by banks and hedge funds. JPMorgan has problems and challenges across their business units in no small part as a result of growing too fast and too large during times of global turmoil. Many of the banking acquisitions have yet to be properly integrated and some of the acquisitions in a post-financial crisis world don’t look the great deal they did when they were originally made.
Clearly, JPMorgan thinks that is the case with Sempra Commodities, the commodities trading house/broker which they bought for $1.7 billion and assumed $3.3 billion in debt in 2010. Sempra is up for sale along with other commodity-related units, which include base metals, coal, global crude oil, North American electrical power, North American natural gas, European power and gas and – more controversially for MetalMiner’s audience – Henry Bath, the metal warehousing group.
Taking an Aluminum Bath
Henry Bath is one of several warehouse operators at the center of a storm involving the LME, major merchant traders, banks, hedge funds, aluminum producers and, those most vocally active, the consumers.
It is possible Henry Bath and other warehouse operators could still be the target of legal action threatened by industry groups frustrated by the huge disconnect between the LME price for aluminum and the market price for the metal – a disconnect many suggest the warehouse operators have been complicit in (even if not intentionally) creating.
The value of the assets in the physical commodities business at JPMorgan is put at $3.3 billion by the firm, according to the FT, and documents indicate that it produces $750 million in annual income before compensation costs. A figure the paper quotes some of the potential buyers as saying is overly optimistic, physical commodities businesses are usually worth 3-4 times earnings, suggesting these assets may be worth $2-3 billion.
Reuters tells us the largest part of the physical business is the bank’s crude trading operations, which JPMorgan values at $1.7 billion, followed by the firm’s North American natural gas assets at $800 million and base metals – including the Henry Bath warehouse company – valued at $500 million.
Although JPMorgan’s decision has not been followed by, for example, Goldman Sachs, their closest contemporary among the metal trading merchant banks, other owners of commodity trading units have moved to exit.
Hess, Goldman Sachs and Morgan Stanley
According to the FT, Hess (HES), the U.S. oil group, is seeking a buyer for Hetco, a trading joint venture run by two former Goldman Sachs partners. Hess separately announced on Wednesday last week the $850 million sale of an oil terminals network. Meanwhile, Gavilon is seeking a buyer for its energy business after selling its grain arm to Japanese trading house Marubeni.
Morgan Stanley has also been engaged in inconclusive talks to sell a stake in its large commodities business. The book positions should indeed be worth a sizable and quantifiable amount, but as the FT quotes industry sources as saying, why pay billions for a business that relies so much on the skills of a comparatively few key traders? Hire the traders and start anew for a fraction of the cost and none of the legacy problems that may yet come to haunt those warehouse and financial firms who are the subject of such industry ire at present.