In an unprecedented move,
JPMorgan Chase & Co.
) announced its plan to exit the physical commodity business,
including stakes of commodities assets and physical trading
operations. This step comes amid heightened regulatory and
political scrutiny of banks' ownership in such assets.
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JPMorgan will be exploring a whole lot of options ranging from a
sale, spin-off or strategic partnership of its physical commodity
business. As of Mar 31, 2013, the company's physical commodities
were valued at nearly $14.3 billion.
Nevertheless, JPMorgan will be committed to traditional banking
activities in the commodity markets and continue to make markets
as well as offer advice and liquidity to clients across the
JPMorgan received the Federal Reserve's approval to trade in
physical commodities in 2005. With the acquisition of Bear
Stearns Cos. in 2008, which included an energy trading platform,
the company began building its physical commodity business.
Moreover, in 2010, the company purchased
Royal Bank of Scotland Group plc
) non-U.S. commodities joint venture with Sempra Energy -
RBS-Sempra Commodities LLP.
However, over the last few years, the physical commodity business
witnessed a decline in revenues across the industry.
Further, JPMorgan's internal review of the operation concluded
that profits from the business were not worth the risks posed
from multiple fronts. Moreover, the company is negotiating a
settlement with the Federal Energy Regulatory Commission for
alleged manipulation of the California and Michigan power
Earlier this month, the Fed stated that it was reviewing its 2003
decision of allowing banks to pursue trading in the physical
commodity market. Further, following complaints of banks and
traders manipulating supplies and prices, the Commodities Futures
and Trading Commission has initiated an inquiry on the banks'
role in the metals warehousing operation.
In deciding to exit the physical commodity business, JPMorgan
The Goldman Sachs Group, Inc.
). Since Mar 2013, Goldman has been trying to sell its
warehousing business Metro International Trade Services LLC,
while Morgan Stanley has been trying to find a buyer for its oil
pipeline and terminals business - TransMontaigne - for more than
a year now.
Further, new stringent regulations and low volatility have
dampened interest in commodity trading. Hence, we believe that
finding a buyer for JPMorgan's vast and diverse physical
commodity business will be quite challenging. Moreover, the
company might have to split the business, in case it does not
find a single buyer for the whole unit.
Currently, JPMorgan carries a Zacks Rank #2 (Buy).