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Metals brokers profit as banks exit commodities

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London: Metals brokers are enjoying a surge in trading profits as they exploit an exodus of banks from commodities markets.

Marex Spectron and Sucden Financial, ring-dealers on the London Metal Exchange’s open-outcry trading floor, last week reported a jump in earnings. As the investment banks that came to dominate during the commodities supercycle continue to pull out, the brokerages are profiting from renewed volatility in the markets.

“There’s an ongoing retreat by banks from our space, and as they’ve retreated their clients have needed a home,” Marex Spectron, chief executive officer Ian Lowitt said. “Many of them have come to us.” Last week, Societe Generale announced it was shutting down its commodities derivatives business, while powerhouse Goldman Sachs Group cut about 10 jobs commodities last month.

Goldman said on Monday it had identified “opportunities to cut expenses” in the commodities division, some of the first public comments from the bank on how it’s reshaping a business that was once the envy of Wall Street.

“Historically, banks have been in a see-saw game of being in and out of commodities, and while their last innings were of significant length, in the last five or six years or so, the situation has changed quite drastically,” Sucden CEO Michael Overlander said by phone. “It presents an opportunity, but it also puts pressure on those that remain to fill the gaps and provide the services clients are used to receiving from the banks.”

Marex has also benefited from investing in technology at a time when increased volatility is attracting new quantitative investors into the market, Lowitt said.

With only a handful of specialist metals hedge funds left in the sector, algorithmic trading firms have become increasingly dominant, helping to drive a rebound in trading volumes on the LME last year.

Market Swings

Brokers’ profits rose during some sharp swings in metal markets over 2018, with the imposition of sanctions on United Co Rusal wreaking havoc in the aluminium industry, while US President Donald Trump’s trade war against China upended the outlook for copper. Zinc dropped by more than a quarter as a wave of supply threatened to swamp the market.

Still, it wasn’t all plain sailing. Marex’s profit was impacted by a $31.9 million provision for potential losses arising from a 2016 fraud involving forged nickel storage receipts. Excluding that, pretax earnings rose 80% to $45.2 million.

Source: Economic Times