Asian players develop an appetite for risky commodities trading
Capital-rich Asian firms show interest as Western banks exit sector
Ray Chan and George Chen
While Western financial giants have been exiting the high-risk, high-reward commodities trading business, capital-rich Asian firms, including state-owned banks and brokerages from China, have seized the opportunity to enter the market.
Western banks including JPMorgan Chase, the world’s largest by assets, and France’s Natixis have been retreating from the commodities business but have found no shortage of Asian players willing to take their place at the table.
The latest example is China Merchants Securities (CMS), which launched a wholly owned subsidiary in Britain to expand into the global capital and commodities markets, with a focus on derivatives trading.
Wilson Wan, chief executive at CMS (Hong Kong), told the South China Morning Post in a recent interview that he planned to hire local talent in London to staff the firm’s new office there.
“After building our futures positions in precious metals, we will soon kick off a unit for oil futures trading, and our clients will be the three mainland oil majors,” Wan said, referring to Sinopec, PetroChina and CNOOC, the three state-owned leading firms in China’s energy industry.
Earlier this month, JPMorgan surprised the market by announcing a plan to sell its global physical commodity assets.
Wan said his focus would initially be on commodities futures trading, but he would not rule out the possibility that the firm would seek business opportunities in physical gold in the near future.
Last year’s sharp price declines have fuelled an exuberant demand in China for futures products in precious metals, including platinum, palladium, silver, and gold.
Futures traded on the Shanghai Futures Exchange have helped the country’s jewellers hedge against price volatility in the face of brisk and growing demand from mainland consumers, Wan said.
CMS, the mainland’s No 6 brokerage by assets, is not alone in expanding into the global commodities business, which can be considered a relatively new area for Asian investors.
“Clearly, this is a season of changing hands,” said an executive at a foreign bank who was in talks with several Chinese banks for a possible deal related to the commodities business.
“Western banks are leaving the table more or less because of their own internal capital pressures, but it’s also too early to say whether Chinese banks are really smarter than anyone else in grabbing the opportunity to make big money in future.”
The executive declined to be named as he was not authorised to speak to the media.
In August, Guangzhou-based GF Securities, one of the mainland’s 10 largest securities firms, acquired the London-based commodities trading unit of French bank Natixis for US$36 million.
In November, Industrial and Commercial Bank of China, the country’s largest lender by market capitalisation, said it planned to acquire the commodities trading platform of South Africa’s Standard Bank in a deal potentially valued at up to US$700 million.
The London-based trading platform of Standard Bank is well known in the industry for its global investments in oil, copper and other raw materials.
Industry executives say such aggressive moves by Chinese players on the global stage of commodities trading are related to the country’s own need for commodities to fuel its economic growth.
China’s hunger for raw materials, including coal, iron ore, and copper, has eased as the country’s growth in economic output started to moderate last year after decades of rapid expansion fuelled by infrastructure spending.
However, despite slowing economic growth, domestic consumer demand for precious metals such as gold has been robust as the government re-engineers the economy to boost the role of household spending.
Hong Kong-headquartered Chow Tai Fook, the world’s largest jewellery chain, announced a 92.3 per cent jump in profit year on year to HK$3.51 billion for the six months to September, helped by the slump in gold prices in April and the subsequent rush to buy gold products.