The Financial Times: The real action is in commodity trading

By Kevin Morrison
Published: January 2 2007 02:00 | Last updated: January 2 2007 02:00

In their fierce competition for commodity traders, investment banks are making guaranteed payments ranging from £500,000 a year to more than £10m over three years in an echo of the dotcom boom of the late 1990s.

Three years ago, according to one bulge bracket bank’s head of European commodity sales, his bank was able to hire from Goldman Sachs and Morgan Stanley, which stood out from the bunch by sticking with commodity trading through economic cycles.

But that was no longer the case.

“It is more difficult to do that now,” he says. “We are in a situation where my traders are getting phone calls from headhunters every day and so we have to battle hard to keep our traders. We try to avoid paying guaranteed payments but in some cases it is very difficult to avoid because the market is so tight for staff.” Citigroup, Lehman Brothers, Merrill Lynch, Credit Suisse and UBS have all said in the past year that they plan to expand their commodity trading coverage, with particularly focus on energy markets.

People close to the industry estimate that the total hiring plans of these five banks would add up to between 300 to 600 staff.

That amount of hiring from a relatively limited pool of potential traders has pushed up the value of commodity traders.

“Five years ago, when Enron went bust, about 1,000 commodity traders were laid off,” says David Mooney, portfolio manager at NewFinance Capital. “The market has gone from bust to boom in a very short time.”

Mr Mooney stresses that it is not just banks that are hiring. He estimates that, in the past 12 months, the number of global hedge funds specialising in commodities rose from 60 to 104.

Banks are turning to oil producers, which have hundreds of traders.

The producers’ highly regarded internal graduate schemes take in the best chemical and petroleum graduates from Oxford and Cambridge.

Mr Mooney adds that at BP they would still receive commissions for hundreds of thousands of dollars, not the millions offered by the banks.

BP, Royal Dutch Shell, Total and ChevronTexaco, have traditionally had loyal traders. BP traders were said to have “green blood flowing through them”, a reference to the predominant colourin the company’s logo.

Although senior traders often got seven-figure bonuses, such payments were few and far between.

The lure of large pay-outs from the financial sector has now replaced loyalty.

Some former BP energy traders have more than trebled their annual income by joining a bank.

The remaining top tier global banks are hungry to share the spoils of the increasing revenue generated from commodity markets, says Christopher Wheeler, banking analyst at Bear Stearns.

Mr Wheeler adds that, according to research done by the Coalition Development, Boston Group and Deutsche Bank, the banks’ estimated sales from commodities trading was $13bn (£6.6bn) for 2006, up from about $3bn in 2002.

Goldman, where Lloyd Blankfein, chief executive, is a former gold trader, commands the largest commodity revenue stream with about $2.2bn, according to Mr Wheeler.

However, the rush to get bigger in commodities trading by leading banks is making life difficult for medium- tier investment banks such as BNP Paribas, Société Générale, Dresdner Kleinwort, Calyon and Fimat.

Will Ainger, editor of SparkSpread.com, which tracks movements of energy traders, says banks are also looking internally to move traders from fixed interest and foreign exchange into commodities. However, this is leading to constraints.

“Banks are also expanding their leveraged finance, structured credit and emerging market businesses and it is not so easy for them to transfer traders from one area to another,” says Ivan Vatchkov, banking analyst at Credit Suisse.

Copyright The Financial Times Limited 2007

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