State-Owned Firms Reshaping Commodities Trading Market

American and European banks have begun to pull out of the commodities trading market in recent weeks. However, state-owned firms, particularly from China and  Russia, have been moving in to fill the gap. Parties involved have been announcing several important deals, as state-firms have started to buy out banks and take over their commodity trading operations amid a shifting market.

The logic in these moves is quite simple: banks are facing increasing regulations that are making commodity trading less attractive. That’s why it’s  looking like a better time than ever to stage an exit. Meanwhile, countries like Russia and China are heavily dependent on commodities. By getting involved directly in the market firms can hope to influence prices and market activities.

State-Owned Firms Seizing Opportunities in Commodity Trading

For state-owned firms, getting directly involved in trading offers opportunities to increase profits and expand operations. Many of the state firms now setting up trading operations are already involved in the production and transportation of natural gas, oil, and other commodities, so trading is a natural extension.

Russia’s Oil

Oil has been a major target for state firms. Just last week Russia’s Rosneft bought the oil trading unit from Morgan Stanley. It took over one of Wall Street’s largest oil trading desks. Russia’s Gazprom, which is the world’s largest natural gas producer, has also built up natural gas trading offices in both London and Singapore.

China’s Increasing Energy Needs

While Russian firms have been aggressively expanding their trading operations, they aren’t the only ones making a push. Many believe that Chinese and Qatari firms were also looking to buy out Morgan Stanley’s oil desk.  While Russia won that battle, financial analysts are expecting Chinese and other state firms to emerge as key players. Eventually, such firms should be able to influence benchmark prices and market activities.

Compared to Russia, China isn’t as rich in oil or natural gas. China has emerged as the world’s manufacturing hub, however. And its billion plus citizens are demanding more and more energy as their economy continues to develop. Having a presence in the energy market is thus essential for the so-called Middle Kingdom.

China is also ramping up its capabilities to store and transport natural gas, oil, and other vital resources. The country has been rapidly expanding its infrastructure, and also cutting deals with resource rich countries across the world. Doing so should ensure ample access to resources for years to come.

Other Countries

Beyond Russia and China, other countries are also getting involved. Singapore’s Sinopec has been ramping up trading operations, along with Brazil’s Petrobras. Firms from the gulf coast countries, which are heavily dependent on oil trading and world energy markets, have also been expanding to fill the gap that retreating banks are leaving behind.

Banks Looking to Exit Commodities Market

Banks, for their part, have been retreating from the commodities market due to increased regulations in the wake of the 2008 Financial Crisis. Firms on Wall Street and elsewhere are coming to view commodities as too much of a headache amid increased government scrutiny.

As a result, banks have been slowly pulling out and selling off their assets and trading units. Deustche Bank has already exited the market, while Barclays has begun to reduce its holdings. Morgan Stanley, as already mentioned, is in the process of selling off its assets. Goldman Sachs, on the other hand, looks set to maintain its presence in the market.

While banks are slowly reducing their commodity trading presence, state firms will face plenty of competition from other firms and organizations. Trading houses, such as Glencore, will continue to be major players. Major companies, such as Shell and BP, are also ramping up their trading operations. As banks recede, markets may actually grow more competitive as companies look to fill the vacuum.

The commodities trading industry itself is likely to evolve over the coming years as traditional players move out, and new entrants enter. While the profit margins may no longer be attractive enough for banks amid increasing regulations, state-owned firms have more incentive to get directly involved in trading, as do energy companies. This could cause a gradual shift in the market to companies directly involved in the production and transportation of commodities.