Germanys largest bank, which was one of the top-five financial players in commodities, said in a statement it will cease trading in energy, agriculture, base metals, coal and iron ore, retaining only precious metals and a limited number of financial derivatives traders. The cuts are expected to largely fall on its main commodity desks in London and New York.
The move comes as the financial sectors role in commodity trading has been squeezed by lower margins, higher capital requirements and growing political and regulatory scrutiny of the role of banks in the natural resources supply chain.
The decision to refocus our commodities business is based on our identification of more attractive ways to deploy our capital and balance sheet resources, Colin Fan, co-head of Corporate Banking and Securities at Deutsche Bank, said in a statement. This move responds to industry-wide regulatory change and will also reduce the complexity of our business.
Deutsche Banks decision will also raise questions for other banks in the sector, after JPMorgan Chase & Co put its physical commodity arm up for sale this summer, while Morgan Stanley has been exploring a sale of its energy trading unit for almost two years.
Deutsche Bank was among the first financial firms a decade ago to challenge the long dominance of Goldman Sachs Group and Morgan Stanley in commodities trading. But it suffered a series of ups and downs and personnel changes over the years, including the departure of global chief David Silbert a year ago.
Silberts departure was the first sign the bank was withdrawing from the one-time billion-dollar business, which included a substantial US and European power and gas book, a major market-making operation in oil options, and base metals trading.
Silbert built up Deutsche Banks commodity group to make it a top five contender in the space of five years and then left rather than pull down the house he built, said George Stein, managing director of New York-based recruiting firm Commodity Talent. The destruction of the commodities business at Deutsche Bank is one more sign that many of the large global banks no longer see commodities as viable, Stein added.
The bank announced the decision to staff at a meeting shortly after lunch on Thursday, with around half the 200 traders affected clearing their desks and leaving immediately, according to a person familiar with the matter.
The remaining traders will be asked to stay and help wind down or sell off parts of the business as part of a unit called the Special Commodities Group over the next two years, with the process being led by the current co-heads Louise Kitchen and Richard Jefferson.
More than 40 traders are expected to be absorbed by other parts of the bank, including those who will continue trading financial commodity derivatives for clients. The bank is not expected to try and sell its commodity operations wholesale.
The banks near $10-billion commodity index business, which allows smaller investors to get exposure to commodity price moves, will not be affected by the closure, according to a person familiar with the matter.
The banks flagship PowerShares DB Commodity Index Tracking Fund has $6 billion invested alone, according to the funds website, making it one of the biggest in the market.
Deutsche Bank had already closed down most of its electricity, natural gas and carbon trading operations in Europe and North America over the past year as regulation tightened, and as the bank was investigated for an alleged tax scam involving the trading of carbon permits.
The bank also reached a $1.5-million settlement with the US Federal Energy Regulatory Commission in January for manipulation of power markets in California.
The decision to quit commodities is not directly related to the US Federal Reserves current review of the role of banks in physical commodity trading, but comes as the bank reassesses its overall business as part of a strategic review.
The Federal Reserve, which first allowed commercial banks to trade physical commodities in 2003, is expected to announce changes in early 2014 in how it regulates the sector.
Deutsche Bank was an active participant in physical commodity markets, but did not own any major trading infrastructure such as power plants, warehouses or oil storage tanks that it could sell as it winds down the business.