Banks flock to Asia commodities, unfazed by risks

Filed on July 12, 2010

SINGAPORE - Banks are expanding in Asiaís commodity and energy sectors at a rapid clip, drawn by the regionís faster growth rates and lightly regulated markets, and will rev up the drive further in coming months.

The strategy is not entirely risk-free, as market volatility escalates, although recent more positive data are calming investor jitters over a possible double-dip recession. The increasingly crowded market may also pressure trading margins and sharpen the competition for the best talent.

Following rapid growth in 2007, the Asian oil sector saw its worst shake-up a year later, when the onset of the global financial crisis froze credit markets and forced many to scale back trading volumes, with a handful shutting up shop.

While Asia remains a safe haven for firms seeking shelter from the last vestiges of the 2008 financial crisis and Europe’s current credit woes, the region is also grappling with shaky demand growth and the spectre of risk aversion.

The ambitions are not limited to banks from the West, but include those within Asia, such as Japan and Singapore.

“With the engines of economic growth for the world economy shifting eastwards, and that growth being energy- and base metals-intensive, the commodity-related interest is also shifting east,” said Harry Tchilinguirian, head of commodity markets strategy at BNP Paribas in London.

“The push into the commodities space started a few years ago. It was interrupted by the past recession and financial crisis, but appears to be resuming its upward trend in 2010.”

Demand from bulk commodities

Singapore-based Commodity Appointments, an international recruitment firm, said the greatest demand for talent was coming from bulk commodities, particularly iron ore and coal, with growing interest in clean fuels, oilseeds, grains and metals.

“It’s busy, it’s been busy all year. There has been a 100 percent uptick since this time last year in the midst of the global financial crisis,” said its consultant Dominic Mound.

“Some financial institutions and trading houses continue to build out in the commodities space and this is creating pressure in the marketplace to find people with the requisite skills.”

Some institutions could have over-hired in the first half in anticipation of a faster-than-expected global recovery, but others have been adding staff at a steady pace, Mound added.

Alexander Toone, Credit Suisse’s Asian head of commodities, also said key growth opportunities lay in the region’s iron ore, coal, freight, energy and base metals markets.

The Swiss bank’s Asian expansion plans are in line with those of Singapore’s DBS, Citigroup, Japan’s Nomura, Standard Chartered, Societe Generale, Australia’s Macquarie and Australia and New Zealand Banking Group.

StanChart is eyeing energy markets, mainly crude oil and coal, after boosting its products portfolio for clients in the past year to include iron ore, freight, palm oil and rubber, Arun Murthy, its global head of commodities trading, said.

Commodity Broking Services, a Sydney-based trading house dealing in metals and grains, has grown its grains desk by 20-25 percent in the past three months.

“Our policy is to get younger people in and train them properly as we anticipate a resurgence in demand for commodities, both from the consumer and investing side in the region,” said its managing director, Jonathan Barratt.

DBS Bank is focusing on base metals and the energy complex, said Roger Quek, director of Integrated Energy, Metals and FFA Services at DBS Vickers Securities.

“These sectors will be more attractive than soft commodities, with Asia pushing forward with its urbanisation plans,” he added.

The growth potential for hedging in Asia’s coal, gas and oil sector could be as high as 60 percent, including consumers in the transportation sector such as airlines and shipping, said a source familiar with the regional hedging business.

Reflecting investor enthusiasm for this asset class, inflows into the commodity sector hit their second-highest levels this year at $8.6 billion in May, after crossing the $12 billion mark in February, Barclays Capital said in a client note.

It cautioned that despite heavy inflows, the sector’s price performance was disappointing, with crude oil and base metals posting steeper falls during the month than agricultural commodities, while gold was the biggest beneficiary of safe-haven buying amidst jitters about the strength of the global recovery.

On the regulatory front, with the United States and Europe pushing to tighten financial rules and boost transparency in opaque markets, Asia’s relatively lighter frameworks are a boon.

“With all the regulatory change occurring in the U.S. and Europe, we’ve seen more and more of the discretionary hedge funds business relocate to Asia,” Toone said.

The U.S. recently approved the most sweeping overhaul of Wall Street financial rules since the 1930s, while the EU is debating controversial rules for hedge funds and is deadlocked in talks to set up watchdogs for policing banks and markets.


Even as signs emerge that the worst could be over for Europe’s financial crisis and U.S. firms look set to post robust quarterly earnings, high U.S. unemployment levels and the spectre of slowing growth in China could muddy the sector’s outlook.

Volatility levels have surged as increasingly risk-averse investors pummelled nearly all commodity markets — except for precious metals — over the last few weeks.

“Investors continue to shift investments away from riskier assets into bonds,” said Ole Hansen, senior manager of CFD and Listed Products at Saxo Bank in London, pointing to the recent poor performance of the benchmark Reuters Jefferies CRB index, which covers 19 mostly U.S.-traded commodities.

The index sank to a 10-month low of 248.79 on May 25, and has fallen about 9 percent since the start of the year.

“In our Q3 forecast, we have a negative outlook for the index. We fear the Chinese slowdown could accelerate the sell-off, especially in base metals and energy,” he added.

But BNP Paribas’ Tchilinguirian was more sanguine about the longer-term outlook.

“If commodities have corrected on concerns over the near-term economic outlook in China and the U.S., it does not necessarily mean market sentiment will stay negative,” he said.

“Asian economic growth prospects are overall positive and monetary policy is expected to remain accommodative well into 2011. Should China’s economic growth slow more than expected, we anticipate the authorities will again loosen credit conditions.”

And for some, volatile markets offer an opportunity to boost hedging volumes, while the move away from central price controls and removal of subsidies in countries like India and China would enhance the need for end users to better hedge their purchases.

“High and volatile commodity prices mean companies are becoming more and more sophisticated in understanding their risks and how to manage that risk,” said Toone at Credit Suisse.

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