Welcome to the New World of Physical Commodities Trading & Wealth Creation
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As JPMorgan Chase & Co has now exited the physical commodities trading business, one wonders what the future of the business at large – along with the one of the two major banks that have dominated Wall Street’s involvement in the natural resources supply chain for 30 years – will be, particularly when it comes to Goldman Sachs and Morgan Stanley; the ultimate “Wall Street Refiners”.
Goldman Sachs and Morgan Stanley may hold one advantage over JPMorgan, as their long history of operating in physical commodities as less regulated banks may provide them with “grandfathered” ownership of assets like warehouses, pipelines and storage tanks that other commercial banks aren’t allowed…I am afraid though this advantage is clearly narrowing by the day.
It is a fact that since 2012 Morgan Stanley has looked at selling its commodity arm and Goldman has made moves to scale back its physical operations.
Market deterioration has also complicated matters. Since hitting its all-time high in July 2008, the benchmark Goldman Sachs Commodities Index has dropped 57 percent, creating losses in some physical arenas and driving many of the banks’ key institutional investors out of the asset class.
Given those seismic changes in the marketplace coming to hit us all, I foresee many more commercial bank divestitures in the years ahead as the U.S Senate will probe more than ever whether banks should be allowed to own pipelines, warehouses and other commercial assets. The Fed after all wants those banks to conform their business activities to the Bank Holding Company Act.
I also foresee even major investment banks getting out of their peripheral business and refocusing only on their core physical oil trading arm. In fact, I believe the commodities business of the future will most likely devolve to its financing and risk management core and the banks will be less active in the physical markets. Wall Street will just become “paper traders”.
The $64,000 question that remains though is whether banks will be able to choose their own future, or will the Federal Reserve’s decision to review the entire role of Wall Street in physical commodities markets see regulators make the choice for them?
At the end of the day, I suppose that the increasing capital strains on banks, and especially the political heat being directed at the industry may not be worth fighting for given the slimmer profits derived from playing the physical trading market at most banks today…. Adding to that the fact that the Fed is also considering imposing a surcharge on bank commodities holdings linked to the amount of capital they require or risk they take, though no formal decisions have been made.
So who’s the most likely new guard ready, willing and able to take over the industry by storm?
It is clear to everyone by now that the top tier private equity groups such as Carlyle and the like are already replacing the commercial and investment banks holding and trading such assets.
Major oil companies are selling more than $300 billion of assets, according to Carlyle International Energy Partners. So no wonder we will see more private-equity companies, commodity traders and sovereign-wealth funds buying more energy infrastructure from oil companies shifting to expensive exploration and production projects.
Big merchant commodity firms like Glencore Xstrata and Trafigura are also positioned to tremendously capitalize on such opportunities.
Varo Energy, Carlyle’s venture with commodity trader Vitol Group that owns Switzerland’s Cressier refinery, is already considering buying a stake in a plant in southern Germany. The joint venture plans to become a “new player” in oil refining and storage in northwest Europe focusing on output of the middle-distillate fuels such as diesel and heating oil that the continent now imports to meet its needs.
Global commodity traders are also already massively investing in infrastructure to expand their trading opportunities and secure supplies; same goes for sovereign wealth funds teaming up with commodity traders to fund purchases of energy assets. Many more players are positioning themselves very aggressively in Africa and Southeast Asia. Not sure yet about North America as regulators are not helping lure such players to our shores.
A private money manager like a sovereign-wealth fund might still lack the interest and the expertise to manage a 10-year oil delivery contract with a major driller —smart traders though learn fast.
Welcome to the new “wealth creators” in the making.
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By :� Ziad K Abdelnour
Ziad is also the author of the best selling book� Economic Warfare: Secrets of Wealth Creation in the Age of Welfare Politics (Wiley, 2011),
Mr. Ziad Abdelnour continues to be featured in hundreds of media channels and publications every year and is widely seen as one of the top business leaders by millions around the world.
He was also featured as one of the� 500 Most Influential CEOs in the World.
FAQs
In turn, five broad classes of SWFs exist to actualize these agendas: (1) stabilization funds (stabilization priority), (2) savings and future generations funds (capital maximization priority), (3) pensions reserve and other future liabilities funds (capital maximization priority), (4) reserve investment funds (capital ...
What are the 24 Santiago principles? ›
The Santiago Principles consists of 24 generally accepted principles and practices voluntarily endorsed by IFSWF members. The Santiago Principles promote transparency, good governance, accountability and prudent investment practices whilst encouraging a more open dialogue and deeper understanding of SWF activities.
What are the negatives of sovereign wealth funds? ›
Despite the advantages, SWFs are not without their drawbacks. One concern is the potential for mismanagement and corruption. Poor governance and lack of transparency can lead to funds being misappropriated or invested in risky ventures, resulting in significant financial losses.
Does the USA have a sovereign wealth fund? ›
Some countries may have more than one SWF. Also, while the United States does not have a federal sovereign wealth fund, several of its states have their own SWFs. The list does not include pension funds that do not meet the SWF criteria.
Where do sovereign wealth funds get their money? ›
The funding for a SWF can come from a variety of sources. Popular sources are surplus reserves from state-owned natural resource revenues, trade surpluses, bank reserves that may accumulate from budgeting excesses, foreign currency operations, money from privatizations, and governmental transfer payments.
Why is it called Santiago Principles? ›
The IWG reached an agreement on GAPP's in Santiago of Chile, September 22th 2008 - called the "Santiago Principles" - and presented them to the International Monetary and Financial Committee (IMFC), the IMF's policy advisory body; in October 2008 in Washington DC.
Who created the Santiago Principles? ›
On October 11, 2008, the International Monetary Fund (IMF)-convened International Working Group of Sovereign Wealth Funds (IWG-SWF) formally launched the Generally Accepted Principles and Practices (GAPPs), also known as the Santiago Principles.
What is global SWF? ›
At Global SWF, we focus on State-Owned Investors, including Central Banks (CBs), Sovereign Wealth Funds (SWFs), and Public Pension Funds (PPFs), because it is what we know well.
Are sovereign wealth funds risky? ›
Because of their dual mission to generate financial as well as social returns, their redemption risk is most probably higher than that of other long-term investors, such as endowment funds.
Is a sovereign wealth fund private equity? ›
A sovereign wealth fund (SWF), sovereign investment fund, or social wealth fund is a state-owned investment fund that invests in real and financial assets such as stocks, bonds, real estate, precious metals, or in alternative investments such as private equity fund or hedge funds.
SWFs generally enjoy favorable tax treatment in the U.S., but this treatment is subject to specific limitations; SWFs typically require separate LPA provisions or side-letter protection to ensure that their favorable tax treatment is not thwarted by the activities of the funds in which they invest. US Tax Exemption.
Who runs sovereign wealth funds? ›
A sovereign wealth fund is owned by the general government, which includes both central government and sub-national governments. Includes investments in foreign financial assets. They invest for financial objectives.
Why doesn't usa have a sovereign wealth fund? ›
The USA is quite unique in the world. And in a very real way, it is not a Sovereign Entity, except in matters of Treaty and Defense. So, that's why. The Federal government hold no wealth beyond the Federal Reserve.
What is the biggest fund in the world? ›
Norway's sovereign wealth fund, the world's largest, was established in the 1990s to invest the surplus revenues of the country's oil and gas sector.
What is the full form of SWF? ›
The term "SWF" has originated as an abbreviation for ShockWave Flash. This usage was changed to the backronym Small Web Format to eliminate confusion with a different technology, Shockwave, from which SWF derived. There is no official resolution to the initialism "SWF" by Adobe.
How does a SWF work? ›
A sovereign wealth fund (SWF), sovereign investment fund, or social wealth fund is a state-owned investment fund that invests in real and financial assets such as stocks, bonds, real estate, precious metals, or in alternative investments such as private equity fund or hedge funds.
What is the meaning of SWF? ›
(Small Web Format) The file format for playing Flash animation files (Flash movies). The Flash source file, which holds the timelines and multimedia elements, uses the . FLA (Flash Authoring) extension and is published to an . SWF file for playback by the Flash media player.
What does SWF mean in banking? ›
A sovereign wealth fund (SWF), also known as a social wealth fund, is the surplus money that a country accrues over time. The government-backed pool of funds is mostly funded from a country's foreign exchange reserves. Other sources of funds for an SWF account include: Bank reserves.
