If you don’t have access to storage in physical commodities trading, you’re nobody.
For banks trading physical commodities it’s a particular problem and one they’re keenly working to resolve.
The FT’s commodities correspondent Javier Blas, for example, reported on Wednesday how two top commodity banks, Goldman Sachs and JP Morgan, recently entered the metal warehousing business:
As piles of base metals from aluminium to nickel build up due to poor demand, Goldman Sachs and JPMorgan have entered the little known but very profitable business of metal warehousing.
The deals reflect banks’ appetite for exposure to physical commodities beyond traditional commodities derivatives. Stockpiles at London Metal Exchange’s registered depots surge to an all-time high of 6m tonnes – up from 1m in 2007. Traders and bankers say warehousing is a classic “anti-cyclical” business as it flourishes when demand for metals is lacklustre and stockpiles mount.
The move follows on from Goldman Sachs, which last week bought Metro International, the operator of a global network of London Metal Exchange-approved warehouses, for a princely sum of $550m.
With inventories like this, you can see why they’d be interested:
The trend for all things storage, meanwhile, is also applicable to the energy markets.
Inventory issues over the course of last year meant storage operators quickly became big beneficiaries of the financial crisis. One of the largest publicly-traded companies in the area being Netherlands-based Vopak, whose shares outperformed the AEX significantly:
According to the latest note from Bank of America Merrill Lynch, meanwhile, the story is much the same for the European coal market too. As the analysts observed on Tuesday:
Of course, some of the material going to Europe is contracted and cannot be cut back. As supply still exceeds demand, European coal inventories remain at excessive levels, both at utilities and at key import ports in Rotterdam and Amsterdam, and barely drew this winter (Chart 10). Coal storage capacity in Europe has now become a rare commodity. We find a pretty strong relationship between spreads in API2 and coal inventories (Chart 11) Hence it is no surprise that the contango in API2 has steepened even more, with front month to front calendar year spreads at the widest since July last year (Chart 12), reflecting the oversupply in the European market and bulging inventories.
Here, meanwhile, is the relevant inventory chart:
One word of caution: the storage business is a long-term game. It’s highly cyclical — and even if times are booming now, that will not necessarily always be the case.
Then again, what does a big punt on storage by the investment banks at this stage really tell us about their long-term view on commodities?