Credit Agricole quits commodity trade as crisis bites

Reuters: Credit Agricole will stop trading  commodities and will also slash its financing of the multi-

 billion-dollar market, the most sweeping commodity cuts yet among European banks strained by the euro zone crisis.

Credit Agricole, the formerly farm-focused bank that had boosted its energy trading in recent years, warned last week of losses and write-downs as it struggles to cope with the credit crunch.

The cuts come just weeks after rival Societe Generale shut down its year-old U.S. gas and power trading desk, and leader BNP Paribas consolidated.

The deepening euro zone debt crisis has hit French banks hard as traditional sources of dollar funding have evaporated and as they face pressure to meet tougher capital requirements.

Volatile commodity prices, dimmer growth prospects and tougher regulation are also forcing some firms to question the outlook for the decade-long boom in trading raw materials.

Cargill Inc., which has voiced a bleaker economic outlook for next year than most of its peers, is cutting 125 jobs worldwide from its energy, transportation and metals operations as part of plans to reduce 2,000 or 1.4 percent of its global workforce over the next six months. Trade sources said more companies may follow.

“What is happening with Credit Agricole is certainly a major trend across banking where the entire commodities trading business is shrinking,” said a senior commodities trader who recently left a major bank for an independent trading house.”It is happening because of regulations, as proprietary trading is not allowed anymore and because people have overspeculated in the past years and got badly burnt.”

Credit Agricole’s commodities trading employs around 100 staff globally, including traders, analysts, marketing teams and technical staff, sources close to Credit Agricole said.

A source in the bank said many employees had only learned of the closure of the commodities trading unit:

“It has all happened very quickly. It is a shock.”

Credit Agricole Chief Executive Jean-Paul Chifflet said the bank was pulling out of commodities because it had less expertise in the field than other core areas:

“We preferred to stop it completely and devote our energy to other activities,” he said.But Chifflet told Les Echos newspaper the bank would not sell its holding in Newedge, a commodities futures and clearing brokerage it co-owns with Societe Generale.

Last year, the head of Credit Agricole’s commodities trading division, Martin Fraenkel, told Reuters energy was a key growth area because “clients of the bank have ever more need for hedging services in these markets”. The bank had just secured a potentially potent tie-up with power trading giant ETF Trading.

But nearly two years on, European banks are under enormous pressure in credit markets and only very large banks have scope to expand. Credit Agricole may be the first of several banks to drop commodities trading, said the senior commodities trader:

“The major players - Goldman Sachs, Morgan Stanley, Merrill Lynch, Deutsche Bank - are still hiring to replace people who leave to funds and trading houses. But small and medium-sized banks are just shutting everything down.”

Morgan Stanley said it would cut 1,600 employees in the first quarter; it did not say how many, if any, would be in its commodities division, which ranks with Goldman Sachs and JP Morgan as one of the three largest in the world.

A senior oil trader at a major European bank said only very large players could now survive in commodities: “They (Credit Agricole) wanted to have a commodities arm but the appetite for risk was so small it was impossible to do big deals.” Credit Agricole, which has expanded from its agricultural origins in recent years, said on Wednesday it would cut 2,350 jobs and exit 21 of the 55 countries where it operates and shutter entire businesses including equity derivatives. BNP Paribas, Europe’s trade finance leader in commodities, has been cutting its trade finance portfolio, drastically reducing exposure to small and medium sized oil and metals firms and reselling part of that exposure, bankers say. A spokeswoman declined to comment.