JPMorgan Chase & Co. (JPM - Analyst Report) has moved a step closer towards selling its physical commodities business. Geneva-based trading house Mercuria Energy Group is being favored as the possible buyer over Sydney-based Macquarie Group and New York-based private equity firm The Blackstone Group L.P. (BX - Analyst Report). However, the final decision on the deal is expected to be taken by the end of this month.
It was in 2005 that JPMorgan received the Federal Reserve’s consent to trade physical commodities. Further, with the acquisition of Bear Stearns Cos. in 2008, which included an energy trading platform, the company began its physical commodity business. Additionally, in 2010, the company purchased Royal Bank of Scotland Group plc's (RBS - Snapshot Report) non-U.S. commodities joint venture with Sempra Energy (SRE - Analyst Report) – RBS-Sempra Commodities LLP.
JPMorgan’s physical commodities business comprises global crude, North American power, North American natural gas, European power and gas, base metals, coal and the Henry Bath metals warehousing networks.
However, over the last few years, the physical commodity business as a whole has witnessed a fall in revenues. Further, in Jul 2013, the Fed stated that it was reviewing its 2003 decision of allowing banks to pursue trading in the physical commodity market.
Therefore, subsequently, JPMorgan announced its plan to exit the physical commodity business, including the sale of stakes in commodities assets and physical trading operations. This step came amid heightened regulatory and political scrutiny of banks’ ownerships in such assets.
For Mercuria, the deal will accord to its strategy of expansion in diverse markets. Founded in 2004, the company has emerged as one of the world's major oil traders in less than a decade.
The deal with JPMorgan, if completed, will make Mercuria one of the top global commodities traders, like Glencore Xstrata plc (GLNCY), Vitol and Trafigura. Further, Mercuria’s expansion in the U.S. is expected to be beneficial as the shale oil boom is opening up new avenues for profits.
Currently, JPMorgan carries a Zacks Rank #3 (Hold).