In order to boost its commodities trading business, Morgan Stanley (MS - Analyst Report) has taken over the bulk commodities trading books of Deutsche Bank AG (DB - Analyst Report), per a Reuters report. This comes on the heels of the legal troubles currently hounding the physical commodities businesses of many Wall Street banks, including Morgan Stanley.
The acquired business of Deutsche Bank deals in coal, iron ore and freight forward contracts. With this acquisition, New York-based Morgan Stanley will re-enter the iron ore derivative trading business from which it retreated last year. Also, the deal will expand its coal and freight contracts business.
Commodities trading, including spot trading in iron ores and coal, has flourished in recent years. Some other banks have shown interests in commodities and power trading businesses too. According to a Reuters report, on Jul 1, Citigroup Inc. (C - Analyst Report) acquired the power trading books of Deutsche Bank in order to boost its energy trading business.
In recent times, the physical commodities business of many banks, including Morgan Stanley, has undergone severe regulatory and political scrutiny. Buckled under regulatory pressure, Morgan Stanley is currently offloading its interest in U.S.-based oil storage and transport company Transmontaigne.
It is also in the process of selling its physical oil business to the Russian energy giant Rosneft. Morgan Stanley’s efforts to expand its commodities derivatives trading business probably aims at compensating the eroding physical commodities businesses.
For Deutsche Bank, the move was part of winding down its commodities trading business due to regulatory pressure and lower profits. Notably, in Dec 2013, the German bank had announced closure of its trading operations in energy, agriculture, base metals, coal and iron ore, while continuing with precious metals and a few financial derivatives traders.
Besides Deutsche Bank, another European counterpart Barclays PLC (BCS - Analyst Report) initiated a similar move by closing its power-trading desks in London and New York in Feb 2014.
Morgan Stanley currently carries a Zacks Rank #4 (Buy).