Recently, Wall Street Journal reported that JPMorgan Chase & Co. (JPM - Analyst Report) has commenced the proposed sale of its physical commodity business. The company in the offering documents valued the assets at approximately $3.3 billion and stated that the business generates about $750 million of income annually (excluding compensation expenses).
Earlier in July, JPMorgan had announced its plan to exit the physical commodity business, including stakes in commodities assets and physical trading operations. This step came amid heightened regulatory and political scrutiny of banks’ ownerships in such assets.
JPMorgan expects bidding offers for the physical commodity business to start coming from the end of October. The company is seeking offers for the purchase of the whole business or a single division within the business that comprise global crude, North American power, North American natural gas, European power and gas, base metals, coal and the Henry Bath metals warehousing networks.
Notably, out of the total assets’ value, the largest is for the crude business ($1.7 billion), followed by North American natural gas ($800 million) and base metals ($500 million). Further, the major part of these high valued assets consists of trading inventories. Nevertheless, the crude division comprises a large number of storage facilities in Canada and the natural-gas business consists of gas fields and storage caverns.
Back in 2005, 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 building 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 – RBS-Sempra Commodities LLP.
However, over the last few years, the physical commodity business witnessed a fall in revenues across the industry. 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.
The amount of interest JPMorgan’s physical commodity business will be able to generate is yet to be seen. Other major banks such as Morgan Stanley (MS - Analyst Report) and The Goldman Sachs Group, Inc. (GS - Analyst Report) , have been trying to sell their physical commodity operations for a quite some time but are not able to find suitable purchasers.
New stringent regulations and low volatility have dampened interest in commodity trading. Hence, we believe that finding a buyer for JPMorgan’s vast and diverse physical commodity business will be quite challenging.
Currently, JPMorgan carries a Zacks Rank #3 (Hold).