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Deutsche Bank takes a lead role in commodities

BARCLAYS and some heavyweight US investment banks are being outmuscled in the commodities markets by razor-sharp traders from Deutsche Bank who have cemented a leading role among the top players in dealing raw materials.

The German bank reported record-beating performance in commodities trading in the third quarter as it snatched business from rivals despite some of the sharpest falls in prices since the 2008-09 financial crisis.

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However, the performance in commodities trading failed to prevent Deutsche Bank’s corporate banking and securities division seeing a 93% drop in pre-tax profits to just €70 million – its worst three months since it made a loss at the end of 2008.

City traders say Deutsche trails only big US investment banks Goldman Sachs and JP Morgan and is on par with Morgan Stanley and Barclays.

Goldman is one of the world’s biggest commodities traders and has strong position in dealing oil futures.

The Frankfurt-based bank has reported its best-ever third quarter in commodities trading in July-September, which followed its best-ever second quarter for April-June and its second-best quarter ever in the first quarter of 2011.

Deutsche Bank’s outstanding performance this year was in sharp contrast with most of its rivals, which reported weaker contributions and reduced risk exposure to commodities.

“Commodities delivered its best third-quarter revenues ever, driven by good performances in precious metals, oil and gas,” Deutsche said in its third- quarter report, adding that commodities also generated record nine-month revenues.

The head of Deutsche’s commodities trading, David Silbert, told Reuters in an interview the bank expected yet further growth in its commodities business, which includes oil.

Commodities fall into two categories – hard and soft and are generally priced in dollars. Hards include industrial metals such as iron ore, copper, zinc and lead.

Softs are predominately agricultural products such as sugar, coffee, rubber, grains and pork bellies. Trading can be highly volatile with millions of dollars at stake.

Commodity markets suffered some of their biggest drops in years during the third quarter as worries about the European debt crisis escalated and the dollar surged against the euro.

The European debt debacle, which is weighing on many of Europe’s banks, is spilling over into commodities trading with French banks, the main financiers of trading houses, curbing their lending.

BNP Paribas and a handful of other European banks, including Societe Generale and Credit Agricole, provide most of the credit lines that underpin the business of the Swiss- based traders that dominate commodities markets.

Trade finance is a huge business, with lending at $114bn in the first nine months, down 6% year-on-year.

Industry executives said that as the banks have to bolster their capital buffers, credit to the trading industry is becoming scarcer and costlier, particularly in dollars, the currency of the global commodity markets.

Meanwhile, signs that China, one of the world’s largest consumers of raw materials, may no longer be counted on to bump up demand for industrial metals such as copper, iron ore and other commodities, also sent many investors in the asset class scrambling to get out of commodities.

Copper, for example, lost a third of its value in the third quarter and then rebounded by nearly 20% since then.

Among the Wall Street heavy-hitters, Morgan Stanley generated higher revenue from commodities in the third quarter as it piled on more trading risks. Combined revenue from its fixed income, currencies and commodities division (FICC) rose to $3.9 billion from $2.1bn in the second quarter and $847 million a year ago.

Wall Street-based Goldman, which posted a third-quarter loss, said its commodities business generated more revenue than in the second quarter although it had to sharply reduce its risks.

Bank of America/Merrill Lynch posted a third-quarter profit but said its FICC division suffered from weaker client activity and adverse market conditions.

JP Morgan said its third- quarter profit fell, blaming a poor showing in its FICC unit.

Swiss bank UBS, whose commodities trading mainly focuses on precious metals, said it had positive contributions from its commodities business during the third quarter.

Oils and gas major BP also said it had a higher contribution from gas marketing and trading and a stronger supply and trading contribution from oil and products.

Deutsche did not disclose revenues in commodities trading, but said it helped offset an otherwise mixed performance in sales and trading.

Its equities trading was affected by volatility, and credit trading experienced losses due to widening spreads, while foreign exchange trading brought in record third-quarter revenues due to significant exchange rate movements.

As a result, third-quarter net revenues from corporate banking and securities fell 38% year-on-year to €2.6bn.

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