Goldman to Vend Metal Warehouse Unit - Analyst Blog

Amid heightened regulatory and political scrutiny on banks' ownership of the physical commodity business, The Goldman Sachs Group, Inc. GS has initiated the sale process of its metals warehouse unit – Metro International Trade Services LLC. Notably, earlier Reuters reported about the proposed sale.

Importance of Commodity Business to Banks

The metals warehouse business has been significantly contributing to Goldman's revenues. Notably, revenues from commodity business of the top 10 investment banks including Goldman, Morgan Stanley MS and JPMorgan Chase & Co. JPM jumped 26% to $1.8 billion for the quarter ended Mar 31, 2014.

Rise in commodities revenues were driven by growth in U.S. power and gas revenues as a result of volatility created by the cold winter in North America. Moreover, investor product performance reflected improved client activity levels.

Over the past few years, commodities revenue at banks were on the downtrend. However, owing to supply-demand fundamentals and investors' confidence in diversifying their portfolios, commodities units have performed well year-to-date.

What Compels the Exit?

Though Metro adds to Goldman's revenues, the company doesn't consider it as a strategic fit anymore. Notably potential buyers have approached the company.  

Goldman bought Detroit-based Metro back in 2010 for around $540 million. Metro is engaged in running warehouses for storage of metals traded on the London Metal Exchange (:LME).

Goldman owns Metro in compliance with the “merchant banking” clause of the bank holding company act that permits banks to own commercial businesses for a holding period of 10 years.  Hence, Goldman can hold this investment till 2020. However, the Federal Reserve proposes to reduce such investment holding period for banks.

As banks' commodity business drew increasing regulatory scrutiny and public criticisms, in 2013 Goldman Sachs, JPMorgan, Switzerland-based Glencore Xstrata plc and LME were accused in a lawsuit related to the hoarding of aluminum and artificial rise in the metal price.

Metro's Detroit warehouse had the second-longest delivery time for aluminum of a whooping 683 days. Owing to excess waiting time, banks gain from increased lease payments, creating shortage of supply in the market that ultimately leads to artificial inflation in aluminum prices. As a result, many industries that are dependent on the metal, like the beverage industry and the automobile industry are affected.

In Conclusion

Goldman is not the only bank that is exiting from this commodity business, Barclays PLC BCS, Deutsche Bank AG, Bank of America Corp., JPMorgan and Morgan Stanley are some other banks that are streamlining the metal business owing to increased regulatory scrutiny and mass criticism.

While banks are striving for alternative sources of revenue in a still low interest rate environment, these are forced to reduce exposure to a lucrative segment like the commodity business.