LONDON - The landscape is changing for commodities merchants as global economic strength swings east, encouraging them to diversify into new products and increase scale while they also can skim the best traders off struggling hedge funds and banks.
Moves by European and U.S. trading houses to leverage and expand their businesses from a focus on only one or two markets have led to a flurry of recruitment of high-profile traders in metals and agricultural commodities.
"Capital is concentrated in the larger trading organisations who can afford to expand into new product areas. Small niche players are being squeezed out of the market as they can't get transaction finance," said Jakob Bloch, chief executive of recruitment firm Commodity.
In May, Barclays lost its commodities trading chief, Roger Jones, to Swiss trader Mercuria, which recently started to trade grains and agriculture products as it diversifies out of energy. More hires are expected.
"On the one hand, you want to diversify your exposure as much as possible," said a source at a London-based commodities brokerage.
"On the other hand, the same factors are influencing the same markets, so you can leverage your expertise in certain areas, whether it's a global network of offices, risk systems or their ability to access capital."
Mercuria has spent seven years trading refined energy products in China, giving it good knowledge of the markets, a license to trade and the confidence to trade other commodities.
Rival Swiss-based Trafigura has also expanded rapidly over the past two years and is now a major player in many commodities including oil, non-ferrous and bulk commodities.
AGS GOLD RUSH
On the other side, players that have traditionally focussed on agriculture have been trying to establish a stronger foothold in oil, Bloch said, including Cargill and Louis Dreyfus.
"There are others who are looking to expand specifically into the ags sector," Bloch said, without divulging names. "This is most likely as many people currently see this industry as the 'gold rush' ... based on growing food consumption."
The major trading houses decline to comment on strategy and recruitment.
"The big trading houses have always dominated, but they are now looking at owning more of the value chain. It's about decreasing their risk, and seeing opportunities to do that," said a partner at a commodities recruitment firm.
"In that regard, in terms of jobs, they are cherry-picking the best, but it also ultimately means there will be people on the streets."
He pointed to the potential merger of commodities trading giant Glencore and mining company Xstrata.
"When that's all done and the dust has settled, there will be people out of a job when that cross-over occurs. That's the underlining trend," he said.
In a bid to minimize its risk, French bank Natixis said in May it would close its commodities brokerage division. As one of the oldest ring-dealing members of the London Metal Exchange, the bank has become the latest victim of the European debt crisis.
Hedge funds focused purely on commodities or running diversified portfolios that include raw materials also mostly suffered in last year's markets. The average commodity fund fell about 6 percent, according to Chicago-based Hedge Fund Research.
"It's got to that point where all these guys (trading houses) realise they probably have access to the types of trader that three or four years ago would have been choosing to go to hedge funds or banks," the first source at the commodities brokerage said.
Dozens of traders have recently quit top commodities trading banks such as Barclays, Goldman Sachs, Morgan Stanley and Merrill Lynch to traders such as Glencore, Vitol, Gunvor and Mercuria.
Healthy banks that have not succumbed to the global credit crisis have also spotted an opportunity to diversify.
New York-based investment bank Jefferies Group Inc made its first foray into the commodities market last year when it bought Prudential Financial's Prudential Bache commodities and financial derivatives business.
This month, Newedge Group global head of metals Mike Frawley left to join Jefferies, dealing a blow to the commodities business of one of the world's largest brokers. Days later three Newedge senior metals dealers also resigned.
Newedge is co-owned by French banks Credit Agricole CIB and Societe Generale, which are cutting their exposure to dollar financing, reducing debt and boosting their capital ratios as the euro-zone debt crisis deepens.
With the focus intensifying on Asia, traders are ratcheting up operations in China, the world's largest buyer of commodities and whose exchanges are playing a growing role in pricing resources.
Trafigura announced in May that Singapore would become its main trading centre, and rival Swiss-based trading house Gunvor said it planned to expand its activities further in the Asian city state.
"The generic appetite for Asia is picking up and this likely fits with the general move of Trafigura and BHP Billiton over to Singapore," Bloch said.
That means the dwindling number of jobs that are available are in Asia, cutting out most Western traders who don't have the necessary qualifications.
In one recruitment advertisement, a Swiss trading house is looking for a LME portfolio manager to be based in China.
"The criteria is so specific that there are few European traders who speak the local language, understand the culture, and are willing to work in such an isolated environment," said specialist metals recruiter Jordan Lewis at Cavendish Bloom.
"Emerging market jobs want emerging market candidates."
(Additional reporting by Melanie Burton and Christopher Johnson; Editing by Veronica Brown and Jane Baird)
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