Credit Agricole Shutters Commodities Business

Credit Agricole will stop trading commodities and will also slash its financing of the multi-billion-dollar market, the most sweeping commodity cuts yet among European banks strained by the euro zone crisis.

Credit Agricole, the formerly farm-focused bank that had boosted its energy trading in recent years, warned on Wednesday of losses and write-downs as it struggles to cope with the credit crunch. The cuts come just weeks after rival Societe Generale shut down its year-old U.S. gas and power trading desk, and leader BNP Paribas consolidated.

The deepening euro zone debt crisis has hit French banks hard as traditional sources of dollar funding have evaporated and as they face pressure to meet tougher capital requirements.

Volatile commodity prices, dimmer growth prospects and tougher regulation are also forcing some firms to question the outlook for the decade-long boom in trading raw materials.

Cargill Inc., which has voiced a bleaker economic outlook for next year than most of its peers, is cutting 125 jobs worldwide from its energy, transportation and metals operations as part of plans to reduce 2,000 or 1.4 percent of its global workforce over the next six months.

Trade sources said more companies may follow.

"What is happening with Credit Agricole is certainly a major trend across banking where the entire commodities trading business is shrinking," said a senior commodities trader who recently left a major bank for an independent trading house.

"It is happening because of regulations, as proprietary trading is not allowed any more and because people have overspeculated in the past years and got badly burnt."

Credit Agricole's commodities trading employs around 100 staff globally, including traders, analysts, marketing teams and technical staff, sources close to Credit Agricole said.

A source in the bank said many employees had only learned of the closure of the commodities trading unit on Wednesday:

"It has all happened very quickly. It is a shock."


On Wednesday, Credit Agricole Chief Executive Jean-Paul Chifflet said the bank was pulling out of commodities because it had less expertise in the field than other core areas:

"We preferred to stop it completely and devote our energy to other activities," he said.

But Chifflet told Les Echos newspaper the bank would not sell its holding in Newedge, a commodities futures and clearing brokerage it co-owns with Societe Generale.

Last year, the head of Credit Agricole's commodities trading division, Martin Fraenkel, told Reuters energy was a key growth area because "clients of the bank have ever more need for hedging services in these markets". The bank had just secured a potentially potent tie-up with power trading giant ETF Trading.

But nearly two years on, European banks are under enormous pressure in credit markets and only very large banks have scope to expand. Credit Agricole may be the first of several banks to drop commodities trading, said the senior commodities trader:

"The major players - Goldman Sachs, Morgan Stanley, Merrill Lynch, Deutsche Bank - are still hiring to replace people who leave to funds and trading houses. But small and medium-sized banks are just shutting everything down."

Morgan Stanley said on Wednesday it would cut 1,600 employees in the first quarter; it did not say how many, if any, would be in its commodities division, which ranks with Goldman Sachs and JP Morgan as one of the three largest in the world.

A senior oil trader at a major European bank said only very large players could now survive in commodities: "They (Credit Agricole) wanted to have a commodities arm but the appetite for risk was so small it was impossible to do big deals."

Credit Agricole, which has expanded from its agricultural origins in recent years, said on Wednesday it would cut 2,350 jobs and exit 21 of the 55 countries where it operates and shutter entire businesses including equity derivatives.

BNP Paribas, Europe's trade finance leader in commodities, has been cutting its trade finance portfolio, drastically reducing exposure to small and medium sized oil and metals firms and reselling part of that exposure, bankers say. A spokeswoman declined to comment.

In November, traders said the bank would close its Houston energy trading office and move some of the team to New York. It has also lost a senior metals trader.

Last week, Societe Generale told employees it would shut down its Stamford, Connecticut-based physical gas and power operation and lay off most of the 140 or so employees at the trading unit it bought less than a year earlier from RBS Sempra.


Many details of the changes only emerged on Thursday.

The bank's commodities derivatives business, trading oil, gas, metals and softs, is based in London and Hong Kong. It also has market representatives in Tokyo, Singapore and New York.

Credit Agricole has been active in oil hedging, traders said, and does not have a reputation for taking on major risk.

"It was very flow-based, rather than proprietary," said a London-based trader with a bank. He said the bank hedged oil positions for airlines, taking positions on over-the-counter jet fuel derivatives and gas oil on the IntercontinentalExchange.

Sources close to Credit Agricole say the bank also plans to cut dramatically its commodities trade financing, which involve commitments of tens of billions of euros, but the exact scale of the retrenchment was unclear.

"In terms of commodities financing, they plan a very, very strong reduction in their activities," a source close to Credit Agricole said, adding the full array of short-term and longer-term letters of credit and export credit would be affected.

The bank's Geneva-based trade finance activities have about 120 people spread around the world, according to a former head of a commodities unit at Credit Agricole Corporate and Investment Banking who left the company just months ago.

Credit Agricole's commodities financing activities concern around 600 people, of which at least half are in France, and involve commitments of tens of billions of euros.


Cargill is not alone among trading houses responding to a disappointing 2011 performance, Swiss-based coal traders said.

Coal has been a particularly tough market for traders this year because prices have been largely stagnant and liquidity has been lower. Without liquidity and volatility, trading profits have been hard to come by.

"We can confirm that as a result of the internal structural changes there have been some personnel changes which will affect around 125 employees in our Energy, Transportation and Metals operations around the world," a Cargill spokesman said.

Cargill has 600 employees in its Geneva office and around 1,100 worldwide in the non-oil Energy Transportation Industrial (ETI) business group.

Cargill will keep the split in its energy business between oil and non-oil with a global non-oil division made up of coal, gas, power and carbon trading and headed by Frank Rivendal, formerly head of power and gas in the U.S. for Cargill.

"Broadly speaking, the big changes are over and very few have been fired so far but there may be a few more job cuts," one source said.

"In 2008-2009 everybody made money because prices were so volatile but this year prices have been stagnant and for the first time in a decade, even the big trading houses are facing a downturn in earnings," he added.

Last month Cargill former head of coal based in Geneva, Patrick Bracken, left to return to the U.S. and Peter Biston, Geneva-based head of power and gas, a junior gas trader and a power trader lost their jobs.

Cargill Ferrous International in November shut its physical steel trading desks in Hong Kong and Geneva and its top sugar trader, Jonathan Drake, left in early December .

"That (restructuring) makes sense. In the previous structure oil made a lot of money and they couldn't bonus traders as power and gas were down. Now oil can live or die by its own performance," said Peter Henry, senior consultant with Commodity Search Partners. (Additional reporting By Jonathan Leff; Editing by David Gregorio)