Q4.3 2024

In its infant years, the 2020s looked likely to join the assemblage of recent decades dominated by the viscous narrative of oil. The curtain opened on a global pandemic, which soon graduated into a global energy crisis, all set to that familiar but sorrowful refrain of tension in the Middle East. Petromelancholia descended upon the West, as the proposed deadlines of environmental targets drew increasingly near, while the targets themselves retained their distance. As such, oil giants continued to dominate the commodities markets, with Vitol turning over $505bn in 2022 alone.

The state of things today is markedly different. The intervening twenty-four months have seen the mitigation of the global energy crisis through increased energy production and the diversification of supply, while observers have noted that the oil market isn’t reacting to Middle Eastern risk as strongly as it once did. As Bloomberg’s Javier Blas remarks, ‘the “war premium” is smaller, and it fades away faster.’

So, as the 2020s nears its half-way point, there is still the opportunity for another commodity market to define the incumbent decade. The chief contender is, of course, metals, which are forecasted for rapid demand growth due to the energy transition. In fact, it is well agreed that we are currently at the dawn of a new metals supercycle, particularly on the industrial metals side (copper, zinc, aluminium, nickel), but with precious metals (gold, silver, platinum) remaining characteristically strong, too.

Now, Blas himself describes metals trading as being historically the ‘poor cousin of energy trading’, with opportunities for profit crushed by the long-term kings of the market, Glencore Plc and Trafigura Group. But, with energy powerhouses (Vitol, Gunvor, and Mercuria) and the bulge-bracket investment banks (J.P. Morgan, Bank of America, and Morgan Stanley) re-entering the physicals market, the prospect of regicide has become more likely.

Predictably, the bidding war for the top metals traders in the world has been raging for some months now, and with new traders landing in seat before the close of the year, franchises have shifted their attention to growing middle office functions in support of these bolstered and increasingly ravenous front offices. What they find, however, is a very tight market, where metals risk talent is sparse and expensive. Here’s why:

The Magnitude of the IB Exit

Post-2008, as IB franchises crumbled or were bailed out at the buzzer and subsequently re- positioned and re-organised, the bulge brackets, almost uniformly, exited the physical commodities markets. Under pressure from regulators, the speculative nature of commodities trading placed too much exposure on savings capital, and the subsequent increased capital regulations and liquidity requirements meant the physical market was no longer worth the trouble—not to mention the ESG implications of commodities disasters, like the BP oil spill, a disaster in which Goldman Sachs, Citi, and RBS were all embroiled.

Instead, IB franchises erred on the financial side of commodities markets—commodities financing and the derivatives market—which require somewhat of a less developed risk function. As a result, the physical commodities risk skills were largely absorbed internally into financially oriented teams, particularly within the areas of emerging markets and corporate markets. With that, expertise of the complexities of the physical market: the handling, storing, transporting, and delivering of physical goods; price and volatility risk; and even relationships with relevant insurers and lawyers, severely atrophied within the IB sphere.

Lean Trading Houses

There was, of course, a select group of risk talent who made the shift from IB commodity businesses to specialised commodities shops post-crisis. Particularly, these movers were tracking at senior corporate grades and were brought in to lead risk functions. As it happens, the route from IB to trading house is still a viable pathway, with the powerhouse traders looking to extract talent from IBs that still have a physical footprint—Macquarie, ICBC, and SCB, to name a few—as well as those that are particularly present in the commodities financing space: Goldman Sachs, J.P. Morgan, Citi, and Morgan Stanley. While this route is still prevalent, the market is notably smaller than it was pre-2008.

For a long time, commodities trading houses were perceived as nebulous figures—a large majority of them are private operations with multiple siloed business arms and concurrent spin-offs—and have not been considered systemically important enough for regulators to turn their full attention to. Though the goal posts are beginning to shift here, trading houses’ risk functions have historically remained lean in order to maximise profit, whilst unencumbered by regulatory burden. Equally, Risk graduate programmes that run parallel have remained modest in size, especially in relation to the numbers that large banking institutions put up. The scope and volume of graduate programmes has been ramped up in recent years, though the maturation period for talent on more recent programmes does still leave a relative gulf at mid-senior to senior level, which is the level IBs returning to the market require in the first instance.

Another squeeze on the commodities risk talent market is that the route from trading house to bank is, to modernise a sentiment from Robert Frost, the road less taken (despite the traffic coming the other way.) The shift from the smaller, and generally flatter, risk teams of trading houses to the firmly hierarchical culture of IBs can prove to be a sticking point. Another obstacle that looms large is the regulatory burden faced by the banks; risk talent doesn’t necessarily jump en masse at this prospect. And while strong compensation packages can incentivise talent to move in this direction, even senior individuals often face a steep learning curve on the regs side, given their lack of exposure in the trading houses.

The Talent Pipeline

There is no escaping the fact that, in the immediate term, market players are vying for a very small pool of senior talent to lead and build out their Metals risk teams. In the context of compensation, naturally the market stirs itself up into frenzied competition. This constrained market at the senior end is unlikely to retract for the rest of the decade while the talent underneath matures, and thus we expect comp packages to float at a high level. The silver lining here is that market commentators generally forecast the metals boom to be more than a brief flash-in-the-pan, and thus IBs have the potential to ride the wave in the medium-to-long term. Consequently, beating out competitors for metals Risk talent through inflated compensation packages is unlikely to be one day regarded as a pyrrhic victory.

What must become a focus, especially for IB players, is the internal development of Associate and VP talent, which in turn will carve out succession lines. To do so, IBs can look to a variety of lending teams for parallel skills. The obvious bet here is to transition commodity financing risk talent into the physical markets off the balance sheet, but there are also rewards to be found in Trade Finance teams exposed to imports and exports; Project Finance teams who are likely to handle transactions for mining companies or large commodities producers at one time or another; and Structured Finance teams that cover complex derivatives that mirror the hedging complexity inherent in commodities markets.

In any case, all players re-entering the metals market must adopt a dual focus: they must keep one eye sharply on the external Risk talent market and the other on their internal reserves, giving their own talent pool a head start on a learning curve in what is likely to prove a very profitable market.

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