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Is fire sale in store as banks exit warehousing biz?

Keywords: Tags  JP Morgan, Henry Bath, London Metal Exchange, Goldman Sachs, Metro, Rotterdam, Detroit, metals assets queues

LONDON -- JPMorgan Chase & Co. understands the corrosive effect that political and regulatory scrutiny can have on perceptions of value better than most participants in the metals market.

When the bank first bid for a large chunk of RBS Sempra Commodities LLP at the start of 2010, it valued the metals, oil, gas and power assets at $4 billion. But by April of  that year, Barack Obama’s support for a plan to put a halt to proprietary trading within deposit-taking banks had prompted JPMorgan to slash its bid to $1.7 billion.

Rival bidders Deutsche Bank AG and Macquarie Bank Ltd. apparently felt even that was too steep a price for a business that was about to have its wings clipped by former Federal Reserve chairman Paul Volcker.

Fast forward three years, and a Senate investigation into the activities of banks in physical commodities, as well as a Federal Reserve review of the same subject, has prompted JPMorgan to look critically at the future value of the assets it acquired in the RBS Sempra deal.

Pre-empting the possibility that politicians will vote through legislation barring its activities in physical commodity markets, JPMorgan announced on Friday July 26 that it is seeking a buyer for its various power, oil, gas and metals assets, which include the Henry Bath warehouse business.

But with Goldman Sachs Group Inc. also putting its Metro International Trade Services LLC warehouses up for sale, and ahead of measures to reduce queues in the London Metal Exchange warehouse network set to come into force next April, industry sources anticipate that the bank will find itself low-balled by potential buyers of Henry Bath.

“This could become a bit of a fire sale,” one warehousing source said, adding that even prior to the LME’s action to tackle queues, Goldman Sachs was finding its efforts to sell Metro a chastening experience.

“The story is that they were looking for $800 million, and everybody started under-bidding one another. One said he wouldn’t even pay $300 million, and the next said he wouldn’t pay $200 million,” he said.

Valuing a warehousing business is not an easy task, but the process hinges on the calculation of rental income that can be derived from the stocks stored by the business at the time of sale, while other factors such as auxiliary logistics services and the tenure of lease-holdings also need to be considered.

Although that income will dwindle if the LME imposes its new rules, the queues that exist at Metro’s stronghold in Detroit at least provide a guaranteed forward rental income for the company.

But accounting for the rental yield from Henry Bath’s warehouses, where there are no significant queues, is a more difficult proposition.

The fact that a large proportion of the stock stored in Henry Bath sheds is financed by JPMorgan makes that calculation more problematic still, as potential buyers will have to weigh  the possibility that stock will be poached by its rivals if and when JPMorgan winds down its physical trading activities, market sources claimed.

For example, at its base of operations in Rotterdam, where 41 of its 69 LME-approved warehouses are located, Henry Bath is understood to be holding a large aluminium inventory for JPMorgan, after the bank ordered upwards of 500,000 tonnes of material for withdrawal from Pacorini Metals BV’s warehouses in Vlissingen, the Netherlands, in early 2012.

One of the questions for any buyers of the Henry Bath business will be what are the company's future plans are for that material.

“There’s no time limit to find a buyer, so it’s not as though they’re going to be selling off all their stock cheaply. It could be years before a buyer is found, and then one day they’ll wake up and find they’re owned by someone else. In the meantime it will be very much business as usual,” an observer of the bank told AMM sister publication Metal Bulletin.

Nevertheless, potential buyers of Henry Bath will recognize that, given the uncertainty over JPMorgan’s future activities in the market and the LME’s impending action to reduce queues, they have an opportunity to talk the assets down and pick them up for a song.

JPMorgan declined to comment.

A version of this article was first published in AMM sister publication Metal Bulletin.

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