JPMorgan Chase & Co. is looking to sell its metal concentrates business due to U.S. regulatory restrictions following its acquisition of RBS Sempra Commodities, and currently faces a deadline of mid-year, industry sources told Reuters.
Stamford, Connecticut-based JPMorgan Metal & Concentrate LLC, led by Chief Executive Philip Bacon, is a small part of the bank's expanded commodities division. It is a mid-sized player in the increasingly competitive market for trading concentrate -- ore that has been crushed and milled to remove waste and increase the metal component.
The planned sale will raise questions about the future of UK-based Henry Bath, the global metals warehousing firm, because the Federal Reserve has previously barred a commercial bank -- the Royal Bank of Scotland Group -- from owning both assets, industry sources said. For a full story on the Fed and commodities:
At least one company with its own international base metal concentrate trading operations kicked the tires on JP Morgan's unit late last year, but walked away without pursuing it further, a source familiar with the process told Reuters. The reason for the withdrawal is not known.
Four other senior industry sources also said the business is for sale, although the sources did not have direct knowledge of any specific discussions with JP Morgan. Some traders have questioned whether the bank will find a buyer in the ultra-competitive market.
The unit trades copper, zinc and lead concentrates, a type of intermediate product that smelters use as raw material to make refined metals.
Because concentrates are not traded on any derivative exchange, the U.S. Federal Reserve had required RBS to divest or shut down the business within two years when it granted approval to the UK bank's acquisition of a stake in Sempra Commodities in 2008, according to its published order.
JP Morgan then bought the same operation in mid-2010 as part of its $1.7 billion acquisition of RBS Sempra's global metals and oil business. The bank has not received any explicit authorization from the Fed to carry on operating the business. Talks with the Fed are ongoing, sources say.
The new two-year deadline for the sale -- which the Fed has the option to extend -- is fast approaching.
A JP Morgan spokeswoman declined to comment for this story.
A COMPETITIVE MARKET
The trading team is well respected, although it is thought to be dwarfed by the bank's London-based physical metal trading business, sources said. The unit traces its history back to MG Metals, the Metallgesellschaft operation that dominated the metals market in the 1990s and was later bought by Enron.
It can be a hugely profitable business through spot or long-term contracts. When mine output falls, so do charges that miners pay smelters to treat and refine their material as smelters scramble for raw material.
In 2010, copper concentrate supply was so scarce after swathes of mining capacity were shuttered during the global economic crisis that charges plunged to zero and there were reports of Chinese copper smelters paying mines for material.
(Concentrate trading) is playing games on long-term supply. You make it through buying offtake, waiting until the market's tight and selling it on, said a European concentrate and cathode trader.
Competition for spot deals is even more fierce, with smelters such as Japan's second-largest smelter Sumitomo Metal Mining Co often buying direct from major miners, such as BHP Billiton.
There are a few spot opportunities from Indian and Chinese smelters, which buy a small portion of their annual requirements on the spot market, but the market has shrunk.
Industry consolidation such as Freeport-McMoRan Copper & Gold's acquisition of Phelps Dodge has created ever-larger companies with their own mining and smelting facilities.
The JP Morgan concentrates trading business has not expanded much since the 2008 buy-in by RBS -- likely because of the regulatory uncertainty, market sources said.
Other rivals in the competitive, opaque market include some of the largest, privately owned commodity houses, including Trafigura, Traxys and Louis Dreyfus and London and Hong Kong-listed Glencore International PlcL>.
As a result, some market watchers have questioned whether JPMorgan will find a buyer. Along with its traders, the value of the unit would be based on its supply agreements with mines.
JPMorgan Metals & Concentrates has at least three agreements to buy concentrate that produce the equivalent of about 43,000 tonnes of copper metal and 23,000 tonnes of zinc metal per year from Australian copper and zinc mines. But one of its copper deals will terminate on July 1.
One life-of-mine agreement, nominally until 2021, is for all zinc concentrate production from Terramin Australia's Angas zinc mine in southern Australia, which is expected to produce 57,000 tonnes of zinc concentrate this year, the firm said in January.
The division also has the long-term offtake for Hillgrove Resources' recently commissioned Kanmantoo copper mine, also in southern Australia, which will have capacity to produce about 80,000 tonnes per year of concentrate, containing about 20,000 tonnes of copper metal, once it has ramped up.
The third deal, which started in January this year, is for some 47,000 tonnes of copper contained in concentrate over two years from Straits Resources' Tritton copper mine.
However, the Perth-based miner said in a briefing on December 16. it will exercise an option to terminate that deal on July 1, paying a $9 million fee to its offtake partner to do so.
When the Fed approved in March 2008 RBS' purchase of a 51-percent stake in Sempra Commodities, they were the most generous terms ever given to a bank to engage in physical commodity trading activities.
The order allowed RBS Sempra to carry on with activities including third-party refining agreements to supply crude or buy products and trading in commodities like nickel that were not listed on any U.S. exchange.
The Fed had not allowed a bank to engage in those activities before. But it drew a hard line on two aspects of Sempra's business: owning, investing in, or operating storage facilities for commodities; and making and taking physical delivery of commodities that are not Approved Commodities, including metal concentrates.
RBS did not ultimately need to divest those businesses, including the Henry Bath metal and soft commodities warehousing operation because within two years, JP Morgan would purchase the majority of RBS Sempra.
In addition to selling the concentrates business, JP Morgan may also have to offload all or part of its warehousing operation Henry Bath, which made a combined after-tax profit of $193 million in 2009 and 2010.
There is no evidence yet to suggest JP Morgan is talking to potential buyers about Henry Bath, but many industry officials say that could be next - unless they manage to convince the Fed it should be allowed to keep it in some capacity, possibly as an arm's-length merchant banking investment.
The U.S. portions of Henry Bath were considered non-compliant, so RBS was going to have to reapply to the Fed to get them to reconsider the issue, or shut them down, says one industry executive who was familiar with the process.
My sense is that the Fed might be more conservative today in light of the banking crisis in terms of what authorizations it might be willing to give.
(Additional reporting by David Sheppard and Jonathan Leff in New York)