JPMorgan deal propels Mercuria to elite commodity club

Posted by Anton Murray Consulting on 20 Mar, 2014

Dmitry Zhdannikov and David Sheppard

The big three just became the big four.

Mercuria’s purchase of JPMorgan’s physical commodities business marks the culmination of a 10-year journey for Swiss traders Marco Dunand and Daniel Jaeggi, two men who transformed a small trading house into an operation to rival the biggest in the natural resources business.

Dunand and Jaeggi started Mercuria in 2004 when they took a stake in Poland-focused trade house J+S, but buying the largest oil and metals trader on Wall Street for $US3.5 billion catapults them into the elite club of global commodity titans, alongside Glencore Xstrata, Vitol and Trafigura.

Dunand said on Wednesday he and Jaeggi’s combined 60-plus years of trading experience, starting at agricultural dealer Cargill before rising through the ranks at storied commodity firms such as Goldman Sachs’ J.Aron operation and oil-trader Phibro, had prepared them for the challenge.

“I could of course tell you that I want to be the king of the world but the reality is we are changing to adapt,” Dunand told Reuters. “We want to be fast growing in an ever changing world. Our model is very much between a traditional trading company and a bank.”

Few would rule out further expansion.

Roman god of trade

Mercuria, named after the Roman god of trade, was growing rapidly even before the JPMorgan purchase. Turnover in 2013 was above $US100 billion for the first time, with profit estimated at over $US400 million. The firm’s current 700-strong headcount will likely expand markedly after the JPMorgan purchase. The bank’s physical commodity division currently employs around 600 people, including traders and commercial operators

The total value of the deal was $US3.5 billion, JPMorgan said in a statement, slightly higher than the $US3.3 billion the bank valued its physical operations in an early prospectus, according to industry sources. The all-cash deal is expected to conclude in the third quarter this year.

The business includes a large North American energy operation, including vast storage tanks near the Canadian oil sands, substantial gas and electricity trading operations, and a supply and trading deal with one of the largest refiners on the East Coast of the United States.

It also includes the Henry Bath metals warehousing business, which should help Mercuria’s metals trading operation, led by ex-Barclays commodities chief Roger Jones since last year.

Dunand said valuing the JPMorgan business, hammered out in New York since the firms entered exclusive talks last month, was an ever-changing target, as it included the bank’s stockpiles of industrial metals and oil.

“The complexity of the deal was massive,” Dunand said. “You have to agree on every word in 1500 pages of documents. And you are buying a moving thing, because JPMorgan’s traders keep trading.”

Looking for strategic Asian investor

Dunand said while the company had no plans to go public like London-listed Glencore, it was still looking to sell a sizeable stake in the firm to a strategic investor in Asia.

That plan, which could see a long-term buyer take as much as 20 per cent of Mercuria, was first aired last year, but put on hold while they finalised the JPMorgan deal.

Dunand and Jaeggi, both in their early 50s, still own almost one third of Mercuria between them, with around half belonging to senior employees through equity schemes.

The remaining share remains with J+S’s founders, including Grzegorz Jankielewicz and Slawomir Smolokowsk, who focused their business on supplying Polish refiner PNK Orlen with Russian oil.

The J+S business expanded into shipping Russian oil to China, before Jaeggi and Dunand, fresh from starting US energy firm Sempra’s European trading business, were brought on board.

In June 2004, shortly after launching Mercuria, Dunand told Reuters “the ultimate step is to have your skin in it,” for any trader looking to make their fortune.

“Mercuria has been such a fast growing company that it feels normal to see them expanding this way,” said Olivier Jakob, an oil analyst at Petromatrix in Zug, Switzerland.

“In terms of management it is a bigger challenge. It’s always a little more challenging to expand the business through acquisition rather than through internal growth.”

Cultural challenge?

Jakob said Dunand and Jaeggi were widely respected as strong leaders, but firms such as Vitol, Glencore and Trafigura would be prepared for the challenge of a newly-expanded rival.

One question mark hanging over the deal is Mercuria’s ability to absorb a large bank team into their existing culture, something JPMorgan initially struggled with after its rapid-fire acquisition strategy at the end of the last decade, including the physically-orientated RBS Sempra business.

“It will be interesting to see whether Mercuria will want to keep us on or not, and whether they will attempt to move our desks to Geneva,” one JPMorgan trader in London said.

“Most of us want to stay here.”

But industry sources say Mercuria has always been keen to hire big-name traders away from banks, a trend that has accelerated since the financial crisis, with Wall Street facing greater restrictions on bonuses and proprietary dealing.

“If you look at their biggest hires over the last couple of years they’ve been one of the biggest beneficiaries of the trend for commodity traders to leave banks for trading houses,” said Jake White, head of front-office commodities recruitment at Selby Jennings in London.

“There’s always a cultural change to get over, especially if anyone is relocating from London to Geneva, but Mercuria are perhaps better placed than most to manage this.”

US crude by rail patch

One of the biggest potential benefits for Mercuria is that the deal will vastly expand its capabilities in North America, where the energy trading landscape has been upended by the shale oil revolution.

Pipeline bottlenecks and the growth of crude-by-rail has created numerous opportunities for savvy trading firms to make money by arbitraging price differences on crudes and refined oil products around the continent.

The JPMorgan business will give Mercuria one of the largest stakes in the fast-growing US crude-by-rail patch, helping to ship almost a fifth of the shale oil produced in the Bakken fields of North Dakota to Philadelphia Energy Solutions’ 350,000 bpd refinery on the US East Coast.

The so-called “supply and offtake” deal with that plant will also give Mercuria a stronger foothold in the key NY Harbor refined products market, which plays a significant role in setting the price of gasoline, diesel and heating fuel consumed in the United States.

“In that respect we want to be in the US, we want to be part of those plays that the US shale revolution has created,” Dunand said. “We want to go into value chains and be in places where we see imbalances.”

Significantly, Mercuria will get access to the JPMorgan’s long-term leases on over 6 million barrels of crude oil storage in Hardisty, Alberta, the heart of Canada’s oil sands industry.

‘We want to remain flexible’

Alongside Mercuria’s existing stakes in a Canadian oil sands producer, this could give it greater insight into the region, as booming production and limited pipeline capacity create new trading opportunities.

After completing such a large deal with JPMorgan, Dunand is guarded about future plans, but didn’t rule out acquisitions.

“I really don’t know what the next big step for us could be,” Dunand said. “We want to remain flexible. Essentially we are laying out a platform which can quickly react to market changes. There are loads of opportunistic ways of growing.”

Speaking to Reuters shortly after forming Mercuria out of J+S back in 2004, Dunand stated that for him and Jaeggi: “This is the last move.”

Ten years on, it’s a promise you can’t imagine him making again.

The Australian Financial Review

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