By Melanie Burton
(Reuters) - A flurry of new metal trading desks that has sprung up this year reflects an industry realignment as bigger players downsize, but in a market still strapped for capital only the thriftiest will survive, industry sources said.
At least six companies have won a mandate to expand their metals businesses in the past six months, backed by Chinese and private capital, often set up by traders who have left large merchants.
Hartree Capital, Viant Commodities, state-owned China aluminium maker Chalco and mid-size Kyen Resources are among firms that have made fresh investments into metals in the past few months, with new hires from commodity trading houses like Swiss-based Gunvor and Noble.
They follow in the footseps of Geneva-headquartered Zopco and London-based Concord Resources that were set up late last year, helping to stem a tide of departures that has thinned the ranks of the industry since 2011.
The smaller, more nimble players are seeking to fill a void left by the exit of banks and hedge funds from metals markets in recent years, said analyst Robin Bhar of Societe Generale (PA:SOGN) in London.
Some of the new ventures are backed by private equity groups, and a few have put in their own funds, leading to smaller overall trade books and sometimes more tightly-controlled investment and trading decisions.
"If they can set up now and take advantage of a market recovery they'll get a good deal ... whether they have enough cash resources or the backing remains to be seen," said Bhar.
The hires have come in part after large commodity merchants downscaled their metals desks to focus on oil where a contango structure - when forward prices are higher than spot - has offered easy paper gains.
This pushed some metals traders to seek new roles or set up their own shops.
Gunvor dismantled its Singapore-based metals business in February and its global head of metals, Rene van der Kam, set up Viant Commodities in June with offices in Singapore, Hong Kong and Shanghai and 15 staff.
As big traders focused on big deals to ramp up revenue, niches opened up to service more traditional, smaller clients.
"What we noticed, is that as our large trading company grew and grew, so did their appetite in terms of size of deal," said one industry source who has set up a desk in the past year.
"Smaller producers with less than 1,000 tonnes a month were dropping off the radar. A lot of traders have focused exclusively on sales into China and that comes at the expense of servicing the world," he said.
LOOKING FORWARD
Chinese money flowing into metals shops is in part from state-owned enterprises taking a long-term view of the cycle, while private equity supporters are opting to buy a team cheaply that can eke out a profit near the bottom, and be primed to reap the rewards when the cycle turns, said analysts and investors.
"Private equity thinks this bear market is getting a bit long in the tooth," said an industry source in New York, but he questioned how many new shops will make money.
The market has become tougher as rockbottom interest rates hollowed out margins and changes to London Metal Exchange (LME) warehouse rules deflated once lucrative premiums to ship metal.
But giant merchants like Trafigura have been able to ride out the five-year bear trend, dominating large volume trade and holding on to the top tier of clients
"This market is tough. There is not a lot of money to be made," said a private equity source active in commodities.
"Not that many people are making money in financial trading. In physical markets and metals, everyone I speak to is one step short of disaster."
The daily value of the copper contract on the Chicago Mercantile Exchange (CME) more than halved to $8.6 billion (£6.5 billion) in February from a 2011 peak of $18.8 billion. It has since recovered to $10.2 billion.
Still, more firms are hiring. Hartree, half owned by PE giant Oaktree Capital, took on three metals traders for its London office last month. It is also building out a presence in Shanghai, two sources familiar with the matter said.
"For private equity it makes sense with interest rates so low, it's one of the better asset classes," another industry source said.
"I don't think anyone is calling for a reacceleration of China but there is opportunity to trade around fundamentals - zinc is up 40 percent this year. As long as the market is doing what you expect then you can make money."