Greenwich, Conn.-based Freepoint Commodities, founded last year by former RBS Sempra executives, is acquiring the Stamford, Conn.-based mineral concentrates unit of J.P. Morgan Chase & Co.
Freepoint Commodities LLC will buy J P Morgan Chase & Co’s physical metal concentrates business, reuniting chief executive David Messer with more of his former Sempra compatriots and building on his plans to create a physical commodities merchant business.
Freepoint, run by former Sempra head Messer, has signed a definitive agreement to buy J P Morgan Metal & Concentrates LLC, the U.S. investment bank’s physical base metal concentrates and copper cathode trading unit, it said in a statement on Wednesday.
The acquisition of this niche metals business, which includes about 25 staff, is a sizeable addition to the more than 150 employees Messer has hired to build his energy trading business since launching Freepoint last year with backing from the $10-billion Stone Point Capital private equity fund.
The deal is also significant for JPM, coming just months ahead of a deadline set by the U.S. Federal Reserve for the U.S. investment bank to sell off parts of its enlarged commodity trading operation that do not meet Fed regulations.
JP Morgan had two years to comply after it bought the bulk of RBS Sempra in 2010.
The terms of the deal, which is subject to regulatory clearance, were not disclosed. A JPM spokeswoman declined to comment on the situation.
MOVE INTO METAL
The acquisition makes sense given Messer’s background in metal and concentrates, which are a type of intermediate product that smelters use as raw material to make refined metals.
Many of the traders that worked for Enron Metals when it was bought by Sempra in 2002 under Messer’s leadership will be joining the new business. Those include unit head Philip Bacon.
“It’s a business we’re familiar with because it’s a business we owned when it was part of Sempra. It has a strong merchant platform for concentrates, provides a diversification from energy and encompasses a team of seasoned professionals with a proven record of success,” Messer told Reuters in an interview.
The business, which traces its history back to MG Metals, the Metallgesellschaft operation that dominated the metals market in the 1990s, will be called Freepoint Metals & Concentrates LLC.
It will focus on copper concentrate trading, but Messer did not rule out expanding into nickel, lead and zinc later.
Market sources say the business needs revitalizing after losing market share following the 2008 buy-in by RBS largely due to the regulatory uncertainty.
But the newly invigorated team will be up against well-known trading rivals, including some of the largest, privately owned commodity houses, including Trafigura, Traxys and Louis Dreyfus and London and Hong Kong-listed Glencore International Plc.
Even so, 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.
The business has 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 run by companies, including Hillgrove Resources Ltd, Terramin Australia’s and Straits Resources Ltd.
The Straits deal is scheduled to terminate on July 1.
The sale of the unit, initially reported by Reuters in March and expected this week, will raise further speculation about the future of Wall Street’s growing role in physical commodity markets. [ID: nL2E8FKFBN]
While the Federal Reserve has over the past decade allowed a dozen banks to freely trade physical commodities such as crude oil, wheat and copper, it has drawn a line at allowing regulated banks to own and operate hard assets, unless they do so at arm’s length under merchant banking terms.
Morgan Stanley and Goldman Sachs were given five years to comply with regulations after they converted to holding companies during the 2008 financial crisis. But JP Morgan had a tighter time frame after its $1.7 billion acquisition of RBS Sempra’s global metals and oil business in July 2010.
Because concentrates are not traded on any derivative exchange, the Fed had already required RBS to divest or shut down the business within two years when it granted approval to the British bank’s acquisition of a stake in Sempra Commodities in 2008, according to its published order.
Now additional questions are being asked about the future of Britain-based Henry Bath, the global metals warehousing firm, because the Federal Reserve previously barred the Royal Bank of Scotland Group Plc from owning such assets.
The bank has not received any explicit authorization from the Fed to carry on operating the business, sources told Reuters last month. Talks with the Fed continue, sources say.
Story by Josephine Mason