The British bank’s exit means three of the top five banks in commodities have significantly reduced or shuttered their natural resource trading arms since last summer, with profits hit by regulatory demands for lenders to hold more capital to shield them against any problems.

Barclays said it would exit most of its base metals, energy and agricultural trading but will continue in precious metals, some oil and gas derivatives products and index products. The smaller business will be based on electronic execution, it said.

The bank did not say how many jobs would be lost from its team of 160 commodities staff across trading, sales and research.

Barclays’ commodities arm was built up when Bob Diamond was growing his investment bank to challenge the big U.S. banks, especially Goldman Sachs and Morgan Stanley, who pioneered commodity trading on Wall Street 30 years ago.

Goldman and Morgan Stanley remain the two largest banks in commodities and several banks have given up the chase.

JPMorgan Chase and Co. is selling its vast physical commodities business to Swiss-based independent trader Mercuria for $3.5 billion, while Deutsche Bank announced late last year it was closing its oil, grains and industrial metals business (all figures US$).

Commodities trading revenue for 10 of the world’s biggest banks fell to $4.5 billion last year, down from more than $14 billion in 2008, according to estimates from analytics firm Coalition.

The Barclays business now ranges from providing hedging for wheat farmers or steel producers to allowing speculation on Brazil’s coffee crop.

The bank also runs a vault in London to store gold and other precious metals like rhodium, which Barclays will continue to operate, a person familiar with the matter said.

Barclays declined to comment on what businesses would be shut or potentially sold.

Barclays CEO Antony Jenkins plans to unveil a wider reduction in the size of his investment bank on May 8 as he attempts to cut costs and improve profitability by axing areas that have been hit hardest hit by tougher regulation. It could see thousands of jobs go.

Rocky AGM?

Jenkins faces a potentially rough ride at Barclays’ annual shareholder meeting on Thursday. The bank has been criticized at past annual meetings for some of its commodities activities and Jenkins is expected to be criticized for last year increasing bonuses for investment bankers despite a drop in profit.

A significant number of shareholders are expected to vote against the bank’s remuneration report in protest. But that vote is non-binding, and Barclays is expected to win approval for a plan to pay up to twice the level of employees’ salaries as bonuses under new European Union rules that cap pay for staff.

Barclays had already cut some of its metal, U.S. power and agricultural trading business, but in the past two years had also branched into new areas to bolster profits hampered by restrictions on trading with the bank’s own money and rising capital requirements.

The bank signed several supply and sales agreements with major oil refineries since summer 2012, including Essar Oil’s 296,000 barrel per day (bpd) Stanlow plant in Britain, Par Petroleum’s 94,000 bpd refinery in Hawaii, and Klesch’s 100,000 bpd Heide plant in northern Germany.

Mike Bagguley, head of commodities at Barclays, said in November the bank was starting to get “critical mass” as refiners became aware of their financing capabilities, including for crude deliveries and the sale of products like gasoline and diesel.

But commodities have also attracted increased regulatory scrutiny, and the U.S. Federal Energy Regulatory Commission (FERC) filed a lawsuit in a California federal court last year to recover some $435 million from Barclays for alleged power market manipulation. The bank disputes the charge.

Barclays said its retreat would have no material impact on its financial results.

In addition to Goldman and Morgan Stanley, Bank of America-Merrill Lynch also remains a big firm in the U.S. energy industry and Citi has expanded its commodity trading over the past year, sources said, while Commonwealth Bank of Australia has expanded its commodities financing.

Asian-Pacific and South American banks, including Australia’s Macquarie Bank and Sao Paulo-based BTG Pactual Banking, are also growing their commodities businesses.

— Steve Slater and David Sheppard are Reuters correspondents covering European banking and commodities respectively from London, England. Additional reporting for Reuters by Jonathan Leff and Jan Harvey.

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The trading company said in a statement on Monday it had modified the terms of the acquisition that was originally valued at $5.6 billion, including $2 billion of debt (all figures US$).

“Marubeni will acquire all of the assets and businesses of Gavilon except the energy business,” the statement said.

The statement did not give details of the amount of debt being assumed in the revised transaction, but said the sellers would receive $2.6 billion in cash while retaining the energy business.

The move confirms a Reuters report on Friday, and indicates Gavilon’s mid-sized energy business could now be on the market. Market participants had speculated Marubeni could offload an energy business not central to its plans.

“The interest was always in the grains, not the oil,” one source with direct knowledge of the Gavilon deal said last week.

Omaha-based Gavilon’s shareholders include investor George Soros, Dwight Anderson’s Ospraie hedge fund, and Egypt’s Orascom Construction Industries.

People familiar with the matter said Gavilon may consider other bids for its energy business, which it values at around $1 billion based on its exclusion from the Marubeni deal.

Its facilities, largely centred in the Midwest and on the Gulf Coast, could be attractive to rival traders or private equity firms looking for access to the North American energy boom.

Gavilon owns 8.5 million barrels of crude oil storage capacity in the United States, including more than 4 million barrels of tank space at Cushing, Oklahoma, the delivery point for the benchmark U.S. crude oil futures contract.

It also has facilities that can hold more than 10 billion cubic feet of natural gas. Gavilon was the 31st-largest seller of natural gas in the U.S. last year, according to reported sales to the Federal Energy Regulatory Commission.

An attempt to sell Gavilon’s energy business would place it in on the market at the same time as Hess Corp’s, trading arm, Hetco, which the oil company is divesting following pressure from activist investors to focus on oil and gas production.

Morgan Stanley has also looked at selling all or part of its energy-focused commodity division in the past year, with Wall Street facing increasing regulatory pressure and rising capital requirements.

— Aaron Sheldrick and David Sheppard cover the energy sector for Reuters from Tokyo and New York respectively.

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(Reuters) –– Commodity investments could near half a trillion dollars by the end of 2011 as the return of $100 oil and a broad-based rally heighten interest in the asset class to levels not seen since 2008.

But the wave of money now hitting commodities is more sophisticated and discerning than its predecessor three years ago. Investors are increasingly looking for active management rather than “buy-and-hold” plays, which left many counting their losses after the financial crisis hit.

Barclays Capital data and estimates suggest that, if prices remain as they are, total fund investments in commodities at the end of 2011 are likely to be around $420 billion. With any price appreciation, the total would be higher (all figures US$).

Barcap estimated that 2010 ended at a record high of about $360 billion invested in commodities by funds — a year-on-year increase of around $90 billion. Of that, about $60 billion was down to flows and the rest due to price rises.

“The overall environment remains positive, but we would expect to see a slowdown in momentum slightly as commodity prices have increased a fair bit over the course of last year,” said Amrita Sen, a commodities analyst at the bank.

“In terms of 2011… lower than or around $60 billion (in new inflows) perhaps, but a robust number nonetheless.”

Analysts now say half a trillion is within reach as big investors are still keen to allocate funds to the sector.

That number is still dwarved by the size of the global equity market, which was valued at $43.26 trillion as of Monday, Datastream figures show. But it is a huge increase from the roughly $80 billion invested in commodities at the start of 2005, according to Barcap.

Pension interest rising

Asset managers and pension fund consultants confirm they have seen a rise in enquiries and in fund flows.

“We do see a substantial part of our clients both on the private banking and institutional side increasing their allocation to commodities, and we are expecting more fund flows this year from institutions,” said Bas Peeters, head of structured investment strategies at ING IM, one of the world’s largest wealth managers.

Simon Fox, principal of the alternatives boutique at pension fund consultants Mercer, paints a similar picture.

“We have done over 20 commodity future searches (in 2010) and 10 have been in the active space — either for commodity fund of hedge funds or long/short commodity managers,” he said.

Active indexes largely outperformed the standard industry benchmarks in 2010. The Summerhaven Dynamic Commodity Index and the Credit Suisse Glencore Active Index Strategy both returned more than 20 per cent.

The S+P GSCI, meanwhile, returned just nine per cent, and the Dow-Jones UBS Commodity Index 16.8 percent.

Colin O’Shea, head of commodities at Hermes Fund Managers in London, which manages over $1.7 billion in commodities, said UK investors were still under-invested in commodities.

“We have a pretty solid pipeline of new business and we’re talking to investors in the UK, Europe, the U.S. and Asia.”

The return of $100 per barrel crude oil and strong commodity prices last year have piqued interest from investors, Jason Schenker, head of Prestige Economics in Texas, said.

“But everything to do with commodities is going to get more attention in 2011,” Schenker said.

“Investors will be looking at everything from active indices and funds to old-fashioned naked speculation… The longer-term trend is higher, and that’s stoking interest across the board.”

Fund managers say there has been growing interest in enhanced indexes and active strategies due to the disappointing performance of passive investing in recent years.

Mandatory

Huge gains in commodities in the first seven months of 2008 turned into huge losses as markets crashed. Then during the recovery, returns were well below spot price increases due to the structure of the market.

Mercer’s Fox said the shift to active strategies was well underway last year and is likely to continue through 2011. He is now starting to see more interest in timberland and agriculture.

“These give you some exposure to commodity prices but also a return on capital from financing the production of the commodities, and I think that’s where we will see more searches in 2011,” Fox said.

According to Sabine Schels, commodity strategist at Merrill Lynch Bank of America, “The big drivers last year were precious metals and agriculture. We think this year we will move towards more cyclical commodities sectors like energy and base metals.”

Alex Moiseev, chief investment officer at Dighton Capital Management, a managed futures investment manager in Switzerland running around $230 million in assets, said he expected established investors to increase their allocations to precious metals this year.

“For the big insurance companies and pension funds it will become a mandatory asset class to hold. I also see an increased allocation to agriculture, and possibly energy,” Moiseev said.

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