Commodity Derivatives House: Citigroup

Oil prices endured a roller-coaster ride in 2016, making for a volatile trading environment that put commodity business models to the test. For consolidating its top-tier position through metals expansion and big-ticket structuring wins, Citigroup is IFR’s Commodity Derivatives House of the Year.

In the wake of the global financial crisis, Citigroup made a bold call to maintain its commitment to commodities. The 2009 sale of its commodity trading unit, Phibro, created opportunities for expansion in financing and hedging activities as others embarked on a long and drawn-out retreat.

By 2015 the call had paid off. After four years of double-digit revenue growth, the bank had cemented its position in the top tier. But far from simply reaping early mover advantage, Citi proved in 2016 that its business model could weather storms.

“What was really important in 2016 was delivering the revenues despite the market being much more challenging and proving that this is a robust business,” said Jose Cogolludo, global head of commodity sales at Citigroup. “This year was all about consolidation of performance. We really felt we had achieved our ambitions in 2015, but we knew we needed to repeat that again.”

Historically tilted to North American gas and power, Citi’s commodity fortunes seemed bleak during the first quarter as crude oil prices fell to decade lows. Principal commodity trading revenue was cut in half for the first quarter compared with a record 2015, and was down 29% for the first three quarters. But client activity was more buoyant than ever as diversification and big-ticket trades put overall commodity revenues back on track to equal or beat 2015.

“We’ve really changed our mentality to go for bigger trades, which has compensated a really challenging year in flow,” said Cogolludo. “Flow keeps you in the market and without it you can probably only grow so big, but when markets are quiet flow goes away.”

Citi worked on some of the largest transactions of the year, including over-the-counter gold trades, sovereign hedging programmes and physical power hedges for wind farms, using balance sheet strength, structuring expertise and flow capabilities to trade in volume, tenor and illiquid markets across multiple products.

Precious metals expansion was key to that success. The bank became a full market-making member at the London Bullion Market Association at the start of the year and built its central bank activities to more than US$4bn. On its Citi Velocity e-trading platform, the bank offered clients instant access to precious metals price-making and liquidity.

By October, client revenues from metals operations had outstripped the oil business.

Diversification was also seen in the geographic breakdown. In 2013, nine of the bank’s top 10 commodity clients were based in North America. By 2016 that was down to just four, with clients from Europe and Latin America making up the remainder, while further traction was gained with Asian clients.

“We’ve added a new dimension to our business this year,” said Cogolludo. “We’re now a top-tier player in the metals business and we feel we have a much more robust business, with growing revenues in Europe and Asia, and less reliance on North America.”

Metals and mining were behind some of the bank’s big-ticket wins. One transaction saw the bank make its first foray into iron ore and metallurgical coking coal – borrowing structuring solutions from a planned oil refinery transaction. The deal saw the bank hold title to the commodities, offering credit enhancement and financing for the client.

“Innovative financing solutions fit well with what Citi is about,” said Cogolludo. “These deals are exactly what we’re supposed to be doing – providing financing and promoting growth.”

The bank’s metals ambitions may be crucial for continued growth as regulatory changes are currently in the works, which will pile hefty capital charges on polluting energy products. In addition, the bank also sees agriculture, bulks and the investor business as core growth areas in the years ahead.

In the oil business, the bank was able to offer an array of financing solutions from simple repos to more complex full working capital solutions. Two separate trades saw the bank purchase oil in the market to sell to refiners just as the oil went into transit. The bank then bought back the refined oil as it moved back into transit, before selling to the end-client.

“These are neat, capital-efficient, but very labour-intensive solutions,” said Cogolludo. “It’s much more complex than a financing transaction from point A to point B, but that’s where there’s real value for the client.”