Last checked at 
(For other news from Reuters Global Commodities Summit, clickon http://www.reuters.com/summit/Commodities14)
* Mercuria looking to expand third party services
* Gunvor says banks exiting commodities is "overblown"
By Claire Milhench
LONDON, Nov 4 (Reuters) - Banks and trading houses will joinforces to provide hedging services in commodities in the sameway that they have provided joint trade finance in the last twoyears, Mercuria's chief executive Marco Dunand said.
Last month Swiss trading house Mercuria completed thepurchase of U.S. bank JPMorgan's physical commodities unit. It now wants to expand its provision of hedgingservices to external customers.
"There's the desire for the company to enter a bit more intothe space of customer service - trying to see whether we canoffer some solutions to clients, primarily in Europe," Dunandtold the annual Reuters Commodities Summit.
Producers and consumers hedge commodity price risk to reducethe impact on their balance sheets of sharp price swings. Forexample, a small oil producer may look to offset the impact of adownward move in the oil price, or an airline may want to offsetthe impact of an upward move in the jet fuel price.
Trading houses specialise in moving physical commoditiesaround the world but Dunand said that some of the people inJPMorgan's London office who moved across to Mercuria werespecialists in putting together hedging and other structureddeals.
"That's something as a company we would like to develop on abroader basis over the next year or so."
Over the last 18 months big investment banks such asJPMorgan, Deutsche Bank and Barclays have exited or scaled down in the commodities trading business.
Commodities trading revenue for ten of the world's biggestbanks fell to just $4.5 billion last year, down from more than$14 billion in 2008, according to analytics firm Coalition.
This has reduced the depth and quality of liquidity incommodity markets, particularly for contracts with settlementdates far in the future, known as the back end of the curve.
The decline in liquidity makes it more difficult forproducers and consumers to source competitive bids for hedging.It has also left an enticing gap in the market for those who arewilling and able to step up to the plate.
"It seems that at the back end of the curve, the bid-offerhas gone wider," said Dunand, referring to the gap betweenprices offered by buyers and sellers.
"Are we interested in entering that space? The answer isyes. But then there's an issue of capital - are we adequatelycapitalised to enter that space?" he said.
Dunand said for some of the smaller deals traders hadadequate capital but for larger ones they would need to team upwith banks, which are more strongly capitalised.
"As a trader you may be interested in that risk, but youhave to look at whether your balance sheet can afford it ornot," Dunand said. "There could be a bank which is interested instaying in commodities but doesn't like to handle the risk orthe volatility of particular instruments."
This option is already being explored in the area of tradefinance and overcomes the high capital hurdle for traders whileallowing banks to remain in the sector despite tougherregulatory requirements.
"STEPPING UP A GEAR"
Senior executives from other trading houses speaking at theReuters commodities summit played down the likelihood of theirfirms offering hedging services.
Pierre Lorinet, the chief financial officer of Trafigura,said his company had no intention of trying to replace the banksin this area.
He added that he wouldn't rule out the banks stepping uptheir involvement in commodities trading again if volatilityimproved.
For the chief executive of trading house Gunvor, TorbjornTornqvist, the whole story about banks exiting commodities was abit "overblown".
"In physical assets they have been scaling down selectively.But ... I would not be surprised to see one or two of themactually stepping up a gear," he told the Reuters CommoditiesSummit.
Follow Reuters Summits on Twitter@Reuters_Summits
For a full list of summit stories, click on (Additional reporting by Dmitry Zhdannikov; Editing by MichaelUrquhart)
