Base Metals House of the Year: Société Générale Corporate & Investment Banking

Société Générale Corporate & Investment Banking (SG CIB) wins Energy Risk’s Base Metals House of the Year award for the second consecutive year as it consolidated its market-leading franchise in sales and trading, and launched ground-breaking risk management offerings in Russia and China

Energy Risk Awards 2012

As global economic growth slowed in the second half of 2011 and the euro sovereign crisis escalated, base metal markets were battered by negative sentiment and endured price movements of as much as 10% in a single day. For many investors, the sharp rise in volatility and increase in correlations between different metals was a signal to either head for the exit or look for effective hedges.

“After 18 months of trending or range-bound markets, we saw levels of volatility that we had not experienced for a long, long time,” says François Combes, SG CIB’s deputy global head of commodities markets. “Implied volatility at the front-end of the copper curve went above 50%, which is pretty rare.”

While investors chose between buying protection or pulling back from the market, producers had little choice but to set hedges in futures and options, with SG CIB reporting “large tickets” in longer maturities.

“That period last summer was not a time for being innovative, but rather for using your experience in the market to help producers find hedges in the right size and maturity,” Combes says. “Our added value here is a mix of risk management expertise using the more liquid contracts and access to a wide client base with potentially matching interests.”

Although the summer in Europe may not have been a time for being innovative, the bank certainly showed innovation elsewhere in 2011, with a focus on Russia and China.

We made an investment in expertise and infrastructure to provide hedging onshore via local entities

In Russia, the bank leveraged its Rosbank subsidiary to offer a range of derivative contracts to local clients.

In China, just 31 large state-owned companies have a licence to trade offshore London Metal Exchange (LME)-listed products. In order to provide Chinese corporates with access to international price references, SG CIB opened a desk in Shanghai, offering bespoke contracts structured as LME or Chicago Mercantile Exchange (CME)-lookalikes but without physical settlement.

“We made an investment in expertise and infrastructure to provide hedging onshore via local entities but based on the international LME or CME prices, which enabled us both to gain market share and to create market share where there was none before,” Combes explains.

Despite the challenging environment, SG CIB was able to upsize its business, in particular through the acquisition of a rival’s base metals franchise. While details of the deal were not disclosed, in March SG CIB closed a transaction to buy a regional bank’s commodity derivatives portfolio, enabling the client to refocus its strategy on core lending. 

“It’s a fairly complex process to pull out from a business, close out positions and manage margins over a period of just a few weeks, but we allowed them to get rid of the problem all at once and at a competitive price,” says Jonathan Whitehead, London-based global head of commodity markets.

Looking ahead, Combes believes the potential sale of the LME could have a wide-ranging impact on the market. The LME accounts for at least 80% of globally traded base metals.

“The LME runs a unique system and the changes we see as a result of any sale could have far-reaching implications both in terms of the cost of transactions and the way the LME operates – so there is a lot at stake,” Combes says.