Mercuria set to become leading commodity player

After building the European oil trading operations of Goldman Sachs and helping the San Diego energy group Sempra establish a presence on the continent, Marco Dunand and Daniel Jaeggi vowed that their next venture would be for themselves.

But when they set up Mercuria in 2004 the duo wondered if they could fill the office space they had rented.

"I was nervous about a two-year contract," Mr Dunand told the Financial Times in 2009. "I thought it was too much space."

He did not have to worry.

A decade later the company, headquartered on the most exclusive shopping street in Geneva, is set to become one of the leading players in commodities markets after striking a deal to buy JPMorgan's physical commodities business.

The deal will catapult Mercuria, named after the Roman god of commerce, into the top tier of commodity traders alongside Glencore Xstrata, Vitol, Trafigura and Gunvor.

It will also boost the company's presence in the North American power and gas markets, which are been reshaped by a boom in oil and gas production.

JPMorgan's physical commodity business is one of the most powerful oil and metals desks on Wall Street. The division was put up for sale last year amid rising political and regulatory pressure to retreat to its core business of lending.

The terms of the deal are not yet clear but offer documents circulated last year valued the division's assets at $3.3bn and indicated that it produced $750m in annual income before compensation costs. However, people who have reviewed the business said that JPMorgan was seeking a price between $2bn-$3bn.

Mercuria was born after Mr Dunand and his business partner Daniel Jaeggi bought a 30 per cent stake in J+S, small trading house whose main business was a contract to supply to crude oil to two refineries in Poland.

Today, the privately-owed business ranks as one of the biggest oil traders in the world, with 37 offices around the world.

Although Mercuria does not publicly disclose details of its financial performance, in the past it has made net profits of between $300m and $450m, according to files in the registry of Larnaca, Cyprus, where the company is incorporated.

In recent years, Mercuria has moved out of its comfort zone of oil, expanding into new areas such as power, natural gas, coal and base metals. Two years ago it hired Roger Jones, formerly head of commodities at Barclays, to run its non-oil operations.

Raw materials other than oil now represent roughly half of its turnover, which reached almost $100bn in 2012. say people familiar with Mercuria's operations.

But spite of its fast growth, Mercuria is still smaller than the world's biggest oil trader Vitol, which has annual turnover of $300bn. However, the JPMorgan deal will help close the gap.

The careers of Mr Dunand and Mr Jaeggi have run in parallel. They first met at Geneva University in the late 1970s. Their friendship was cemented a few years later when they both joined Cargill, the world's largest trader of agricultural commodities.

"Cargill was like an MBA," the duo have said.

After years in London at Goldman Sachs and then Phibro - the commodities trader sold by Citigroup to Occidental Petroleum - they joined Sempra in the 1990s, where they built its European-based energy business from scratch.

In 2004 they moved back to Geneva to start their own company, where traders and executives in jeans debate trading strategies in small glass walled meeting rooms.

Now, after a decade of strong growth, in which Mercuria has outpaced many of its rivals, Mr Dunand and Mr Jaeggi are taking their next big step.

A key motivation for the deal, according to people familiar with Mercuria's thinking is the surging oil and gas production in North America,

Logistical bottlenecks have sprung up in the US because of the shale revolution and rising output from Canada's oil sands. These have presented attractive trading opportunities for trading houses like Mercuria, Vitol and Gunvor. The emergence of the US as a major exported or refined products such as gasoline, is another attraction.

JPMorgan's US power and gas business is well positioned in North America. It reportedly has long-term leases on more than a quarter of the oil tanks in Hardisty, Alberta, the main storage and transportation hub for output from Canada's oil sands.

But rivals say the biggest challenge facing Mercuria will be integrating a business, which was expensively assembled through a string of deals and now employs around 600 people.

Indeed, the deal has already seen Mercuria put on hold to find a strategic investor. Mercuria hired bankers last year to sell a 10-20 per cent equity stake but search has been suspended and will not resume until the JPMorgan acquisition is bedded down.

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