In 2011, the team traded 269 million tonnes of coal contracts, which was supplemented by a significant amount of trading in physical and financial freight contracts, making them one of the biggest players in the market. E.on Energy Trading has been able to substantially increase the number of counterparties it deals with and, as a result, has grown its physical freight operations.
This is against a backdrop in which the economic woes of Europe have sent demand for coal tumbling. Since 2011, the benchmark price for coal imported into Europe (API #2) has lost over a quarter of its value.
“Last year there was low liquidity, low demand and a lack of opportunities, but we still managed to increase our base of customers across Europe,” says David Finch, director of coal and freight trading.
The business has increased the number of counterparties it trades with by 55% in the past 12 months and has more than doubled the number of dry bulk vessels it has on time charter since the beginning of 2011.
Turkey and India are two very close markets with completely different prices. That’s where the arbitrage is
E.on Energy Trading is primarily responsible for sourcing and delivering coal for its parent company’s 17 gigawatts (GW) of plant capacity but also engages with third parties in financial and physical contracts.
A recent major success for E.on Energy Trading’s coal desk has been the start of its business trading coal to and from Turkey, which it began in January 2011. As a result of this, the team has been able to better balance risks across its overall portfolio and also take advantage of physical arbitrage opportunities.
“It provides us with a way to potentially deliver coals from different regions so that we can take advantage of an arbitrage if and when it occurs,” says Finch.
Gustavo Fernandez, desk head – coal and freight, says what triggered E.on Energy Trading’s involvement in Turkey was the improvement in the country’s freight infrastructure, namely the building of bigger ports that can handle Capesize vessels (the largest dry bulk vessel class). “As they built bigger ports, they opened the opportunities to trade Colombian, South African and US coal. That gave us the opportunity to optimise our deliveries,” he says.
Fernandez sees rich arbitrage opportunities between the Turkish and Indian coal markets due to their very different prices but relatively close proximity. “Obviously you have to manage some physical restrictions, but they are two very close markets with completely different prices. That’s where the arbitrage is.”
As well as being a catalyst for market opportunities, E.on Energy Trading’s activities in Turkey provide diversification benefits that help it manage the risks of operating in other European coal markets. “Turkey is a completely different market. We have seen weak demand in northern Germany but very strong demand in Turkey and that’s helping us to balance the book and diversify our deliveries,” says Fernandez.
Looking ahead, the coal team is optimistic that it will continue to grow its business in the Asia-Pacific region and the US. However, Finch is keen to stress that the value in the opportunities available does not lie in simply profiting from physical/financial arbitrages. By understanding how to optimally trade various coals between these markets, Finch believes the core function of the desk can be improved. “We see these growth opportunities as a way to be more involved in a business that directly affects our plants,” says Finch.
“These are markets with a lot of potential and we are committed to developing these areas further,” says Fernandez.
The week on Risk.net, August 19-25, 2016Receive this by email