Derivatives house of the year: Macquarie Group

Energy Risk Awards 2020: Firm’s wide commodities presence, physical and financial risk expertise and financing capabilities result in standout deals

Nick O'Kane

Macquarie Group’s long-standing commodities business has continued to grow over the past 18 months. Its expansion into several new markets and a raft of innovative and strategic deals have won it Energy Risk’s Derivatives house of the year award, 2020.

Offering access to more than 115 different products – many of them specialist and illiquid – Macquarie’s commodity markets and finance division has one of the widest and most diverse offerings in the commodities space. The team stands out for its ability to take physical delivery across many markets, to offer physical and financial hedging and to combine this with financing. In credit- or liquidity-constrained markets, Macquarie’s capacity to take physical and operational risk enables firms to reduce working capital, says Ozzie Pagan, head of commodity financing, Americas.   

“We can manage a lot of the operational and physical risk for our clients, [for example] chartering our own vessels or managing physical volumes on a pipeline or in a tank [which] reduces our clients’ working capital requirements,” says Pagan. “[This is] real risk transfer that we are well-positioned to manage.”

The firm is active across the commodities world from oil, natural gas and power to environmental markets, agriculture, uranium and metals. In North America, it is the second-largest physical gas marketer and has increased its presence in Latin America over the past two years. It is one of the biggest participants in power and emissions markets in Australia, while in Europe its operations cover oil, agriculture, metals, natural gas and power, as well as asset management and carbon trading.

The firm’s commitment to commodities comes from the top, as evidenced by the March purchase of Societe Generale’s over-the-counter energy portfolio and the 2017 acquisitions of Cargill’s petroleum business and its North American gas and power business.

“Commodities has been a core Macquarie business for four decades, and our long-term success stems from constantly evolving and developing our capabilities throughout the commodity value chain,” says Nick O’Kane, head of Macquarie’s commodities and global markets group.

A deal showcasing the firm’s physical and financial expertise is its June 2019 supply and offtake deal with a UK refinery in which Macquarie owns physical crude, selling it to the refinery only when it is required and also buying some of the physical products. “In a sense, the deal is a working capital facility and an intermediation facility put together into one,” says Daniel Vizel, global head of oil trading.

The deal is part of a portfolio of supply and offtake agreements that allow refineries to receive payment for their products before paying for crude. This significantly reduces working capital needs and market risk exposures. Without it, a refinery might need to buy crude up to three months earlier due to voyage times. 

Our long-term success stems from constantly evolving and developing our capabilities throughout the commodity value chain

Nick O’Kane, Macquarie

“Essentially, our business is moving oil for people, providing the best logistics, hedging and timing,” says Vizel. “It could be moving it from one location to another, through time or through a transformation at a refinery and through pricing, for example, from one index to another or from fixed price to floating.”

Additionally, because the shipping team insists on the highest standard of vessel, these deals – which require daily movements of oil cargoes – are helping to raise standards in the shipping industry, Vizel believes.      

Cindy Khek

The same approach is taken in power, where the bank has transmission rights to move electricity. “We are essentially a logistics business with a diverse array of financing and hedging capabilities,” says Cindy Khek, co-head of the North American gas and power business. “We move electricity usually from a utility to other customers optimising it using our own flexibility.” Again, the firm’s strong balance sheet combined with its ability to operate in many different intraday and forward power markets enables it to structure tailored deals for different clients and offset any additional risk it takes on through derivatives markets.  

The power business is at the forefront of the decarbonisation movement. Since 2010, Macquarie has helped finance 22 gigawatts (GW) of renewable energy generation capacity, and plans to develop an additional 20GW of renewables projects over the next five years.

The bank is also active in numerous emissions trading systems (ETSs) globally. It has operated in the European Union’s ETS since its 2005 inception and continues to grow that business.

Daniel Vizel

“We are one of the few firms adding to our presence in that market and picking up new clients,” says Ben Readman, managing director at Macquarie. For example, the bank offers structured notes that allow investors to take positions in EU carbon allowances while helping utilities reduce their funding costs.

Stringent environmental goals sit at the heart of Macquarie’s commodities business, and it is engaged in many aspects of the transition to the low-carbon economy, from power decarbonisation and energy efficiency to emissions reduction across agriculture, waste and real estate.

“With a strong focus on climate change and the energy transition, we are building our physical, financial and risk offerings in environmental products and leveraging our deep understanding of global commodities markets to new areas of growth for our clients,” says O’Kane.