Commodities prices have been volatile this year with extended periods of relatively low correlation between products. The resulting increased basis risk has been especially hard to manage in Asia where markets are less mature and more opaque than in Europe and the US.
The winners of this year’s Energy Risk Asia awards operate across a range of different market segments but they have all contributed to taking Asian markets to the next level, either through sophisticated structuring, bespoke risk management solutions or by bringing more transparency to the region.
Increased basis risk was particularly evident in the Asian liquefied natural gas (LNG) market this year, fuelling demand for hedging using regional indexes. “There is a growing need to manage risk across various locations … [and] as a result, clients have a lot of basis risk,” says Nishan Hegde, associate, commodity sales at BNP Paribas, this year’s derivatives house of the year. The bank offers bespoke hedging solutions based on a variety of indexes from the well-established ones to less liquid, local indexes, such as the Japan Korea Marker and the Japanese Crude Cocktail.
Meanwhile, the oil and products market faces risk management challenges of its own due to upcoming rules from the International Maritime Organisation mandating low sulphur shipping fuel from 2020. There are huge questions over whether refineries will be able to produce enough of the new fuel in time to meet demand and what the impact of that will be on their production of other fuels. Not just shipping companies but all energy-intensive firms, from manufacturers and miners to airlines could feel the impact of this.
“This is a huge shock to the system,” says Singapore-based Iain Lawson, head of structured products, eastern hemisphere, at BP, the winner of our oil and products house of the year. Moreover, hedging the new fuel from 2020 onwards is currently impossible as contracts on it are not yet trading. BP is one of very few firms offering its clients risk management solutions in this area.
Elsewhere, the spread of electricity market liberalisation continues to create more risks and trading opportunities across Asia-Pacific, particularly in Japan where retail power markets were liberalised in 2016 and in Singapore, where a futures market was established in 2015.
Overall, the explosion of trading opportunities has lured a swathe of new players into Asia in recent years, many of them relatively small and without sophisticated risk systems. This increases counterparty credit risk which, in turn, is hard to manage due to a lack of transparency. “In Asia it’s hard to get the financials needed to do fundamental credit work,” says Karl Sees, Singapore-based managing director of CubeLogic, a software company awarded best newcomer for the enterprise risk and credit solutions it is introducing to Asia.
A lack of transparency around China is a particular challenge, but this year the country took huge strides towards opening up its derivatives markets. The Shanghai-based International Energy Exchange launched a crude oil futures contract accessible to offshore and domestic investors, while the Dalian Commodities Exchange opened its iron contracts to international traders. These moves caused Bank of China International, the investment banking arm of Bank of China, to fast-track plans to launch its China Commodities Index, a product which earnt it our innovation of the year award.
And on the financing side, the spread of renewables across Asia is presenting new challenges. “This is a new asset class being born in the region,” says Daniel Mallo, Asia-Pacific head of natural resources and infrastructure at Societe Generale, the winner of our finance house of the year. “We expect it to mushroom and develop rapidly,” he adds.
For a full list of this year’s winners and to read the accounts of why they won, please see the links below.
Derivatives house of the year
Commodity finance house of the year
Best commodity research
Exchange of the year
CTRM software house of the year
Coal house of the year
Tata International Singapore
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