x
Breaking News
0

No future(s): Asian financial coal trading dries up as Noble declines, Glencore rules

Stock MarketsOct 23, 2017 01:50
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
© Reuters. FILE PHOTO: A worker stands on a wagon of a coal train as it tranfers coal to a power plant in Huaibei

By Henning Gloystein and Vera Eckert

SINGAPORE/FRANKFURT (Reuters) - Financial trading of thermal coal has virtually ceased in Asia as a result of the woes at one major trading house and the growing dominance of another, despite the region being by far the world's biggest consumer of the fuel.

Asia gobbles up some 70 percent of all coal used for power generation, and the unprecedented demise of its futures market poses significant risks for utilities in particular.

With coal prices rising sharply this year, power generators would usually hedge or protect themselves by taking positions in related derivatives markets.

"With Asia's futures pretty much gone, that greatly increases our risk for supplies in that region. It may mean that we source less from there going forward," said a risk manager with a big European utility, declining to be named as he was not authorised to speak publicly about company risk.

Data from several exchanges shows that since its heyday in 2015, Asia coal futures trading activity has declined by over 90 percent.

Two senior coal brokers and six senior traders at merchant houses, utilities and miners spoken to by Reuters pointed to the shrinking role of Singapore-listed commodity merchant Noble Group (SI:NOBG) as the single most important factor in the decline of Asian coal futures volumes.

Noble has sold-off assets and slashed trading operations following allegations from Iceberg Research in 2015 that it had overstated its assets by billions of dollars, sending its share price tumbling.

"Noble is a massive loss to the market. Its troubles seriously dented liquidity," one merchant trader said.

Noble declined to comment for this article, but said in a letter to Singapore Exchange in May "very thin trading liquidity" in hedging instruments had contributed to its first quarter losses.

GLENCORE DOMINANCE

Many traders also see a link between declining Asian coal futures and the growing dominance of a single company in supplying physical Asian coal.

Swiss-based, London-listed Glencore (L:GLEN) is the world's biggest producer of thermal coal, exporting well over 50 million tonnes from Australia alone in 2016, a quarter of the country's shipments. Physical Newcastle coal prices, which act as Asia's key futures benchmark, have jumped from around $70 to over $100 per tonne this year.

Glencore, which owns a dozen thermal coal mines in Australia, declined to comment. But market participants say the firm is not as active in coal futures trading as many of its peers, instead preferring bilateral supply deals with customers.

"Doubts over deliberate intervention on the supply side for Australian coal linger, which kills any enthusiasm to trade the (financial) product," said Georgi Slavov, head of research at commodity brokerage Marex Spectron.

Glencore's control and knowledge of actual coal output in Australia and the influence this has on derivatives contracts means it is difficult for outsiders to predict price movements, scaring off traders.

"If you don't know what Glencore's mines are up to, it's very hard to trade Australian coal futures," said one trader with a large European utility. "It's not Glencore's wrongdoing, just the way it is."

Glencore has previously said it is as vulnerable as any other market participant to commodity price swings, and in the past has also used derivatives to hedge its own production.

STEEP DECLINE

The decline in Asian coal futures volumes stands in stark contrast to booming oil and natural gas futures.

The amount traded in front-month Australian coal futures on the Intercontinental Exchange (N:ICE) has collapsed from a high of over 1.6 million tonnes in September 2014 to under 290,000 tonnes this September.

Data from rival CME Group (O:CME) shows that open interest, which describes the number of open positions, of its Asian coal futures as fallen from around 2.7 million tonnes in early 2015 to just 65,000 in August this year, with Indonesian and Chinese futures totally vanishing.

"In that sort of environment, utilities stop hedging. It's too risky," said a senior coal trader with a major commodity merchant, requesting anonymity.

Major European utilities that source international coal include Germany's RWE (DE:RWEG), Uniper (DE:UN01) and ENBW (DE:EBKG), Italy's ENEL (MI:ENEI), Sweden's Vattenfall, as well as Switzerland's Axpo Holding.

"All coal derivatives markets have shrunken this year… as a result of lower options trading, and due to some counter parties that have become less active," said Joachim Hall, cross commodity trader at RWE Supply & Trading, the trading arm of Germany's biggest power supplier.

"Europe's API2 (coal futures market) remains liquid, but it does not move in parallel with physical coal we buy in Asia," Hall said.

VOLUMES DOWN, RISK UP

Noble's troubles and Glencore's strength are not the only reasons for the malaise.

Unlike many other markets, no single exchange has attracted enough liquidity to hedge reliably.

Instead bourses like ICE, CME and others including China's Zhengzhou Commodity Exchange (ZCE), Singapore Exchange (SI:SGXL) or the European Energy Exchange (DE:T3PA) offer contracts with varying delivery options, differing underlying coal qualities, and in various currencies.

Chinese exchanges like ZCE <0#CZC> have grown somewhat, but months can still pass without trades, and Chinese coal futures are problematic for international traders.

"There has been quite a bit of turmoil in the coal trading business," said Ben Tait, analyst at British energy consultancy Prospex Research. "China is the driver. Its coal policy shifts can make prices soar or plunge. This has led to some big trading losses."

Yet not everybody sees only doom and gloom.

RWE's Hall said he hoped liquidity would gradually improve again over time, something Pat Markey, managing director of Singapore's Sierra Vista Resources, also expected.

"The Asian market is poised for growth in financial trading, but this will take time as the Asian market is quite fragmented," Markey said.

(For a graphic on coal consumption by region, click

No future(s): Asian financial coal trading dries up as Noble declines, Glencore rules
 

Related Articles

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

 
Are you sure you want to delete this chart?
 
Write your thoughts here
 
Replace the attached chart with a new chart ?
Post
Post also to:
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
 
Replace the attached chart with a new chart ?
Post 1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email