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


By Henning Gloystein and Vera Eckert

SINGAPORE/FRANKFURT (Reuters) - Financial trading of thermal has virtually ceased in 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.

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

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

"With Asia's 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, trading activity has declined by over 90 percent.

Two senior brokers and six senior traders at merchant houses, utilities and miners spoken to by pointed to the shrinking role of Singapore-listed commodity merchant Noble Group as the single most important factor in the decline of Asian 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 Exchange in May "very thin trading liquidity" in hedging instruments had contributed to its first quarter losses.


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

Swiss-based, London-listed Glencore 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 prices, which act as Asia's key benchmark, have jumped from around $70 to over $100 per tonne this year.

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

"Doubts over deliberate intervention on the supply side for Australian 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 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 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.


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

The amount traded in front-month Australian on the Intercontinental Exchange 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 shows that open interest, which describes the number of open positions, of its Asian as fallen from around 2.7 million tonnes in early 2015 to just 65,000 in August this year, with Indonesian and Chinese totally vanishing.

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

Major European utilities that source international include Germany's RWE, Uniper and ENBW, Italy's ENEL, Sweden's Vattenfall, as well as Switzerland's Axpo Holding.

"All 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 (market) remains liquid, but it does not move in parallel with physical we buy in Asia," Hall said.


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), Exchange or the European Energy Exchange offer contracts with varying delivery options, differing underlying qualities, and in various currencies.

Chinese exchanges like ZCE have grown somewhat, but months can still pass without trades, and Chinese are problematic for international traders.

"There has been quite a bit of turmoil in the trading business," said Ben Tait, analyst at British energy consultancy Prospex Research. "China is the driver. Its 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.

(Editing by Lincoln Feast)

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

First Published: Mon, October 23 2017. 13:59 IST