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Climate Failures May Stoke Record Coal Trading: Energy Markets
2010-08-27 08:55:44.675 GMT
By Mathew Carr
Aug. 27 (Bloomberg) -- Coal trading is poised to rise to an
all-time high this year as prices at less than half their 2008
peak stoke demand, defying government efforts to phase out the
most-polluting fossil fuel.
The volume of coal derivatives bought and sold around the
world may jump as much as 46 percent this year to 2.3 billion
metric tons, based on data from exchanges and brokers, according
to Guillaume Perret, founder of Perret Associates Ltd. and a
former trader at RWE AG, Germany's second-biggest utility. That
would exceed the record 2.2 billion tons traded in 2007.
"It's looking pretty good for coal," Kris Voorspools,
director of 70Watt Capital Management, a Luxembourg-based hedge
fund that specializes in trading spreads in energy and carbon
markets, said in an Aug. 24 interview. "It's the fuel for the
developing world. China and India are using it to grow."
The increase in coal trading underscores how fuel demand in
Asia is hampering government measures to tackle global warming.
United Nations Climate Chief Christiana Figueres said on June 9
negotiations to extend Kyoto Protocol limits on greenhouse-gas
emissions are unlikely to succeed this year. Global coal demand
held near a record in 2009, while oil consumption dropped 1.7
percent and natural-gas use fell 2.1 percent, according to BP
Plc's June 2010 Statistical Review.
Taking Advantage
Prices have fallen 56 percent since trading at a record
$217.75 a ton on July 1, 2008. Coal for next-year delivery in
northwest Europe, the world's biggest derivatives market for the
fuel, closed yesterday at $96.65 a ton, according to broker
prices compiled by Bloomberg, 31 percent lower than the 2008
average of $140.40 a ton.
Export prices at Newcastle, Australia, a benchmark for
Asia, rose 1 percent to 87.79 a ton in the week ended Aug. 20,
according to London-based globalCOAL. Prices at Richards Bay,
South Africa, the continent's biggest export facility for the
fuel, fell 0.6 percent to $86.34 a ton, according to data from
IHS McCloskey.
The world's biggest energy exchanges are seeking to
encourage trading. Intercontinental Exchange Inc.'s ICE Futures
Europe on Aug. 6 began allowing investors to trade coal
derivatives with a minimum of 1,000 tons, 20 percent the size of
its previous requirement, to attract hedge funds and smaller
banks. CME Group Inc. said this week it will start offering four
new contracts settled against coal prices.
LCH.Clearnet Group Ltd. plans to offer Richards Bay and
Rotterdam coal swaps "soon," according to Jason LaBrooy, a
spokesman in London.
"We expect to see a pick-up in activity into the fourth
quarter," Tris Simmonds, the head of coal trading in London at
GFI Group Inc., a New York-based broker, said by e-mail. "LCH
and CME offering clearing to the coal market as well as ICE will
lead to a more competitive market place for clearing."
Ambitious Targets
European governments set the world's most ambitious targets
to cut greenhouse gases and wean themselves off coal, which
emits about twice as much carbon dioxide as natural gas. The
European Commission, the regulator for the 27-nation European
Union, set up a cap-and-trade system in 2005 to make polluters
pay for carbon emissions. In the U.S., where coal accounts for
about 25 percent of energy consumption, lawmakers plan to revive
climate-protection legislation after being defeated in Congress
last month.
Coal-price declines and the growing use of alternative
energy still pose risks for traders.
Some banks and hedge funds "threw in the towel" in 2008
and 2009, Perret, founder of London-based Perret Associates, a
coal, freight and iron-ore adviser, said in an Aug. 25 e-mail.
New exchange-cleared products are easing concern about
traders' creditworthiness, said Adrian Hills, senior market
manager for globalCOAL.
New Hiring
"Credit has been the biggest issue to impact trading over
the last few years," Hills said in an Aug. 24 interview.
Gunvor International BV, an Amsterdam-based commodity
trader, said in May it hired traders for its coal business.
Mercuria Energy Ltd. in Geneva, which buys and sells oil and
emissions contracts, added traders in Houston and Jakarta last
August after entering the coal business in 2007.
The reduced minimum lots for ICE contracts will probably
lure new entrants, including traders seeking to bet on spreads
between fuels, European Union carbon allowances and electricity,
said 70Watts's Voorspools.
"The initiative can lead to a boom in liquidity in coal,"
said Voorspools, who said he used the new 1,000-ton lot on ICE
last week. "Many are interested in coal, but only a few can
actually trade it because of the big size."
Not Needed
The utilities and banks that dominate trading won't need
the smaller lot sizes when hedging risks for entire ships, which
can carry as much as 110,000 tons of fuel, according to Clive
Murray, chief executive officer at London Commodity Brokers Ltd.
"If you are trying to hedge a whole ship, 1,000 tons is
neither here nor there," he said.
For traders, the flexibility of smaller transactions will
offer an advantage, David Peniket, president and chief operating
officer of ICE Futures Europe in London, said in an e-mail.
Coal trading on ICE jumped more than fourfold last year to
634 million tons, or about 40 percent of the derivatives market,
from 149 million tons in 2008, according to globalCOAL. It was
615 million tons in the first half.
"The total volume of steam coal consumed in the world and
the volume of physical seaborne trade continue to increase,"
said Perret. Coal-trading will range from 2 billion to 2.3
billion tons this year, compared with about 1.6 billion last
year, he said.
For Related News and Information:
For more Energy Markets columns see NI NRGM <GO>
Emission market news NI ENVMARKET <GO>
Today's top energy stories ETOP <GO>
European power-markets home page EPWR <GO>
--With assistance from Alistair Holloway in London. Editors:
Mike Anderson, Stephen Voss
To contact the reporter on this story:
Mathew Carr in London at +44-20-7073-3531 or
m.carr@bloomberg.net
To contact the editor responsible for this story:
Stephen Voss at +44-20-7073-3520 or
sev@bloomberg.net
