Banks, power companies and hedge funds are gearing up to take advantage of the financially settled coal derivatives market. Major players, including Merrill Lynch, Goldman Sachs and Sempra Commodities, are boosting their resources.
Steve Nesis, a managing director who heads Evolution Markets' coal desk in White Plains, N.Y., said financially settled trading volumes could easily quadruple this year. "The new players entering the market are interested in financials." Last year financially settled trades accounted for around three million tons of coal, less than 2% of the U.S. market volume, according to the brokerage's estimates. "We have nearly matched that volume in the first month of 2005," he said, adding price volatility is the biggest driver of the growing market.
Tom Hiemstra, v.p. in the coal services group at Evolution Markets in New York, explained demand for coal has risen--it is cheap relative to other energy commodities--but supply has not, leading to a tremendous surge in price. Hedge funds have entered the market because of the arbitrage opportunities, he said. He added some energy companies used to hedge on the physical side with long-term contracts and have been prevented from doing so because of deregulation. They are now hedging their exposure from a financial standpoint, he explained. Banks are being brought more coal financing projects because the demand for coal has increased and they are looking to hedge their exposure, he said.
Last month, Merrill hired Matt Schicke, previously with Detroit-based DTE Coal Services, to build up a Houston coal trading desk. Schicke confirmed his arrival, but referred further questions to a spokeswoman who declined to elaborate. J. Aron, the commodities trading arm of Goldman Sachs, is looking for a dedicated U.S. coal trader, according to an official. John Bertuzzi, a managing director on Goldman Sachs' energy desk in New York, declined comment. Sempra Commodities, a Stamford, Conn.-based subsidiary of Sempra Energy, recently hired its first a coal trader, but a spokeswoman declined to explain the company's plans.