Mercuria could pursue physical assets as it seeks to reduce speculative trading in CEE

28 Mar 14 – Mercuria, the private Switzerland-based commodities trading house, could look to buy power-producing assets in Central and Eastern Europe to reduce its levels of speculative energy trading in the region, people claiming familiarity with the company have said.

“Mercuria is reducing [its power trading] activities in CEE for now. It is not pulling out, but reducing activity until it can pick up some assets,” a person with knowledge of the company said. “It wants to trade volume on the back of an asset, not just speculatively. ”

Mercuria would be following the recent examples of several other banks and commodities trading firms. Many have either pulled out of the EU energy markets, reduced activities there, or, alternatively, begun to acquire power-producing assets in attempts to mitigate against declining market conditions.

“Spec trading isn’t as profitable as it once was because renewables subsidies have ruined the market, as there is no volatility,” an industry source said. “The continental markets are now dictated by wind generation, which is not something that is measurable ahead of time.”

Mercuria does not yet own any physical assets in CEE. The company had already reduced the amount of speculative trading there, the person with knowledge of Mercuria said.

Swiss energy company Alpiq’s assets in the Czech Republic could be among the most likely targets for Mercuria, a second industry source and a sector banker said. Alpiq owns Kladno (406 MW electrical, 852 MW thermal) and Zlin (69 MW electrical, 220 MW thermal), two hard coal-fired thermal plants in the Czech Republic, which it tried to dispose of in 2013 during a CHF 1.2bn divestment programme. Alpiq has reportedly sought CHF 500m for the two plants, a price widely deemed too high at the time.

However Alpiq said it has now decided not to sell the two thermal power plants at Kladno and Zlín. “As it makes better business sense, under current market conditions, to retain the two plants in the Alpiq portfolio,” a spokesperson told this news service. He declined to comment on whether the company would revisit a sale should it receive an attractive offer.

“The plants are an attractive target for someone seeking to enter the market as they are large and new and would need minimum investment,” the banker said. “At the same time, Alpiq wants to sell a price that reflects the high level of investment it made into the plants.”

Since Mercuria trades in energy, gas storage could also be a logical asset to acquire, a third industry source suggested. As previously reported by this news service, RWE [ETR:RWE], the listed German energy group, is considering disposal of its gas storage holdings in the Czech Republic, according to a person familiar with the company.

RWE Gas Storage has six storage facilities in the Czech Republic, which account for about 2.7 bcm (billion cubic meters) of the country’s total 3.7 bcm capacity. RWE, however, declined to comment on whether it had been approached by parties interested in its Czech gas assets.

Earlier in March Mercuria completed its USD 3.5bn purchase of JP Morgan’s [NYSE:JPM] physical commodity assets. The company’s apparent move away from speculative to physical trading, makes sense in the current market conditions, where an increase in pricing stability has minimised opportunities to turn large profits, the first industry source said.

In contrast, Cargill, the US commodities trading firm, announced on 27 March that it would exit the global coal market and also the European gas and power markets.

Barclays [LON:BARC] closed its US and EU power trading operations in February, and Bank of America Merrill Lynch [NYSE:BAC] has also recently abandoned trading European oil and gas. Many other banks, such as Citi [NYSE:C], Deutsche Bank [ETR:DBK] and Morgan Stanley [NYSE:MS] have drastically scaled back their EU energy trading activities.

Macquarie [ASX:MQG] and Vitol, however, have moved towards trading volumes off physical assets. Macquarie’s recent purchases include the 850MW Severn CCGT power plant in Wales. Vitol bought the 1.2GW combined-heat and power plant VPI Immingham, and has publicly declared its strategy to increase its physical assets.

Mercuria was founded in 2004 and is now the world’s fourth-largest independent commodity trading firm. It had turnover of USD 98bn in 2012, according to its website. Its operations began with it opening a trade route shipping Russian crude oil to China from Poland. Since then it has increased its presence to 28 countries across five continents. Its portfolio encompasses biofuels, natural gas and LNG, power, coal, iron ore and agricultural products.

By Katie McQue and Katka Krosnar