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Commodity Traders Boost Role As Banking Model Fades

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Commodity Traders Boost Role As Banking Model Fades www.poten.com June 30, 2013 Commodity Traders Boost Role As Banking Model Fades The departure this month of Morgan Stanley’s LNG trading desk to Swiss commodities giant Glencore Xtrata does not signal a death knell for investment banks in the physical market. But it is the latest in a trend that has seen traditional commodity traders evolve into a potent force in short-term trading. With internal credit restrictions reducing the amount of risk capital available for trading, investment banks have either left the market or reduced their involvement to more specialized roles. “Morgan Stanley made no secret that they wanted to sell or somehow monetize their LNG desk, and the exodus says a lot about the end of the banking model into trading,” notes one source who says the banks no longer allow their trading desks to take speculative positions that are not fully hedged or supported by back-to-back sales. As the banks reduce their presence, trading giants Vitol, Trafigura and Gunvor have upped their game and are being joined by the likes of Glencore Xtrata, Noble Group, Axpo and Koch Supply & Trading. Singapore’s Temasek Holdings has also set up a LNG trading arm called Pavilion Energy with $1 billion in capital, which will begin operations in September, while Azerbaijan has established Socar Trading in Switzerland. Banks have tried numerous times to break into the physical LNG market, but have mainly set their sights on the Americas. Goldman Sachs backed the now defunct Calais import terminal in Maine, and was rumored to have traded cargoes from Trinidad’s Atlantic LNG in 2007 before its efforts faded at the end of the decade. Bank of America Merrill Lynch took a capacity option at Louisiana’s Cameron terminal, and then spent $10 million wriggling out of this position. It also pitched a floating liquefaction scheme with Teekay in western Canada that failed to get off the ground (see LNGWM, Mar ’09). Merrill Lynch scooped up 1 Bcm/y of import capacity at Gate in the Netherlands, but exited when it realized this commitment did not give it access to storage. It continues to dabble in the business and this month revealed a new strategy of Email: [email protected] NEW YORK LONDON PERTH ATHENS HONG KONG SINGAPORE GUANGZHOU supplying LNG as bunker fuel to vessels in the fast-growing Baltic Sea market. This may see it return to Gate, as its second jetty will be able to handle the small ship chartered by Merrill. Barclays Capital agreed in 2009 to market sendout from Excelerate’s buoy- based terminal near Boston and joined forces with Eni in 2010 to optimize its position at Cameron. Both plans fizzled as the LNG opportunity in the US shifted wholly to exports. Aussie bank Macquarie jumped into LNG in 2010 when it joined Freeport LNG to jointly market and develop three liquefaction trains at the Texas terminal. But the venture went belly up in early 2012 when Freeport’s principal backer engineered Macquarie’s exit. Its North American trading arm experimented with re-exports at Freeport in 2009 and 2010 after inheriting import capacity at the terminal from Constellation Energy, and Macquarie remains one of the top five firms in the physical gas market in the US. Citi pioneered re-exports from North America, taking the first reloads from Freeport and Louisiana’s Sabine Pass terminals in 2009 and 2010, respectively. The bank vacated its physical positions in 2010 and focused on developing the emerging LNG swaps arena before easing back into spot market trading last year. JP Morgan cut its teeth in LNG through a marketing agreement with Cheniere Energy at Sabine Pass, leading to a dozen reloads from the terminal between 2010 and 2012. The bank is also assisting Cheniere in feedgas strategies for its liquefaction sales from Sabine Pass and offered two spot cargoes into Mexico’s recent supply tender (see LNGWM, Apr ’13). Commodity Trading Firms Find Success Trader Headquarters Achievements KPC, Korea Midland supply contracts, 2013 Escobar Vitol Geneva contract in Argentina, spot cargo success Awarded CFE/Pemex tender to supply 19 cargoes Trafigura Geneva to Mexico in 2013-2014, JV with Sonangol Secured string of 19 Peru LNG cargoes in 2011, Gunvor Geneva Montoir regas capacity, won NGC tender in 2012 Delivered first cargo to Greece's Revithoussa terminal EGL/Axpo Zurich in 2011, regas capacity at UK South Hook Signed 1 MMt/y offtake deal from InterOil's Gulf LNG, Noble Group Hong Kong UK South Hook capacity, chartered vessel in 2011 Koch S&T Geneva Hired global gas and LNG staff in 2012 Mercuria Geneva Hired high-profile LNG traders in 2010 Glencore Xtrata Zug Hired former Morgan Stanley LNG team Source: Poten & Partners Email: [email protected] NEW YORK LONDON PERTH ATHENS HONG KONG SINGAPORE GUANGZHOU Arguably the biggest success by a bank in the LNG space came in 2011 when Morgan Stanley was awarded 70% of the supply obligation at Argentina’s Escobar terminal. Morgan Stanley sold about 22 cargoes to state-owned Enarsa at Escobar that year. At least one delivery required ship-to-ship transfer in open water at the mouth of the Parana River in order to reach the draft-restricted terminal, which at the time was considered an innovative maneuver. But other STS attempts failed. Morgan Stanley remains a big supplier to Argentina, and has finalized numerous spot deals into Brazil, the Mediterranean and Asia, principally utilizing reloads from European terminals. The investment bank also has 0.5 Bcm/y of capacity at Gate. But the team that built Morgan Stanley into the brightest light in Banks' Chartering-In Activity (2011 - June 2013) the banking industry’s attempts at LNG has now moved in a well- Bank Days Vessel Morgan Apr-11 180 Arctic Spirit publicized shake up to Glencore Stanley Morgan Xtrata. Morgan Stanley recently Jun-11 11 Methania Stanley reduced the size of its Sep-12 Citi 180 Golar Arctic commodities operation and tried Morgan Nov-12 180 Excel to entice Qatar’s sovereign wealth Stanley Morgan fund into linking up with the Dec-12 75 Arctic Spirit Stanley bank’s commodities unit, which Morgan Sonangol Dec-12 60 includes the LNG desk, for the Stanley Sambizanga Merrill Multi- Small-scale Jun-13 better part of a year. “Morgan Lynch year vessel Stanley wanted the Qataris to put Source: Poten & Partners up the trading collateral in return for providing an elite group of traders across all products,” comments one source. Qatar Holding has a 12% stake in Glencore Xtrata and there are suggestions that its Doha-based owners encouraged the trader’s entrance into LNG. Traditional trading firms, largely centered in the Swiss city of Geneva, do not have their risk scrutinized like banks whose commercial operations are now sharply constrained by oversight legislation adopted on both sides of the Atlantic after the 2008 banking crisis. With the exception of the newly-listed Glencore Xtrata, these companies are not publicly traded either. Decades worth of history in high-stakes commodity markets, particularly in crude oil, do not scare trading firms away from the capital-intensive LNG market. Email: [email protected] NEW YORK LONDON PERTH ATHENS HONG KONG SINGAPORE GUANGZHOU Citibank also recently lost Short-Term Charter Shipping Days for Traders LNG traders to Eni. Some 450 think the recent flight of 400 traders from banks is not a 350 larger trend and that empty 300 seats at Citi and Morgan 250 Trafigura EGL Stanley will be filled quickly, 200 Gunvor Vitol 150 despite the new constraints Total Ship Charter Days on bonus payments that 100 have been unpopular with 50 0 trading desks. But the 2011 2012 2013 (Annualized) success of commodity Data aggregates all shipping charter days by trader for contracts of less than three months duration traders in LNG is Source: Poten & Partners LNG Commercial Dept. undeniable. Vitol initially put its stamp on the market with a five-year sale to Kuwait’s KPC, which expires in October. It also has a 10-year contract with Korea Midland Power for 0.4 MMt/y beginning in 2015. The world’s largest oil trader was tapped to deliver 0.7 MMt/y to Escobar this year and recently won a tender from the Israel Electric Corp over competition from Russia’s Gazprom. This month Vitol signed a preliminary deal with Rosneft, the Russian oil giant looking to create an LNG project in Far East Russia, which could give the trader access to volumes from 2019. Following in Vitol’s footsteps, Trafigura pulled off a coup in Mexico when two state-owned companies awarded the Swiss trader 19 out of 29 cargoes in a recent buy tender. Trafigura had completed a handful of LNG spot deals in the past but stepped into the spot light with the obligation in Mexico. Even among traders a hierarchy is emerging. Vitol is currently the dominant player, dwarfing its western rivals in terms of ships chartered and deals done. But with its substantial supply position at Manzanillo, Trafigura could eventually take top billing – particularly if its Sonaci DT Pte partnership with Sonangol can bring Angola LNG cargoes to bear (see LNGWM, Feb ’13). One marketer says the new plant represents the best volume opportunity for non- traditional players, as all of the production from the 5.2 MMt/y train is expected to be sold on the short-term market. There is always downside risk in the physical market, however. Morgan Stanley, for example, is thought to have gotten caught out Email: [email protected] NEW YORK LONDON PERTH ATHENS HONG KONG SINGAPORE GUANGZHOU after the Fukushima disaster in Japan upended the market and left its unhedged position exposed.
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