(Bloomberg) – Coal traders are turning to private financing to keep shipments going after a European ban on Russian imports caused prices to quintuple.
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Russia accounted for almost half of the European Union’s hard coal imports in 2020, but purchases all but stopped in August when the bloc imposed sanctions over the war in Ukraine. It has upended trade flows as European buyers scour the world for alternative supplies to fill an energy shortage, causing prices to spike.
The recovery has been a problem for traders, who were already under pressure when banks pulled back from financing thermal coal transactions in recent years. With each shipment now worth much more, financing shipments has become trickier, pushing traders into private funds – which typically charge higher interest.
“Most banks and insurance companies won’t touch it, so traders are looking to the alternative market,” said Peter Ryan, managing director of private finance fund Goba Capital. Goba has more than $500 million in its commodity loan pipeline — the majority in coal — according to Ryan.
As Europe suffers its worst energy crisis in decades, a number of countries have backtracked on coal phase-out plans, using the fuel to power power stations as natural gas costs rise in a context of shortage of supply.
The increased demand for the polluting product – as well as the high returns that traders are willing to pay to access credit – have underpinned the growing willingness of funds to finance transactions.
Commodity trade finance is usually secured on a secured basis, meaning that the lending bank effectively owns the cargo during shipment, which generally makes it a low-margin business. But whereas banks would charge low single digits to finance a shipment of metals or oil, the funds are offering mid-teens interest rates for coal swaps, according to Goba’s Ryan.
These funding opportunities appeal to commodity-focused funds, but also those that have traditionally focused on generic trade finance.
“We’re not hardcore commodity specialists,” Ryan said. “It’s just this new reality, especially in coal, where high prices lend themselves to our high yield offering.”
Coal trading margins are so good that the market can face exorbitant lending rates, according to Chris Scott, chief financial officer of Novum Energy Trading Corp., which specializes in petroleum products but also trades US and Colombian coal. .
“The funds are there for a reason – the margins are there to support the additional costs of capital,” Scott said, adding that high expenses tend to be passed on, with energy providers ending up charging customers more for their energy. heater.
“The reality is that at the end of the day, it’s the man on the street who pays. It is always transmitted along the chain.
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