Coal Traders Turn to Private Finance as High Demand Lifts Prices

(Bloomberg) — Coal traders are turning to private finance to keep shipments moving after a European ban on Russian imports sent prices quintupling.

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Russia used to account for almost half of the European Union’s hard coal imports in 2020, but all purchases stopped in August as the bloc imposed sanctions over the war in Ukraine. This has reversed trade flows as European buyers scan the world for alternative supplies to offset energy shortages, causing prices to rise.

The rally was a problem for traders, who were already under pressure as banks pulled back from financing thermal coal transactions in recent years. With each commodity now costing much more, financing shipments has become more difficult, pushing traders towards private funds – which typically charge higher interest.

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“Most banks and insurance companies won’t touch it, so traders are entering the alternative market,” said Peter Ryan, managing director at private finance fund Goba Capital. . Goba has more than $500 million in its commodity lending pipeline — the majority in coal — according to Ryan.

With Europe suffering its worst energy crisis in decades, a number of countries have backed down on plans to phase out coal, using the fuel to power power plants as as natural gas costs have risen amid a supply crisis.

Increased demand for the polluting commodity — as well as high-yielding traders willing to pay to access credit — underpinned funds’ growing willingness to trade bankroll.

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Commodity trade financing is usually done on a secured basis, meaning that the lending bank effectively owns the goods during shipment — making it a typically low-margin business. But while banks charge low single digits for metals or oil cargo financing, funds have been offering interest rates in the mid-teens for coal trades, according to Ryan of ‘ Goba.

Such funding opportunities attract funds with a focus on commodities, but also those that have traditionally concentrated on generic trade finance.

“We’re not hard commodity specialists,” Ryan said. “It’s just this new reality, especially in coal, where the high prices lend themselves to our high yield offering.”

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Trading margins on coal are so good that the market can withstand very high lending rates, according to Chris Scott, chief financial officer of Novum Energy Trading Corp., which specializes in energy products. oil but also trades American and Colombian coal.

“The funds are there for a reason — the margins are there to support the additional capital costs,” Scott said, adding that high costs tend to be passed on, with energy providers eventually charging customers more for their heating.

“The reality is, at the end of the day it’s the man in the street who is paying for it. It’s always being passed down the chain.”

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