Some still love coal as exchanges battle for market dominance

[LONDON] Coal may be under attack from the Paris climate deal and governments promising its demise, but the world's biggest exchanges covet the fuel more than ever.

The organic rock used to generate 40 per cent of the world's electricity is at the center of a hard-fought battle for trading revenue in Europe between CME Group Inc and Intercontinental Exchange Inc.

CME has been winning for the past three years as the Chicago-based bourse offered incentives to brokers and simpler trading. ICE, the dominant energy market in the region, cut fees to zero and bought a trading software provider to get direct access to brokers.

Their effort and sacrifices show how far exchanges will go to gain business just as regulators boost oversight of markets from electricity to carbon, driving more of Europe's trading to cleared exchanges from over-the-counter markets. As coal trading jumped 44 per cent last year in Europe, CME garnered two-thirds of the US$305 billion non-US financial coal market, according to Prospex Research Ltd.

"CME is trying to get a foothold in Europe," said Paul Gulberg, a New York-based analyst at Portales Partners LLC, which provides financial-services research. "Energy is very important because it's one of the biggest buckets of business."

Almost 200 nations agreed in Paris last December to a pact curbing greenhouse-gas emissions. While it didn't specify fuels, coal is the largest source of planet-warming carbon dioxide. The UK already plans to phase out coal power in the next decade, Germany aims to get more than half its energy from renewables by 2050 and President Barack Obama is pushing for curbs of emissions from coal and gas-fired plants in the world's biggest economy.

For CME, energy markets are especially valuable as it gets US$1.19 for each contract traded, more than double the revenue from financial products, according to its website. Average daily volume for energy jumped 21 per cent at CME last year, helping cushion a 4 per cent drop in interest-rate trading.

To encourage new participants to coal, CME has made it easier to trade options and has also allowed brokers to send deals done privately, or over-the-counter, straight to the exchange for clearing.

"The coal market is a very competitive place," Henrik Hasselknippe, senior director for energy products for CME in London, said in an interview. "We might still be relatively small in terms of European energy, but using our global footprint we are looking to bring the market out to a vast number of participants."

While on paper it's cheaper to trade coal on CME - it charges US$7 per 1,000 metric-ton contract compared with US$9 on ICE - both exchanges provide concessions that make transaction costs more competitive. CME declined to comment on its incentive programs.

ICE, for its part, has offered traders fee rebates of as much as 100 per cent to "stimulate global activity and interest in our offering," Adaora Anunoby, a spokeswoman for the company in London, said by e-mail.

ICE also bought Trayport Ltd, a software company that allows brokers, utilities and energy producers to trade over- the-counter contracts for more than 40 commodity markets including coal. One of its services will include helping clients comply with mandatory trade reporting under new EU rules on market transparency. The US$650 million acquisition in November keeps Trayport from CME, which tried to buy it in 2014.

"Trayport is the plumbing for European energy trading," said Michael Cosgrove, a partner in Vectra Capital LLC, a New York-based trading firm. "It's going to be extremely valuable to ICE" as it seeks market share.

Coal's attraction for traders is building after prices plunged 33 per cent last year in Europe, undermined by shrinking Chinese demand, tougher emissions standards and slumping natural gas, a cleaner substitute in power generation. At the same time, Asian markets, including India, are forecast to still need coal well into the future, boosting trading opportunities.

"Once ICE digests Trayport, it could bridge the gap with CME when it comes to coal trading," said Elchin Mammadov, an analyst in London with Bloomberg Intelligence. "There is money to be made in coal."

BLOOMBERG