Enron collapse cannot stem chemicals futures tide

07 December 2001 09:55  [Source: ICIS news]

The limited impact on chemicals of Enron’s financial collapse shows that the move towards much more active electronic futures trading in chemicals is unstoppable.

Companies have been slow to take advantage of hedging opportunities but they are getting used to relatively new (for them) ideas and concepts. Many more chemical deals are being done now compared with only a few months ago; while only a limited number of players are active, the number of trades on the online trading platforms is growing fast. The bigger consultants are also becoming much more heavily involved.

Enron’s problems particularly do not appear to have stemmed this growing enthusiasm. Certainly, even the most exposed energy markets have relatively smoothly taken up the slack created by the energy trader and producer’s withdrawal. Enron had been active in electronic chemicals futures trading but this was always a limited part of its business. Its ‘one to many’ business model didn’t work well and its spreads were very high. The company introduced online futures trading in a handful of products late last year and introduced styrene swaps in August but volume was well behind that traded on online auction sites such as CheMatch and ChemConnect.

There is no doubt that trading has taken off in aromatics in only a relatively short period. In Europe, the loss of some forward contracts for ethylene has not stopped producers looking much more closely at what they can gain from this side of the market. Europe is behind the US but aromatics trades on CheMatch, for instance, have risen from between 5000 tonne and 10 000 tonne a week in the second quarter to closer to 50 000 tonne a week. There has also been more movement in olefins. ChemConnect has seen an increase in trades of methanol and methyl tertiary butyl ether (MTBE).

European product managers are meeting next week at an invitation-only workshop following the European Petrochemical Luncheon (EPL) in Antwerp where they plan to talk about paper trades. This fact alone illustrates growing interest in the market. Individually, managers have to be comfortable with trading in this sort of environment. They and their companies have to get to grips with putting in place the trading management systems and trading control mechanisms through which ultimately they will operate.

Parallels can be drawn between the first tentative steps towards currency hedging companies took 20 years ago. No chief financial officer today would want to operate without this capability. In the same way the bigger firms are learning more about paper trading and risk management when applied to physical product. At some stage companies have to work out what the linkage is between their commercial, or physical, and their financial exposure.

In cyclical chemical markets many managers take a lot of persuading that they should hedge forward. Not known for its dynamism, the chemical industry does seem to be reluctant to move on and expose itself to this particular wave of change. Most producers are faced with volatile feedstock costs and none too volatile product prices. They all want to generate a lot of cash in the upturn so they seem to be prepared to put up with painfully thin margins for a long period.

But the pressure on them to change and manage margins much more closely is growing by the day. Companies are expected now to manage exposure and risk better so some sort of forward trading will have to be developed. How the impact on traditional markets develops remains to be seen but the pull of the new is inexorable.

(CNI's parent company, Reed Elsevier, has an equity share in CheMatch.)

By: Nigel Davis
+44 20 8652 3214

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