Enron demise ignites e-tools debate

10 December 2001 00:00  [Source: ICB]

The spectacular collapse of Enron over the last ten days (see page 7) reignited a debate on the validity and future of risk management and online trading for the European petrochemical industry.

Enron was one of the pioneers of online trading, risk management and contracts for difference (swaps) and had made its mark in the petrochemical trading community very quickly.

'Such a swift fall could not have been predicted by anybody', one source said, and added 'many players will be looking at their positions, as there is a serious credit issue here, some people have deals covering the first quarter of 2002'.

Other players appeared to have picked up the signs of what was happening. 'I am not surprised they have had problems, the signals were there for some time, it just didn't taste right', said a trader. 'They were acting like kings, very arrogant, it was clear something was going wrong'.

It was Enron that introduced the concept of financial risk management into the day-to-day running of petrochemical companies' businesses.

Recently, the company launched benzene swaps in Europe (ECN 24 September 2001). The idea was to extend price hedging and paper trading beyond naphtha into olefins and aromatics.

Enron launched in Europe only in 2000, still a young player compared to CheMatch and Chemconnect. Compared to its traditional activities in deregulated sectors such as electricity and gas, Enron entered a petrochemical market which already had a certain element of liquidity anyway.

The recent events may have shaken players' confidence in these new tools and confirmed their original reservations.

One aromatics player said: 'The level of liquidity is smaller than people think and most of Enron's business was still concluded through traditional OTC deals.' 'The fact that they have gone bankrupt says a lot about the value of their solutions for our industry,' commented an olefins producer.

Enron's disappearance will certainly prompt an increase in trading on other platforms but it also opens up opportunities for further consolidation in online business.

'People want one platform to trade on, they want to see clear market leadership in order to create the right level of liquidity', comments Paul Hodges of International eChem. Hodges also says: 'The interest is there, it is a case of people feeling comfortable with these tools and setting up systems that allow trading control.'

Another likely effect of the demise of Enron will be the delay in the further development of hedging tools.

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