Serbian OTC liquidity down but new exchange could boost it – traders

Serbian over-the-counter (OTC) electricity traded volumes have plummeted in 2014, but the launch of a day-ahead exchange due at the start of next year is expected to reverse the trend.

A total of 134.40GWh have changed hands on the Serbian OTC market between 1 January – 11 July 2014, a 40% drop year on year, according to ICIS data. The stark drop is down to several factors that have changed the behaviour of market participants year on year.

From selling to buying

In 2013 state-owned utility EPS, the biggest market player in Serbia, was long because of very good hydro availability and previously secured volumes from annual tenders. As a result the company was constantly on the selling side, traders have said.

This boosted liquidity last year as EPS is the only big producer on the market. EPS sells and buys mainly through tenders, but it also trades OTC to meet additional demand ( see EDEM 30 January 2014 ). “Only EPS [enables] liquidity in Serbia,” one regional trader remarked.

However, at the start of this year EPS sold less, traders noted, while an unexpected coal supply disruption, caused by severe flooding in May, moved EPS to the buying side ( see EDEM 30 May 2014 ).

This has harmed OTC liquidity, as the company then mainly bought volumes via tenders.

Foreign players

In 2013, the Serbian market also saw a new wave of foreign players active on the OTC market – which temporarily boosted liquidity.

“Last year, late spring to early summer, I noticed a renaissance on the Serbian [OTC] market […] some new companies entered the market [but] with relatively young and inexperienced traders,” the first trader said.

However, small profit margins and hidden costs meant that they have retreated from OTC trade again this year.

Although Serbian OTC prices are quoted in Euros, the same trader added, actual transactions are done in Serbian Dinners. This affects profit margins, because of the FX rate changes and because EPS, the main seller, always tries to reach a price as close to the Hungarian equivalent as possible.

Two other traders agreed that foreign companies had withdrawn from OTC this year.

Transit area

Many companies use Serbia as a transit country to flow electricity, paid for in Euros, to more profitable neighboring markets. This also limits liquidity, another Balkan trader noted.

He explained that there were no congestions on the Hungarian-Serbian border and, since there is higher liquidity in Hungary, it was easier for market participants to trade in Hungary directly, the source said.

“I think that the main reason for dropping liquidity this year is that there is no major spread between Serbia and Hungary [yet], “ he remarked.

On average the Serbian Day-ahead has been assessed at a €0.10/MWh discount to the Hungarian counterpart so far this year, ICIS data shows.

“After the floods EPS is most likely to be a serious buyer in Q4 and in Q1, “ the same trader added. This meant the discount of the Serbian contract to the Hungarian equivalent could widen and more electricty be traderd on the cheaper OTC market later in 2014.

Exchange hopes

The long overdue day-ahead exchange also has the potential to improve trading interest on the OTC market, sources agreed, once it builds up its own liquidity.

The SEEPEX exchange should be established as a company by November with day-ahead and intra-day trading to start in the first quarter of next year ( see EDEM 20 June 2014 ).

“I think that the Serbian exchange can increase trading on OTC. But the question is who will participate on this exchange, especially will there be serious market maker(s)?” the Balkan trader said.

“If they manage to have EPS as a market maker and the exchange builds up liquidity in a short period of time we could expect that it can take part of the liquidity from Hungary,” the first trader said.

Initially, this would mean OTC activity would dry up as well, he added. However, once a stable reference day-ahead price is developed on the exchange, OTC will pick up again, he said.

“I think that the exchange will surely increase the liquidity, especially if EPS goes there and it should. I expect the market in the Balkan [region] to normalise because of that, but I am skeptical if the exchange will actually start as planned,” a fourth source said.

Two other traders agreed that Serbia would also need to couple its market in order to boost liquidity.

The country’s energy regulator recently announced that Serbia is determined to start work on joining the EU’s market coupling initiative once the exchange is up and running ( see EDEM 20 June 2014 ). Irina Peltegova