Analysis: Coal outlook, market shrinkage behind Spanish trade slump

Over the counter (OTC) liquidity in the Spanish power market plummeted 75% year on year in January which has been attributed to both uncertainty over the price of coal, and the reported exit of a number of large counterparties from the market.

Traded volume totalled around 7.25TWh in January 2015, compared to about 27TWh in January 2014, according to ICIS data. Trade of the front year contract was down 80% year on year.

One trader said: “The coal price has been very volatile, so people have refrained from trading, particularly on the curve. Gas prices in Spain have moved quite a lot too, which has also had a minor impact.”

Coal has become an increasingly important source for electricity generation in Spain over the past six months, so it is not surprising movement in that market has had an impact on the Spanish power sector. Coal accounted for 23% of all electricity produced in January 2015, more than double the 10% it produced in January 2014 according to REE data.

In terms of prices, coal for delivery in 2016 moved within a $6.80/tonne range in January 2015, while the equivalent 2015 contract fluctuated by $3.60/tonne during January 2014. Similar movement was seen in the Q4 2015 contract, with the highest and the lowest prices being $6.75/tonne apart. This compared to a $3.60/tonne range in January 2014.

A second trader said: “I’m not surprised by these figures. There has been a number of changes in the market, and a number of active participants have stopped trading which is one reason for the decline.”

The trader did not name these counterparties.

“The other factor is that there wasn’t very much price movement on the curve, so there wasn’t a great deal of incentive to trade,” the dealer added.

The Year 2016 product traded €1.60/MWh lower during the course of January, while the equivalent 2015 product gained €1.50/MWh during the first month of 2014, according to ICIS pricing data.

Brighter future?

Liquidity has fallen annually in Spain for the past five years due to falling demand, which in turn has been the result of an economic depression. OTC liquidity fell 17% year on year in 2014, while demand was down 1.2%.

But while the finalisation of regulatory reform has resulted in more certainty in the market, and demand has increased 2.3% year to date, traders are uncertain whether the drop in liquidity will be stemmed as demand continues to pick up.

Liquidity has picked up a little month on month and in February to date traded volume totals 9TWh. The year on year difference between front year liquidity has narrowed a little, with volumes in February 2015 being 65% lower than they were during February 2015.

One trader said: “It’s impossible to know if liquidity will pick up further, it’s what we all want to know, of course. Increased demand and better economic conditions could attract new players to the market which would boost liquidity. But it’s all theoretical, and some traders feel there are better opportunities in other, growing markets.” Claire Wilson