Turkish traders eye EU energy markets but face tough barriers

Growing liquidity and bullish prices in central and southeast European energy markets have caught the attention of Turkish traders and brokers who are now looking to gain a foothold in neighbouring countries.

However, challenges linked to financial risk and different trading cultures are likely to raise significant barriers, ICIS has found.

A wave of French nuclear outages at the end of last year sent European power prices soaring and triggered volatility across all continental power markets.

This meant that countries such as Hungary saw all-time highs in their traded volume, with as much as 29.6TWh changing hands over the counter (OTC) in November alone, overtaking the Netherlands in 2016 as the fourth-largest OTC power market in Europe.

As Turkey’s own economic landscape has deteriorated in recent months pressuring energy demand, and implicitly returns, companies are now in search of new markets and better opportunities.

Ayen, a Turkish company, has already become an established name in Hungary, having traded the market for three years.

And at least another four Turkish firms are thought to have either set up a subsidiary in the region or sought to trade in Romania, Serbia and Bulgaria.

However, the switch to other markets is fraught with difficulties linked either to Turkey’s own country risk or to bureaucratic barriers in the target countries.

Financial risk

A major challenge for Turkish companies looking to trade European markets is linked to requirements for high credit limits and the full disclosure of properly audited financial records.

A Turkish trader who already operates in European markets said Turkey’s increased country risk following its downgrade by rating agencies as well as individual companies’ weak balance sheets would be a significant hurdle to becoming a counterparty for European trading outfits.

“You don’t have to be a big company in Europe, all you need is to have proper financials,” a Turkish trader said.

“You need to prove reputation and be ethical in trading. One default even at a weekly delivery is enough to put a company on the black list everywhere.”

Another Turkish trader looking to establish a presence in Europe said the debt-to-equity ratio had increased in the Turkish energy sector, raising serious fears about widespread bankruptcies. Companies in a weak financial position may be perceived as carrying higher risk, which may leave them unable to find trading counterparties on the over-the-counter market, he said.

To clear the financial risk, Turkish companies would have to establish a European entity from scratch, but this in itself may raise problems.

“If Turkish companies want to trade other markets they would need a collateral. In order to get a collateral you need a European bank to underwrite it. In order to get a European bank to underwrite it you would need an EU company and have EU assets. It’s a loop,” he said.

Exchange barriers

If, on the other hand, Turkish companies wanted to trade on European energy exchanges, they might face other types of restrictions. A Turkish trader who had an interest in trading on the London-based Intercontinental Exchange (ICE) said the bourse considered the Turkish jurisdiction as presenting a high degree of risk.

According to ICE requirements, Turkish participants can only enter into derivative transactions through intermediary institutions authorised by Turkey’s Capital Markets Board, the country’s financial watchdog.

Meanwhile the day-ahead exchange EPEX SPOT, which is part of Europe’s largest energy exchange EEX, does not raise any restrictions for Turkish traders, but requires all participants to take training courses and pass exams before being allowed to join the platform. Similar requirements are made by the Hungarian day-ahead exchange HUPX.

Trading culture

Turkish traders already active on European markets said companies looking to enter them would have to sharpen up their trading mindset, improve their analytical skills and avoid thinking in terms of spot trading only.

“There needs to be more know-how building and paying up for good talent,” another trader said.

Another source active in European markets said there were significant differences between countries.

“You need a local trader for Balkan countries to communicate,” he said. “Data is not available at all times, you need to call to get information. Sometimes you don’t receive tender e-mails, so you need to ask around. Also, there are language barriers. Some transmission system operators in Balkan countries prefer to speak their language.”aura.sabadus@icis.com