(Bloomberg) — Coal traders are turning to private finance to keep shipments going after a European ban on Russian imports sent prices soaring fivefold.
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Russia made up about half of the EU’s hard-coal imports in 2020, but stopped all purchases in August as the bloc imposed sanctions over the war in Ukraine. European buyers scan the world for alternative supplies and increase trade flows to plug energy shortages, driving up prices.
The rally is a problem for traders, who were already under pressure as banks have pulled back on lending for thermal-coal deals in recent years. As each cargo is now more valuable, funding shipments has become more difficult, pushing traders to private funds — which typically charge higher interest.
“Most banks and insurance companies won’t touch it, so traders are coming to the alternative market,” said Peter Ryan, managing director of private finance fund Goba Capital. Goba has more than $500 million in its commodities financing pipeline — mostly coal — according to Ryan.
As Europe faces its worst energy crisis in decades, a number of countries have backed plans to phase out coal, using the fuel to fuel power plants, due to rising natural-gas costs amid supply shortages.
Rising demand for polluting commodities — as well as the higher yields traders are willing to pay to get credit — has driven a growing desire to fund bankroll trades.
Commodity trade finance is typically done on a secured basis, meaning the lending bank effectively owns the cargo during shipment — making it a typically low-margin business. But while banks will charge low single-digit figures to finance metals or oil cargoes, funds are offering interest rates in the mid-teens for coal trades, according to Gobana Ryan.
Such financing opportunities attract funds focused on commodities, but also those that have traditionally focused on general trade finance.
“We’re not hardcore commodities experts,” Ryan said. “It’s just this new reality, particularly in coal, where higher prices lend themselves to our higher-yield offering.”
Trading margins on coal are good enough that the market can withstand sky-high lending rates, according to Chris Scott, chief financial officer at Novum Energy Trading Corp., which specializes in oil products but also trades U.S. and Colombian coal.
“The funds are there for a reason — the margin is there to support additional capital costs,” Scott said, adding that the higher costs are passed along as energy providers ultimately charge customers more for their heating.
“The reality is, at the end of the day it’s the man on the street who’s paying for it. It is always passing through the chain.
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