Market Dynamics Report

JANUARY 10 2013

2012 - The Year in Review

 The seasonally low volumes of December bring 2012 to an end. So what were the key trends and movements in the Euro Commodity Markets?

1. UK Gas: The Rise of Exchange Execution - A Game of Two Halves

H1 2012 saw a fairly stable market composition for UK Gas – a continuation of YE 2011. H2 2012 saw a surge in exchange activity, with exchange executions grabbing a record month share in November. During December 2012 this trend reversed, with market composition settling back to H1 2012 levels.

The result: FY 2012 vs FY 2011 saw exchange executions gaining a small share at the sole expense of broker bilateral.

2. Coal: Dodd-Frank and the Shift to Clearing

While the major European coal markets of API2 and API4 began the year as majority cleared, we end the year with a market that is almost fully cleared. This shift to clearing became apparent during September and October this year – the month prior and the month of the key Dodd-Frank implementation date of 12 October 2012. Based on current data, the majority of this is traded as swaps but there is a growing proportion of block futures executed at both exchange venues.

3. Emissions: Increasing Volumes, Falling Prices, and Venue Closure

While the emissions markets had a tough time in 2011, 2012 was tougher. The EUA price dropped below €8, to finish the year at €6.67 – a steep drop vs. December 2011. While prices suffered, volumes did not – both EUA and CER volumes were up, with emissions ending the year as the third largest Euro Commodity Group.

A stable factor for emissions this year was market share split, with the composition remaining similar to that in 2011.

Another theme for emissions was that of shrinking venues – Bluenext closed early December and Bayerische Borse's greenmarket shut its doors in June. CME also acquired 100% of the Green Exchange, absorbing it completely into the NYMEX portion of their business.

4. European Gas: Major Corporate Activity and the Outstanding Growth Story

The big news in European Gas this year was the announcement of ICE's acquisition of APX-Endex's Derivatives and Spot Gas business in September. The closure of this deal in early 2013 will see the futures exchange market for the largest European Gas contract, TTF, shrink by half (from two exchanges to one). It also brings the spot and futures market for UK Gas onto one exchange operator.

In addition, during November, EEX and Powernext announced the development of a Pan-European Gas market collaboration to offer EEX's TTF and German Gas markets alongside Powernext's PEG market.

While Euro Gas is currently a majority brokered market, this has been tested this year with exchanges growing share in TTF.

European Gas is the volume growth story for 2012 – with a double digit increase in trading volume vs 2011. TTF grew to end the year almost half the size of UK Gas, up from just over a third the size FY 2011; while German Gas volumes were significantly up vs 2011 – the 2012 star of the Euro Commodity markets.

5. European Power: Volumes Down, Market Composition

While German Power volumes were down during 2012, the overriding market composition theme was an increase in cleared market share. The surprise kick-back right at the end of the year also saw the cleared market jump to an unprecedented share of the market in December. 2012 ended with exchange executions gaining at the expense of broker bilateral and broker cleared.

The French Power story was one of decreasing volumes and increasing broker share – volumes dropped 2012 vs 2011 while broker share gained at the expense of the cleared market.

6. UK Power: Volumes Drop, Market Composition Stable

The move by several of the large utilities active in the UK Power markets to auction a large percentage their day ahead volume through the N2Ex auction may have impacted on UK Power derivative market volumes this year, with Dec 2012 volumes down vs. Dec 2011. This was a common theme for UK Power during 2012, with volumes down YoY in almost every month.

Despite this, market composition was stable – a fully brokered market.

All in all, 2012 was a dynamic year filled with activity. We've enjoyed following and reporting on it. We look forward to an interesting 2013.