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Market Dynamics Report

AUGUST 14 2013

July 2013

Major exchange reaches record levels in coal, German Power looms large on the political landscape and European Gas continues to gain on UK Gas

The key coal contracts of API2 and API4 continue to be the main story of 2013, with high volumes, falling prices, and continued competition between two major exchanges. Although API2 volumes fell vs. June 2013, they are still up YTD. API4 volumes are also up YTD. Prices bottomed out in API2, ending July up MoM, while API4 prices fell to a record low. One of the two exchanges battling for majority share strengthened its position in the cleared coal markets, climbing to a record percentage of the cleared API2 market, and the majority of the cleared API4 market. The split of the total cleared coal markets is now heavily in favour of this exchange. Block futures contracts have leveled out after months of steady growth, dropping as a percentage of total cleared volume, vs. June 2013. Have block futures reached saturation point within the cleared market? Or does July 2013 represent an aberration after months of steady growth?

As Germany continues its "Energiewende" programme to significantly reduce emissions and provide the majority of the country's electricity consumption from renewable sources by 2050, the dynamics of the German Power market will continue to be monitored closely. Large German utility companies are pressurising the government to soften these aggressive targets as they are struggling to maintain profitability, as renewable energy will always take priority for feeding the grid whenever the weather is suitable to produce it. Front month prices spiked in July 2013, up from the record low month of June, YoY prices are down and this oversupply will continue to put downward pressure on both the power prices and the profitability of the large producers.

European Gas continues to close the gap on NBP for the title of the largest European Energy Commodity class, with volumes increasing as a percentage of NBP volumes in July 2013. Volumes in NBP continue to decline, down YTD, while TTF, NCG and Gaspool volumes are up. NBP appears to have reached full maturity as a market while the mainland European markets continue to grow. Will this growth translate itself in a growing share for the exchanges active in the European Gas markets, or will they continue to be majority broker bilateral?