(Bloomberg) — Coal traders are turning to private finance to keep supplies flowing after a European ban on Russian imports raised prices fivefold.
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Russia accounted for almost half of the EU’s coal imports in 2020, but all purchases stopped in August as the bloc imposed sanctions over the war in Ukraine. This has boosted trade flows as European buyers look to the world for alternative supplies to offset power shortages and push up prices.
The walkout was a problem for traders who were already under pressure when banks refused to finance coal deals in recent years. With each load now worth more, it becomes more difficult to transfer funds, pushing traders to private funds, which usually charge higher interest rates.
“Most banks and insurance companies won’t touch it, so traders are coming to the alternative market,” said Peter Ryan, managing director of private equity fund Goba Capital. According to Ryan, Goba has more than $500 million in debt in its pipeline, most of which is from coal.
As Europe faces its worst energy crisis in decades, a number of countries have backed plans to phase out coal and use the fuel to power power plants as natural gas prices rise amid a supply crunch.
The growing demand for polluting goods, as well as the high yield of traders willing to access credit, contributed to the increasing willingness of funds to trade in banks.
Trade finance is usually secured, which means that the lending bank effectively owns the cargo at the time of shipment, making it a typically cost-effective business. According to Ryan, Goba, while banks require low single-digit rates to finance metal or oil cargoes, funds are offering interest rates in the mid-teens for coal trades.
Such financing opportunities attract funds with a focus on commodities, but those that have traditionally focused on general business financing.
“We’re not hard goods specialists,” Ryan said. “It’s just a new reality, especially in coal, where high prices lend themselves to our high yield offering.”
According to Chris Scott, chief financial officer at Novum Energy Trading Corp., which specializes in oil products but also trades U.S. and Columbia coal, margins are so good in coal that the market can handle high lending rates.
“The fees are there for a reason – the margins are there to support the additional capital costs,” Scott said, adding that higher costs tend to get lost and energy providers end up charging customers more to heat them.
“The truth is, at the end of the day, it’s the man on the street who pays for it. It always goes through the chain. “
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