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APX –Endex Wood Pellet Exchange has cold start
|Published on [PUBL_DATE]|
November last year, APX-Endex in cooperation with the Port of Rotterdam launched a new market; the biomass renewable energy exchange.
The first contract listed on this exchange is an industrial wood pellets contract. Rotterdam was chosen for its proximity to key wood pellet consumers in Germany, its accessibility for US exporters, and the ambition of the port of Rotterdam to advance its status as an energy trading hub.
Already in 2008, APX-Endex started publishing an industrial wood pellets index, for which the pricing panel now has 13 members. This index should bring price transparency to an opaque, regionally fragmented market.
The biomass exchange will be launched in two phases. During the first current phase trades will not go through a clearing house and physical settlement is arranged bilaterally by counterparties. Phase two, scheduled to take place during the course of 2012, will include the development and implementation of clearing services for wood pellets contracts.
Talking to several market insiders we learned that they are quite pleased with the index that is published by APX-Endex, because that provides so much needed transparency to the market. About the trading side they were not that outspoken. Although there were orders on the screen, no trades were done yet. Also on the underlying OTC market there were only a few transactions established lately. A spokes woman of the APX –Endex, told Maycroft that they remain optimistic as there is an increased interest from the market participants since the launch of the exchange. They are therefore confident that trading will pick up.
Some market players told us that they expect trading to take off once the clearing will be introduced. Others did have a different opinion. A biomass trader of an European utility, for instance, is of the opinion that the introduction of Clearing is not going to be a game changer. He believes that for trading to take off first a standard contract like the one made up by EFET for power and gas need to be developed. On top of that also the sustainability annex/criteria need to be standardized. Once that is established, market making should be offered via Trayport, where APX-Endex should act as the broker. First after that clearing should be introduced.
Looking at the market fundamentals and its future outlook one could identify some interesting features. Today the bulk of the demand for wood pellets comes from Europe, because the European Union has rules requiring member countries to generate 20% of their electricity from renewable sources by 2020.
But a big hurdle to the development of pan-European renewable product markets is the lack of a common approach among the EU Member States. As a result there exist sharply differing regulatory frameworks, government incentives and local laws across Europe today. Besides today there are only 7 big buyers in Europe, mainly utilities. That number does not look sufficient to get a liquid wood pellet trading market on both the OTC as well as the APX-Endex market.
There are several experts who have expressed their concerns whether there exist enough resources to cover an increasing demand and managing of the trading of wood pellets in a sustainable way. Because it is not only in Europe the market develops. New market areas are starting to develop and large potential users like Brazil, Argentina, Chile and New Zealand are set to become significant players in the global wood pellet market in the near term. Further it seems fair to assume that Asian-Pacific countries like China, South Korea, Australia, India and Japan will become important actors as well in the next decade or so. Are these countries going to use the Rotterdam based Index as the benchmark in their contracts or will they develop a regional index?
As for most new contracts liquidity will be key and as is described above it remains to be seen whether that will happen to the APX-Endex wood pellet market. There is a historic lesson that could be learned from an earlier initiative between an exchange and the Rotterdam Harbour trading community; the failed attempt to launch an Oil futures market in Rotterdam at the end of the eighties of the last century. That exchange, called the ROEFEX, was a joint venture between the Amsterdam Options Exchange ( now part of NYSE-Euronext) and the Rotterdam Oil Trading community and was forced to close its doors within 2 years after its launch. The Rotterdam oil traders thought that because Rotterdam was and still is the oil trading hub in Europe that they should also facilitate for a futures exchange.
That was a misconception as - despite the interest shown by many important market players -, they were never able to attract enough liquidity to make the exchange a success. Although the reason for the lack of liquidity looks different than that of the wood pellet market. The ROEFEX was in fierce competition with the already successful and liquid IPE (now ICE Futures) in London. However, the main lesson that could be learned was that it is the market players who finally decide whether they will use an exchange and its contracts yes or no. They will only use it when there is sufficient liquidity to ensure an efficient market with the best prices.
That seems to be the big challenge to the APX-Endex. The wood pellet exchange is also a joint initiative between an exchange, the APX-Endex and the Rotterdam Harbour. The Rotterdam companies backing the new initiative are very active in the physical trading of the wood pellets. The question is whether they make the same mistake in their way of thinking as their oil peers 25 years ago or that it is based on real good market fundamentals analysis.
Or should we look at this initiative in the way as expressed by Bert den Ouden , CEO of APX-Endex: "The bottom line is, let's finally start creating a market for renewables. If we want to realise all those targets for renewables in Europe, we should do away with a fragmented market, with preferences for different types of renewables, different subsidies, etc. We should create a unified market and do it in the most cost-effective way. If our biomass exchange can be a first stimulus for that, then I think it has served its purpose." Only time will tell.
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