May 3, 2013 8:53 am

Germany’s Eon relaunches in-house commodities trading arm

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men working on the logo of German power giant E.ON©AFP

Eon, the largest German utility by sales, is relaunching its in-house trading business, aiming to build a global presence at a time when the global commodities trading industry faces headwinds after a decade-long boom.

The Düsseldorf-based company on Thursday unveiled Eon Global Commodities, a new subsidiary, created from the merger of Eon Energy Trading, which previously handled power, coal and natural gas trading, and Eon Ruhrgas, which in the past managed long-term physical supply contracts for natural gas.

“We are going to evolve from a European player into a global organisation,” Klaus Schäfer, chief executive of Eon Global Commodities, said in an interview.

Eon Global Commodities, which will trade anything from electricity to natural gas and from oil to coal, believes the combination will give it a reach the two previous units were unable to achieve in the past separately. In particular, the merger with Ruhrgas will give the trading unit access to pipelines and gas storage facilities.

Mr Schäfer said the new organisation would allow Eon to compete in a market that has become more complex and challenging to trade. “Values pools have shifted – take the power market: you cannot simply make money by arbitraging time spreads or regional spreads on the screen. You need a physical presence,” he said.

But the relaunch of Eon’s trading unit comes as the global commodities trading industry faces challenges: investment banks are making far less money compared with the previous decade trading commodities, while physical trading houses – particularly those involved in energy – have seen profits dropping.

Eon does not disclose the profitability of its trading business. But rival EDF of France, which publishes separate results for its in-house trading unit known as EDF Trading, provides a rare window of transparency into the sector.

EDF Trading last month reported net income in 2012 of €345m, the lowest in eight years and down more than 50 per cent from a record high of €718m set in 2008. The sharp drop suggests that European utilities’ trading units are struggling.

Eon and its rivals RWE of Germany and EDF and GDF Suez of France are among the European utilities with strong trading arms. Oil and gas companies BP, Royal Dutch Shell, Lukoil and Gazprom have also built strong in-house commodities trading businesses. All compete with independent trading houses such as Vitol.

Eon Global Commodities will employ roughly 1,500 staff. In spite of the global ambitions of the company, rivals said that Eon’s trading activities were too concentrated in Düsseldorf, with a relatively small presence in Houston, the main energy trading hub in North America, and Singapore, the Asian trading hub.

North America and Asia are, however, top priorities for Eon Global Commodities, which thinks that the shale boom, and the potential for the US to become an exporter of LNG – supercooled gas turned into a liquid so it can be shipped – will redraw the world’s map of natural gas, linking what nowadays are local markets.

“Integration of the natural gas market means that you cannot just be active in one region of the world. You need a global presence. In LNG, for example, we are building an international presence now,” Mr Schäfer said.

The Commodities Note is a regular online commentary on the industry from the Financial Times

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