Special edition | 2016 Commodities Through booms and busts the swiss Commodity hub Reshaping commodities global dynamics pages 4-11 the regulatory landsCape A maze of complex requirements pages 12-17 energy in transition Time for the climate change agenda pages 19-23 teChnology & innovation Enabling multi-faceted innovation pages 25-29 books, events and eduCation pages 30-31
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page 3. speCial edition March 2016 Commodities | | editorial Through booms and busts Things change fast. Two years ago, when we pu- slower growth in all major economies. The latest clusive, as net-zero emissions strategies such as blished the first edition of this magazine, it was figures also point to a sharp fall in Chinese trade. carbon capture and utilisation (CCU) potentially all about rising oil prices, the need to unlock vast In parallel, the regulatory landscape has shifted open up a “third way”. On the other hand, solar, reserves of shale oil and gas, mining companies dramatically. Rules designed to prevent a new cri- wind, geothermal and biomass-derived forms of exploring farther and deeper, and fears that shor- sis have come or are coming into force. These are energy offer a broader choice and may, in the long tage of acreage would drive agricultural prices aimed not only at financial institutions but also at run, afford countries greater energy security. up. Brent hovered around $109 a barrel. companies active in commodity trading on both Throughout it all, commodity markets have We’ve come a long way since then. By the time the physical and derivatives markets. The Dodd- continued to function efficiently. They have sur- our second edition came out in April 2015, Brent Franck Act in the US, the Commodity Trading vived price movements, changing political agen- had dropped to $56 a barrel; now it struggles to Act in Singapore, MiFID, EMIR and MAD/R in das and constant innovation, riding booms and stay above $30. Metal prices are under severe the European Union, and the FMIA (FinfraG) in busts and keeping up with a constantly evolving pressure, with that of the worst performer, nic- Switzerland, share objectives. Unfortunately, dif- global situation. The Swiss commodity hub is kel, having fallen by nearly 80 percent over the ferences in approach and implementation have prepared to support growth in the renewable last two years. Last but not least, agricultural pri- generated a labyrinthine set of requirements that energy market by providing a wide range of ser- ces are in their fifth year of decline. will only weigh the industry down. vices related to the trade in power, as well as fuel Overcapacity rather than flagging demand is at the On the environmental front, the 2015 United and agricultural supply chains. With the Swiss root of the slump in prices. Overall demand for Nations Climate Change Conference held in Pa- Research Institute on Commodities (SRIC), it is commodities keeps growing (albeit more slowly) ris in December will drive a change of agenda, building a platform for exchange between acade- and WTO figures confirm a slight rise in 2015 after 187 countries agreed to limit greenhouse mics, professionals and the Swiss authorities, in international trade volumes. China’s oil imports gas emissions. One of them, China – currently order to better meet future chal- were 8.8 percent higher in 2015 than in the pre- the biggest emitter of such gases – has indicated lenges and to deliver solutions vious year, for example. Nevertheless, dollar value its willingness to take a lead in reining in carbon based on scientific research. for commodities and industrial trade is down. emissions from 2030. Despite a much projected boost in importing coun- Advances in technology are also reshaping the tries due to the drop in oil prices, and regardless landscape. Lower CO2 emissions and sustained nicolette de Joncaire of low interest rates, recent OECD data point to hydrocarbon use need no longer be mutually ex- editor in chief Contents - marCh 2016 04. at the forefront of what is happening in the world. 13. new swiss rules on oTC derivatives. 22. africa’s energy transition and Cop21. Francis perrin, david Fransen, StSa || endurance in the face of change. Georges racine, lalive oaG africa newsletter || Traders’ value proposition in Martin Fasser, Zca 14. Regulatory changes applied to commodity renewable energies. pablo Fernandez, Mercuria energy foCus: The swiss CoMModiTy hub trading. victoria attwood Scott, Mercuria energy 23. interview. isabelle Chevalley, Member of parlia- || un guiding principles: a sectoral approach. ment: “Making a success of the energy transition” 06. interview. Roberto bocca & gillian davidson, wef: Bruno Bischoff, credit Suisse “The challenge of China’s rebalancing model” foCus: TeChnology & innovaTion 15. Responsible gold sourcing. 25. innovation in commodities. adrian Moguel y anza, 07. broadening research on commodity trading. olivier demierre, MKS paMp Group Yves Flückiger, University of Geneva libero commodities || The distributed energy Revolution. 16. why acting responsibly is good business. dr torsten amelung, Statkraft 08. Trading energy in the swiss commodity hub. andrew Gowers, trafigura 26. big data in the commodity supply chain. Jeremy Baines, neste (Suisse) || Metals trading in richard Quigley, daniel dixey, dataGenic || agricultural switzerland. thomas patrick, duferco 17. interview. Jacques de watteville, fdf: “The interplay of swiss and international regulations” data and market transparency. Siavosh arasteh, agFlow 09. Reshaping global dynamics in agricultural 27. vessel tracking and supply chain analysis. commodities. pedro nonay, louis dreyfus commodities foCus: eneRgy in TRansiTion robert Snyder, Genscape || Can blockchain revolutionise 10. The swiss commodities trade finance hub. alastair 19. The paris agreement and sustainable energy. trade finance? andreas lenzhofer, pwc Houlding, inG || Commodities trade finance: challenges Scott Foster, Unece || Thinking renewables along 28. The future of deep strategy analytics. François and opportunities. rabih Bleik, nBad the value chain. pr. Ulf Moslener, FS-Unep Gilardoni, e-GtSa || agricultural innovation turns Canada 11. interview. stéphane graber, sTsa: 20. sustainable development? The only option. into world leader. alexandre Krieger, Bcv 29. interview. alexander R. Malaket, iCC: “in search of harmonised international regulation” Jean-claude Keller, engineer epF || Time for an energy policy reboot. “will the renminbi become dominant?” foCus: The RegulaToRy landsCape david Fyfe, Gunvor Group foCus: books, evenTs and eduCaTion 12. world rules and interplay with switzerland. 21. segregation in the swiss electricity market. 30. Review of books || events Françoise deshusses, consultant || Regulatory big data for dr. Martin p. everts, axpo Holding || biomass for biofuel: a 31. Commodity Trading fundamentals oTC derivatives. thomas Zeeb, SiX Securities Services new market. Ghasideh pourhashem, rice University nicolette de Joncaire, l’agefi Founding sponsor 11 - 13 April 2016 | Beau-Rivage Palace, Lausanne | live.ft.com/commodities
page 4. speCial edition March 2016 Commodities | | Commodity trading: at the forefront of what is happening in the world David Fransen discusses the commodities – with neither knowing if they’ll ouR fooTpRinT of trade related infrastructure, thereby facilita- positive role that commodity be able to cover their costs. In such a situation, and ouR ting economic growth and increasing incomes. where businesses struggle to prudently manage For example, the UN’s Food and Agricultural trading can play around risk, there is more, not less, likelihood of busi- ResponsibiliTies organisation estimates that in sub-Saharan Africa 150kg of food is lost per capita each year at the ness failures. the world. Transparent and efficient markets benefit both aRe global. harvesting and processing level. More anecdo- the producers and users of commodities, but as a CoMMuniTy tally, we have seen how fishermen in San Pedro, they are at risk from inappropriate regulations. Cote d’Ivoire have benefited from Japanese tra- These, even if they are intended to improve ouR inTeResTs ders building refrigerated storage, enabling them the market’s function, can too easily be used to aRe laRgely to sell their catch beyond the local market. david Fransen stifle efficiencies, increase risk and protect vested With regard to energy commodities, it is not only Managing director, vitol Sa interests, increasing costs and limiting economic aligned wiTh export infrastructure which is required and in president of the StSa development; thereby harming those it is most The CounTRies which traders are investing, but also consump- intended they protect. in whiCh we tion related infrastructure. According to World s I write many commodity mar- The risks of absolute price exposure are, at pre- Bank estimates, on average lack of power is redu- kets are at multiyear lows – as sent, being markedly felt by some producing opeRaTe. cing GDP growth by two per cent a year in Afri- ever they are a key indicator of countries, particularly those where commodi- ca, and worldwide over one billion people do not broader economic sentiment ties are a key part of the economy. In such ins- have access to electricity. 2.9 billion still use solid and activity in markets around tances, ensuring commodity products reach the fuel such as wood, charcoal and dung for cooking A the world. The anticipated optimal market, efficiently and safely, is even and heating; fuels which are time consuming to slowdown in China’s economic growth and more important and here commodity traders collect and associated with increased respiratory rebalancing of its economy away from industry can and do add real value – particularly when problems, limiting the ability of women to engage and towards services has made its impact felt operating within a competitive and open market. in more economically productive activities. Com- worldwide. From their highs a couple of years Over 15 per cent of GDP in large parts of South modity traders, with their international networks ago, copper is down 42%, iron ore 35% and oil America and Africa is commodity dependant, and familiarity with complex markets are well 72%. And yet throughout these price movements, and across Africa commodities account for over placed to building distribution networks for a commodity markets have continued to function 90 per cent of export revenues. At a time of low range of energy products, as well as engaging in in an orderly and efficient manner, enabling prices maximising revenues in countries depen- the development of power solutions, either from commodity products to be shipped around the dent on commodity revenues is critical. locally produced gas or imported fuels. world and producers and consumers to hedge Another feature of many commodity exporting Our footprint and, with it our responsibilities, their future exposure to movements in the price, countries is their limited infrastructure. The are global. As a community our interests are lar- should they choose to do so. World Bank estimates that, in Africa, the total gely aligned with the countries in which we ope- We should not forget that this is only possible investment in infrastructure required to sup- rate, but we have to do better at communicating due to the presence of financial participants and port growth is some USD 93 billion per annum. the positive and important role we play around speculators in the market. Without them, entire The majority of this must be government led, the world, to stakeholders worldwide. If we sectors of the economy, from farmers to airlines, however, the commodity trading sector can play do, there is no reason why we should not be an would be exposed to the gyrations in the price of an important role in enabling the development industry of which Switzerland can be proud. Endurance in the face of change In spite of shifting conditions means the ability to go on, even to thrive, in times CoMModiTy traders continue to widen the value proposition and new challenges, commodity of adversity, crisis and change. One of the critical TRadeRs keep in energy. success factors for resilience is the ability to adapt The example of the energy transition shows that trading remains resilient, in order to carry on. This, our sector displays at playing The change requires one to be innovative – coming its finest. Its core activity – indeed its very nature up with new ways of doing things, or indeed adaptive and innovative. – remains unabated. Commodities keep flowing, essenTial Role doing entirely new things. Our industry displays from where they are abundant to where they are of TRansfoRMing a wide range of both. In trade finance, alterna- in demand, and the related risks – so pervasive tive ways of financing commodity flows are gai- in challenging times – are managed with com- CoMModiTies ning ground along with new currencies such as petence. Commodity traders keep playing the es- in spaCe, in TiMe the renminbi. The digitalisation of trade finance sential role of transforming commodities in spa- helps make transactions secure and traceable. martin Fasser ce via their logistics networks, in time through and in foRM. Commodity traders use ever more sophistica- president, Zug commodity association their storage facilities, and in form through their ted ways of generating and analysing a wealth processing units. So no matter how much the of data to plan, organise, monitor and execute ooms or busts, the world keeps context may have changed – with China’s eco- transactions, using the resulting insights to their turning, and so do international nomy normalising, price bubbles bursting or the advantage, be this in sourcing, shipping or hed- trade and the commodity industry. Iran sanctions being lifted –, commodity trading ging. Last but not least, the members of our As markets move, prices shift and is still around, and is here to stay. association have taken the lead in implementing the global economy changes sha- Our sector continues to have a role in responding the UN Guiding Principles on Human Rights Bpe, our sector shows remarkable to the evolving demand of consumers and the and Business – the Ruggie Principles – for the resilience. Despite the present upheavals – from supply patterns of producers, and to this end, it commodity trading sector, and in doing so, have free-falling oil prices to volatile currencies or tur- has travelled well-trodden paths and found new stepped ahead of the curve in taking responsi- moil in producing countries – the commodity in- routes. Companies have invested in logistics bility as global corporate citizens. All of this has dustry continues to make a positive contribution and transformation assets such as ports, termi- not gone unnoticed in political circles and with to the growth of the Swiss economy. Even at the nals and processing plants, they have expanded the authorities: the innovative forces of the com- height of the financial crisis of 2008, the commo- their analytic, quantitative and risk management modity trading sector are explicitly recognised, dity trading sector accounted for 3.9 percent of capacities, and are adapting to the ever-more and deemed worthy of support, in the Canton of Swiss GDP – on par with pharmaceuticals and knowledge and data-driven economy of our Geneva’s Economic Strategy 2030. tourism – and created over CHF 7 billion in va- globalised age. We can therefore be confident, as we move lue added to the Swiss economy. That our indus- Energy is a case in point for the need and ability forward into a new era after the China boom, try managed to achieve this in times of recession of our sector to adapt. The future of our energy that our sector will be able to master the chal- attests to just how resilient, adaptive and inno- supply, globally and locally, hinges on integra- lenges, changes and opportunities that lie ahead. vative it can be, and the pages of this magazine ting more renewable energies and distributing By its adaptive, innovative and therefore resilient will take you through an overview of these three energy in a more flexible and indeed “smarter” nature, to which the pages that follow attest so aspects of the Swiss commodity industry. way. In this era of transition, new technology richly, commodity trading is still here, and it is Resilience, a somewhat overused term of late, and new energy products will help ensure that here to stay. Commodities is a supplement to L’AGEFI, daily publication of l’Agence économique et financière à Genève | president Alain Duménil | Managing director-Chief editor François Schaller | Ceo agefi sa Olivier Bloch | web editor in chief Luc Petitfrère | deputy manager, developments Lionel Rouge | editor in chief Nicolette de Joncaire | editorial contribution Georg von Kalckreuth, STSA | graphic design Sigrid Van Hove | administration Patricia Chevalley, Carole Bommottet | Marketing Guillaume Tinsel (021) 331 41 06 | iT Guy-Marc Aprin | subscriptions (021) 331 41 01 – [email protected] | advertising sTsa Silviane Chatelain Tél. (022) 715 29 90 – [email protected] | printers Kliemo Printing, Eupen | Copyright © Any reproduction of articles and illustrations published is prohibited unless written permission of the editorial staff | head office Rue de Genève 17, Case postale 5031, CH-1002 Lausanne, tél. (021) 331 41 41, fax (021) 331 41 10, www.agefi.com | photo front page iStockphoto.
page 6. speCial edition March 2016 Commodities The swiss CoMModiTy hub | | ||| interview | roberto boCCa & gillian davidson weF The challenge of China’s rebalancing model ompounded with the slow-down in China (and more generally in emerging markets) flagging growth is now also affecting Europe, bringing this year’s glo- Cbal economic prospects to their lowest level in the last few years. Despite a much projected boost in importing countries from the drop in oil prices and regardless of low interest rates, recent OECD data point to slower growth in all major economies. Concern has risen on the sharp fall in China’s recently published interna- tional trade figures and most commodity markets are at historical lows. After the boom years trigge- red by the emergence of China as a world player, the next steps are still unclear. The commodity market needs adapting and so does commodity trading in Switzerland and elsewhere. Roberto Bocca and Gillian Davidson of the World Econo- mic Forum reflect on the current developments and on what to expect in the future. is China’s drive for infrastructure building gone? From a commodity point of view China’s domestic production has gone down and there- fore imports have increased compared to 2014. To accelerate growth the Chinese government is RobeRto bocca. Head of eneRgy IndustRIes gIllIan davIdson. Head of MInIng MeMbeR of tHe executIve coMMIttee and Metals IndustRy changing its model, transforming the supply and demand dynamics. An additional element in the 1993-1995 Unifarma, Finconsumo, Telecom Italia. 2004-2008 Head of Social and Economic Sciences, changing infrastructure dynamics is China’s anti- 1995-2009 Group Leader, BP International: Rescan Environmental (part of the ERM corruption campaign, which has resulted in de- Downstream and Alternative Energy group of companies). lays to many projects as authorities and busines- in different businesses in India, South 2008-2014 Director, Social Responsibility, Teck ses adjust to the new normal. Another priority is Africa, China, Vietnam, Indonesia and Resources: Canada’s largest diversified miner China’s new climate agenda. China has expressed across Europe and Northern Africa with operations in Canada, USA, Chile the willingness to take a lead on global climate including France, Poland, UK. and Peru and exploration globally. change with stemming rise in carbon emissions since 2009 Head of Energy Industries, since 2014 Head of Mining and Metals Industries, beyond 2030. This pledge is modifying the World Economic Forum. World Economic Forum. future of the Chinese economy. However, the shift towards a consumer-driven economic model and the rise of a large middle-class, supported by the scrap of the one-child how will emerging geopolitical factors impact markets? policy, will increase infrastructure investment and also bring about Whereas tensions in Iraq, Syria or Libya are already priced, there is still re-emerging infrastructure products. The Chinese dynamics are little uncertainty regarding the effect of the strain between China and neigh- understood. There has been a lot of talk about China’s soft and hard bouring countries. Another unanswered pending concern is that of failing landing – we would rather consider it a bumpy landing. states such as Venezuela, Nigeria or Azerbaijan. Geopolitical conflicts and interconnections among countries and regions are causing investments to will the oil market remain oversupplied in spite of a rather healthy rise in be increasingly vulnerable and risky, and thereby constitute an overall fear demand? of investing. It is each country’s responsibility to reinforce trust among the Production from OPEC – led by Saudi Arabia – has increased throughout government and energy market players. last year, helping to maintain the glut. Outside OPEC countries, produc- tion has been far more resilient than expected with US oil rigs operating how will the energy transition affect market flows? way below what was previously believed to be their breakeven. The oil The outcome of COP21 was much better than we expected. There is a industry is technologically savvy. It grew fat on complexity and compla- broad consensus of countries and companies to address the roots of envi- cency but has now entered a phase of cleansing. The inefficiencies of the ronmental distress. The energy transition is setting new economic criteria boom cycle will fade away, as will the margins. That being said, the mar- and a new competitive landscape. It is important to note that countries gin of cost of production will not be a variable cost anymore. On the today have much more diversified energy supplies to choose from. Solar, other hand massive investment cuts, estimated around $400 billion, will wind, geothermal, biomass and shale have opened a broad array of new threaten long term output. Low investment will turn around the supply/ options. This new energy mix also enhances supply security. Nor should demand balance and, in the long run, demand and supply will converge one underestimate the positive impact of digitalisation on energy efficien- again. The time of the oil price increase is unclear, as it is uncertain if cy, in smoothing electricity peaks or in assisting end-users to manage their there will be a gradual increase or if the reduced investment will create a consumption. As we discussed early, it remains difficult at this stage to spike at some stage in the coming years or months. Yet, the impact of the quantify the impact of technology disruption and long-term market flows energy transition and diversification will also alter oil demand in a way remain largely unpredictable. which is largely unpredictable and depends also on the steps being taken to protect from oil substitution with net-zero emissions strategies such as is this also the case for metals? Carbon capture and utilisation (CCU). In this respect, the pledge to fight Indeed, the energy transition and technological disruption will alter the global warming by ten of the largest oil companies in October of last year demand for certain products. The need for more energy efficient transpor- is emblematic. tation and vehicle light-weighting for example will modify the flows for steel, aluminium, nickel and carbon based materials. Progress in distribu- will demand diversifying strategies also apply to coal? ted renewable energy sources and grid scale energy storage will shift de- They will, but transition won’t be immediate. The demand for coal as an mand in metals such as lithium and zinc, and the need for alternative fuel- accessible and low cost energy source, particularly from emerging countries led transport and vehicle electrification will affect the demand for copper. such as India, could likely remain high for the next two decades. However, Tomorrow’s demand will be different from todays, in volumes and diver- technology innovations, investor activities and a shift to conservation, effi- sity of demand. The market players need to look at the transformations ciency and renewables will bring disruption. emerging in downstream value chains and get involved in better under- standing the question: «am I in the right commodity?» will the energy transition also affect metal producers? how are they reacting? Thinking ahead, technology is going to disrupt and create different will there be another China? demand for different commodities, including metals. Metal players are We do not believe so. India is growing at a strong 6 to 8 percent per annum increasingly recognising the importance of being part of the climate agen- but it won’t be a game changer. The largest growth potential is in Africa da as their industry too is being affected but also they have a role to play in but looking forward, we see a more consistent and balanced growth over the creation of value chain solutions. Our first multi-stakeholder conver- a larger number of regions. China has enabled stability looking at overall sation with the mining and metals community took place during a climate GDP in the world and is still driving, but there is more symmetry in global focused session at Davos this year, prior to which several companies signed growth. our CEO Climate Action Statement. Interview Nicolette de Joncaire
page 7. speCial edition March 2016 Commodities The swiss CoMModiTy hub | ||| | Broadening research on commodity trading The SRIC will provide matters with, on top of everything, a guaranteed The ReseaRCh various stakeholders. They will then make sub- a platform for exchange job in a company. This is the case for nearly 200 insTiTuTe missions to a network of professors concerned students who have followed the programme up with trading at Swiss universities, with the in- between the academic world until now. Participants are selected on the basis of inTends To seRve tention of identifying potential Ph.D. students academic criteria in combination with obtaining for these subjects. These will then have the op- and trading professionals. an internship within a company. as a plaTfoRM portunity to collaborate with players in the pro- This dual training course, unrivalled at the uni- foR The fessional world in Geneva and have access via versity level, has proven its effectiveness for the Institute to unique sources of information. over eight years now. It draws on cutting-edge disseMinaTion For their part, the professionals may offer to fund research to enhance the quality of the training it of sCienTifiC research projects on matters of interest to them. provides. The SRIC has stepped in to fill a gap. In this case, the SRIC will tender to the Swiss yves FlüCkiger Trading is not a university discipline as such, and knowledge universities and its scientific board will confirm rector, University of Geneva it has therefore been necessary to unite the dis- in The TRading the selected projects. parate facilities of various departments within seCToR. In the longer term, the SRIC also intends to naugurated in September 2015, the UNIGE and other Swiss universities – resear- serve as a platform for the dissemination of Swiss Research Institute on Commodi- chers working in international commerce, earth scientific knowledge in the trading sector. Thus, ties (SRIC) reflects the ambition of the sciences, international law, finance, ethics or ma- once completed, the work of the Ph.D. students University of Geneva (UNIGE) to be, nagement. This is also the reason why one of the and research done on commission will be made in parallel with its traditional activities, first missions of the SRIC is to map professors available not only to the stakeholders concerned Ia platform for exchange between acade- and research groups working in Switzerland in but also to the public at large, in a summarised mics and the city around it, to better meet the areas of interest relating to international trading. format. Research will gradually be fed into a challenges that stakeholders face and deliver The SRIC seeks to encourage research by foste- knowledge and expertise bank. This activity will solutions based on scientific research. ring contacts between its various partners. simultaneously strengthen the appeal of UNI- With this vision in mind, we created the “Master’s The SRIC has a management board of which GE’s Master’s in Trading. Each year, the scienti- Degree in International Trading, Commodity Fi- I am the chairman and which comprises repre- fic committee will select a few of the best thesis nance and Shipping” in 2008. This course, which sentatives of the federal and cantonal authorities, works, which will be published on the Institu- is unique in the Swiss and international academic the professional world and non-governmental te’s website, giving visibility to the most accom- landscape, reflects the importance of the trading organisations. Alongside the management board, plished students. sector to Geneva and Switzerland. It is unique not the scientific board examines research proposals The development of international trading in only in its content, but also because it combines submitted to the Institute. This is a crucial aspect: Geneva and Switzerland is the fruit of a long his- a demanding university course with employment the «raison d’être» of a University Institute such tory. It is part of our country’s economic success in a company active in the sector in Geneva. Our as the SRIC being anchored on scientific quality over the course of the last few centuries. Throu- students thus have the opportunity to address all and the independence of its research. gh the creation of the SRIC, the UNIGE and its the issues relating to international trading: eco- To initiate its activities, the SRIC will identify partners aim to contribute to a better knowledge nomic, social, financial, ethical and professional a number of themes suggested by the Institute’s in this field for the benefit of society. 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page . speCial edition March 2016 Commodities The swiss CoMModiTy hub | ||| | TRADING ENERGY IN THE SWISS COMMODITY HUB At the forefront of major global changes The energy trading business sands of individuals in hundreds of companies eneRgy tions. It is therefore no different from a farmer’s are needed to form this hub. The skills that these decision making process for what crop to plant is easily misunderstood. It is people bring and the value they generate flow CoMpanies play for the next year. The farmer is speculating perceived to be far too big, into the Swiss economy as people join and leave an iMpoRTanT that one crop will be worth more than another. The difference and the challenge for the energy the industry. So not only is it beneficial to the complex and risky and hence energy industry, but the skills are also taken up Role in The business is the scale. Due to the size of the tran- in other parts of the economy. Geneva with its sactions the value involved becomes very large, in need of special regulation. excellent transport links and centrally located in global eConoMy and so despite razor thin margins the profits and Can When in reality its driving Europe, brings European capitals to within but a ConTRibuTe or losses can be substantial. But in this case, it couple of hour’s flight. Therefore it is no surpri- is creating a market where these different ex- forces are really quite simple. se that many energy and supporting industries gReaTly To pectations can be exchanged and monetised. have established themselves in Geneva, reinfor- Arbitrage is the other major area of misunders- cing the hub appeal. Being able to continue to swiTzeRland. tanding. When arbitrage is really moving pro- attract international talent is therefore essential They should duct from a market where it has a low value to to maintaining and growing this industry. one where it has a higher value. But this is no One of the big challenges in recent years facing Make eveRy different from a builder looking for the best the energy sector has been the growing regulato- effoRT To value material among different suppliers, or a Jeremy baines ry environment. The main reason this has been cheese manufacturer looking for the best export vp Sales & trading, oil products challenging is that legislation has not been har- To gRow The market. The energy companies do the same by neste (Suisse) S.a. monised across different jurisdictions, creating TRusT of The moving product from surplus areas to deficit the need for complex reporting and monitoring areas. Here too the scale and complexity are am often asked why Neste has a com- systems. Most of this new legislation in the diffe- wideR publiC. very large, which translates into the need for mercial office in Geneva. And usually rent jurisdictions are in fact seeking the same aim having this concentration of skills. As for every there is surprise that my first reason of transparency, but the lack of harmonisation movement of said product, dozens of specialist is: not for tax purposes. After all, there creates the need to report similar information in interactions and contributions are required. are places in the world with lower or many different ways, which unfortunately does I believe that energy companies play an im- I no tax, so this was never going to be a not add value. To be able to keep investing, the portant role in the global economy and can convincing reason. What is important for ener- industry needs a stable and transparent roadmap contribute greatly to Switzerland. But they gy companies is access to a truly professional for the future. should make every effort to explain their ac- talent pool, proximity to market participants and Unfortunately the energy trading business is tivities, to maintain and grow the trust of the customers and lastly to a stable and competitive easily misunderstood. It is perceived to be far wider public. Over the next few decades the regulatory environment. too big, complex and risky and hence in need energy sector needs to transform itself for a low Geneva has for years been able to attract talent of special regulation. Like many industries, it carbon environment as recent discussions in the from across the globe thereby building up the has developed its own technical vocabulary, COP and the global trend is moving to a decar- deep knowledge required to succeed. For tra- which can confuse the outside observer, when bonised world. The opportunities for Geneva ding and commerce requires a combination in reality its driving forces are really quite sim- and its commodity hub to be at the forefront of of many skills. From financing and banking, ple. Two major aspects of the trading business this change are huge. Spearheading this deve- through chartering and shipping, insurance and are the much derided terms of speculation and lopment and being able to deliver the needed inspections, operations and accounting to sales arbitrage. Speculation though is no more than services and solutions are the key for Geneva’s and marketing, and supply and trading. Thou- the business of creating value from expecta- continued success. Metals trading in Switzerland The Swiss trading hub vements and balance sheet exposures. Long gone iT is essenTial reholding arrangements or direct shareholding must fight hard to retain are the days of speculative pure trading activi- ThaT swiTzeRland of suppliers by the trading houses. IT systems tailored to trading needs allowing efficient and ties across regions arbitraging price ignorance. a compelling business logic Survival nowadays (at least in the metals spa- ReMains an open professional controls over the business process requiring substantial investments of both mo- ce and more particularly steel trading) is based in an increasingly competitive on being a global service provider that can ap- and pRogRessive ney and management time are key components global environment. ply sophisticated trade finance and risk mitiga- business to ensure longevity. The above are complex in tion tools and has strong links to suppliers and terms of management and heavy in terms of fi- customers alike. enviRonMenT nancial capacity that few small trading houses Since the end of the super cycle (marked dra- so ThaT CulTuRal can assemble. matically by the global financial market collapse Global trading companies are multi-cultural or- in 2008) the number of traders has declined diveRsiTy is noT ganisations and when centred in Switzerland, for many of the challenges set out above. The unReasonably they are reliant on having a diverse pool of fo- thomas patriCk concentration has been accelerated by the “flight reign national personnel with the requisite skill chief Financial officer, dUFerco S.a. to quality” by the financial institutions and the ConsTRained. sets to manage and develop business. This beco- fundamental need to be a structural component mes more pronounced depending on the depth he global market place and the of the supply chain in the current trading en- of integration required in relation to JVs and up commodities segment have been vironment. This ironically has the unwelcome or downstream shareholding arrangements. dampened by weak demand and consequence of causing the big to get bigger and It is essential that Switzerland remains an open price attrition. The combined the small to wither and fade away. Competition and progressive business environment supported blows of a slowdown in growth (like volatility) is a healthy component of any by both Federal and Cantonal authorities so that T in China and stagnating econo- commercial environment, in our case compe- cultural diversity is not unreasonably constrai- mic activity in Europe with (in the case of steel tition has been reduced by the contraction and ned. We are global companies requiring global in particular) regionalisation of trade flows regionalisation of markets and by the reluctance staffing solutions. It is equally important that driven by protectionist trade barriers has made of the financial market to support small to me- the activities of the commodity sector in Swit- metals trading an extremely difficult business to dium size traders. zerland are understood and appreciated by the manage. Trading margins are thin and with low How does the above translate into strategic ac- governing authorities and all interested parties. absolute prices depressing profitability so 2016 tion by metal trading houses to sustain business? Switzerland has all the essential services necessa- is appearing to be yet another tough year with Size matters as does global reach, meaning the ry to manage a diverse and sophisticated trading the only bright spot that it might be finally rea- big focus on getting bigger through regional organisation and occupies a central European lo- ching the price bottom. investment that in our opinion is best mana- cation to conveniently headquarter large trading Facing the above perfect storm, today’s metal ged by centralised oversight. Source and supply houses. But Switzerland is competing with other traders are only viable if they provide mine-to matter but not at the expense of balance sheet strategic locales including Singapore and Dubai -customer services in the form of logistics mana- exposure to fixed assets which is best managed and must fight hard to retain a compelling busi- gement, storage and consignment facilities and by financing suppliers through structured pro- ness logic in an increasingly competitive global also finance trade flows while applying risk mi- grams. Integration with suppliers is a common environment. tigation practices that protect against price mo- theme with traders - often through joint sha-
page 9. speCial edition March 2016 Commodities The swiss CoMModiTy hub | ||| | The Swiss commodity hub must adapt to new challenges as traditional agricultural commodity players remodel themselves to continue to feed the fast-growing world population. Reshaping global dynamics in the world of agricultural commodities cultural hub. In addition to its convenient time a favouRable POPULATION ACTUAL VS. FORECASTS, BY AREA (MILLIONS) zone, strong financial institutions and fiscal ad- vantages, it has also offered skilled teams, syner- CoMModiTies 2016 3000 2050 pedro nonay gies with shipping entities and energy trading enviRonMenT 2500 regional Head of oilseeds for europe houses, as well as many other reliable service and Black Sea, louis dreyfus commodities providers which are crucial to the business, in- is noT unique 2000 cluding insurance groups, supervision compa- To swiTzeRland 1500 gricultural commodity trading nies, and so on. has greatly expanded with the Agriculture is sometimes seen as being a slow Though. asia, 1000 development of international moving industry. Nevertheless, the sector is no- and paRTiCulaRly 500 trade over the last 70 years. It wadays facing the unprecedented challenge of has always been and continues feeding a growing world population which will China, has 0 A to be a truly global business reach 9 billion people by 2050, under ever more eMeRged as Europe & North East Asia Latin South Africa America & ME Asia & Pacific central Asia America where events in South America impact markets volatile environmental conditions and finite ara- a new gianT in in China or Indonesia and vice-versa. Backed by ble land resources. Source: Louis Dreyfus Commodities global supply chains and logistics, together with The CoMModiTies networks of suppliers and customers, the sector FOOD merchants must adapt to the 21 century, indusTRy. In order to adapt to new conditions, companies st is creating value by solving imbalances in food namely to the Internet and telecommunications will need to invest in their workforce to attract, availability and demand. In enabling the flow of revolution which has made information readily retain and develop top talent. A deeper par- goods from one region to another, agricultural available across the world at a low cost. Twenty tnership with schools is needed beyond the exis- commodity players ensure that each piece of years ago, if a coffee plantation had a poor har- ting basic programs with Universities. food finds the right consumer at the right time vest in Colombia, only a few well-connected and place, linking farmers to end users across the market players would have been aware and have A FAVOURABLE commodities environment globe. This commercial orchestration has many had a competitive edge. This is no longer true. is not unique to Switzerland though. Asia, and equivalents in other industries, with modern day Small players can now compete on a global scale particularly China, has emerged as a new giant examples including social media networks such with large commodity groups, combining their in the commodities industry, with markets open as Facebook and online retailers (e.g. Amazon, agility with relatively cheap financing, which is around the clock through the use of new tech- eBay, etc.), to name a few. no longer the barrier to entry that it used to be. nologies. This has reduced the importance of Technological developments have had a great time zones and enabled more countries and ci- LOUIS DREYFUS Commodities has been fin- impact at the origin. Nowadays, many farmers ties to substitute the current commodities hubs. ding new trading solutions and routes for the follow trading exchanges in real-time on their Switzerland is in effect losing importance in the last 165 years. From 2006 to 2012, commodity mobile devices, whereas they would barely have financial sphere as other locations become more markets enjoyed a strong period of growth, so- been able to participate in the past. Weather in flexible and creative. The strength of the Swiss metimes referred to as the “commodity super the field is tracked instantaneously using satel- franc is not helping the country’s competitive- cycle”. During this period, companies compe- lite images, and drones are able to estimate crop ness compared to other locations. The presence ted for the best investments and experienced yields by flying over hundreds of hectares at a of Asian companies in the Swiss agricultural rapid geographical expansion on the back of time. Downstream, food companies are dealing hub is an additional asset for them. rising prices. Many newcomers emerged in this with increasingly demanding and informed These are just some of the complex dynamics fruitful period, notably in Asia. However, from consumers who require higher quality, traceable that come into play. By making a sustained ef- 2012 onwards the commodities landscape began and environmentally friendly products. Ultima- fort to innovate and modernise the supply chain, to change drastically, with the industry witnes- tely, commodity players will need to manage a there is no doubt that solutions will be found so sing bankruptcies, rapid consolidations as well more unstable and unpredictable environment, that commodity trading houses can successfully as the rationalisation of business operations. marked by complex geopolitics and price vola- overcome the challenge of doubling global food Over the last few decades, Switzerland has offe- tility. Covering risks has become a question of production in a sustainable way over the next red an ideal environment for building an agri- survival. 50 years. 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page 10. speCial edition March 2016 Commodities The swiss CoMModiTy hub | ||| | The Swiss commodities trade finance hub The realities of trade finance ment will be more acute and the industry will The TRading when the general direction of international re- today: managing through need to demonstrate its capacity and skills to ma- CoMMuniTy gulations tends to increase the requirements nage within that altered landscape. on the business, whether on capital needed or turbulent times. Locally, banks must also adjust to new complian- business is To in terms of additional reporting or liquidity ce standards as Switzerland has enacted further requirements. Nevertheless, commodity finance anti-money laundering legislation which places soMe exTenT remains fundamental to the origination, trans- a duty on banks to take a view on their client’s “poRTable”. mission and delivery of primary commodities tax paying position when dealing with clients and while these goods may seem temporarily alastair houlding incorporated in foreign jurisdictions. The tra- This May oveR out of fashion because of supply / demand dislo- Member of the Management committee ding community business is to some extent TiMe RepResenT cation, they are emphatically not out of demand. Head of trade & commodity Finance “portable” and there appears to be a trend to es- The cash conversion cycle remains short and inG Belgium, Brussels, Geneva branch tablishment of trading company incorporation a Challenge engagement with trading firms provides finan- and operations in the UAE which may over time To The swiss cial institutions with an ability to diversify their aving entered the Commodi- represent a challenge to the Swiss trading node. TRading node. country risk in an informed partnership with ties Finance industry in 1999 The industry also faces a changed credit environ- clients for goods in critical demand. The Swiss (a year that began with oil at ment. For a decade or so the oil industry has had $11 a barrel) I little then an- to closely follow refiner credit risk, which now The swiss enviRonMenT, ticipated that we were stan- (with some exceptions in Russia and Africa) is ConTinues To pRovide an Hding at the foot of a mountain enjoying its day in the sun – while we worried range that would peak at over $130 a barrel in less about commodity producer credit – be it in exCepTional ConCenTRaTion 2008, as a precursor (via a vertiginous drop in the mining or E&P sector. The steel sector and of expeRTise in The 2009 and a rapid recovery) to a plateau in excess related raw materials is challenged by the im- of $100 for a number of years. If the trading pact of a tsunami of Chinese steel impacting pri- CoMModiTy TRading seCToR. industry grumbled at the backwardated market ces and profits. Overall the cycle of petrodollar and relative lack of volatility in 2011-14, the liquidity has diminished with an impact on emer- banking community got rather used to it and ging market balance of payments and reserves, environment, meanwhile, continues to provide to the turnover it could generate based on these particularly amongst the producing countries. an exceptional concentration of expertise in the high prices. The inevitable recovery (it’s a truism that the commodity trading and financing sector and in 17 years later, 2016 has reminded us that markets seeds of the next boom are planted in every trou- contrast to the producing sector, traders may are (of course) cyclical leaving the CTF industry gh) seems quite far off at present, with China even improve their margins in volatile times. again in the valley of low prices at a time when being as much a part of the problem for the com- Overall we believe the sector is durable “throu- the industry additionally faces new challenges. modity sector as it was a solution in 2009. The gh the cycle” and we see time and again that Internationally, regulation has increased driving global uncertainty might be amplified by the a consistent approach to long term client rela- higher capital and liquidity charges. Significant impact these macro-economic developments can tionships leads to value-added opportunities. and increasing effort is dedicated to compliance have on bank shares which could lead certain The current market we are going through will tasks. Typically more hands on deck are requi- banks, as already noticed in the market, deciding push banks and their clients to adapt to and to red, not least as transactions have become more to review their exposure to the industry. demonstrate that the Swiss hub will remain one complex than simple voyage finance. In 2016 So far so gloomy and it is clear that 2016 will of the most competitive and vibrant CTF loca- then, this new equation in the Swiss environ- present challenges for the CTF sector – at a time tions worldwide. COMMODITIES FINANCING Challenges and opportunities in trade finance There has been a radical change East or Africa. Lending criteria have tighte- geneva, london strategy is still not clear despite several years of in the lending landscape of the ned and both lenders and borrowers have had oR singapoRe activity in that industry. As a result, commodity traders find it more com- to adapt to a new situation where credit is less commodity trading sphere. available, more restrictive and, in general, more ReMain global plicated to obtain credit in the same way that had facilitated their business in the previous decades. expensive. Historical actors have drama- This has led to a radical change in the lending business hubs Companies with low capital and high risk pro- tically reduced their ambitions landscape of the commodity trading sphere: his- as They aRe files are having hard time to raise the necessary torical actors have dramatically reduced their liquidity for their transactions, while companies while new entrants are beco- ambitions, notably the French banks, and while ReseRvoiRs of with higher capital and financing capacities have ming more and more active. new entrants are becoming more and more acti- TalenT pools relatively easier access to the banking market al- beit at higher prices. Further distinctions can be ve such as select Asian (Japan, Chinese) or Mid- dle Eastern banks, high entry barriers do exist ThaT aRe haRd made by type of industry (energy, agricultural that make it difficult for banks to fully embrace To find goods, metals, etc.) but the trend is generally the that industry and, most importantly for their elsewheRe. same for everyone. rabih bleik customers, to commit to it on the long term. Needless to say that this poses challenges for tra- Head of client relationships, Indeed, one should not forget that commodity ders, especially small to medium size players, to wholesale Banking, Switzerland financing is not a standardised product but re- maintain their market positioning and business national Bank of abu dhabi pJSc mains a tailor-made approach to lending with stamina, especially in an era of volatile commo- structures generally varying with clients, mar- dity prices that represents good business oppor- oday’s commodity trade financing kets, and types of transactions. The techniques tunities for traders but higher risk for lenders. environment is marred by chal- of transactional financing practiced by Geneva- However, those who are able to understand the lenges that affect financiers and based banks is a prime example. Moreover, while shifting nature of the banking landscape and their clients, the traders. Howe- default probabilities are generally very low, the the banks’ “flight to quality”, are in a better po- ver, this environment also repre- financial impact of a default can be high and not sition to profit from the generally lesser pool of T sents opportunities for those with commensurate with the amount of capital that liquidity available for that industry. Working the right setup and strategy. a company is willing (or can) post alongside its capital and balance sheet management, quality Commodity trade financing in general has been bank. and flexibility of transactions, as well as invest- witnessing a radical transformation for the past Hence a bank that wishes to enter and succeed ment in talent and technology, will be defining 5 years as a result of the stricter capital rules in that space has to build up internal knowledge elements for traders to maintain their competi- imposed by regulators since 2008 (Basel II and and comfort with such an approach to lending, tive advantage and, generally, render themselves Basel III, in addition to national regulators from which can prove difficult especially if factored “more bankable” in the eyes of their lenders. the US to Europe to Asia). The transformation with the tighter capital and compliance rela- This is where the element of talent also comes accelerated in 2014 with the combined effects of ted regulations that affect the industry at large. into force, and where cities like Geneva, London price volatility in commodity prices, large fines We see some banks having capitalised on the or Singapore, remain global business hubs for paid by several large banks historically active in knowledge base built up by other banks, throu- commodity traders and financiers in general, as the commodities space, and shrinking liquidity gh acquisition of teams for example, with suc- they are reservoirs of talent pools that are hard in energy-dependent areas such as the Middle cess. Others, however, are struggling and their to find elsewhere.
page 11. speCial edition March 2016 Commodities The swiss CoMModiTy hub | ||| | interview | stéphane graber stsa In search of harmonised international regulation oday, Switzerland faces cy of industry payments to governments some challenges that could and mitigate risks in the commodity value- affect the commodity tra- chain. STSA members are already fulfilling ding industry. As a major EITI disclosure obligations in participating trading hub, Switzerland is countries such as Iraq. Furthermore, the T increasingly pressured by STSA initiated a closed meeting, organised competitors such as London, the Nether- alongside the EITI side-event in Bern in lands, Singapore, Hong Kong or Dubai. October 2015. This included the launch of Rising operational costs such as staff sala- a multi-stakeholder EITI and commodity ries and other overheads are exacerbated trading working group, by the STSA and by the strength of the Swiss franc. New major Swiss commodity trading houses. and pending regulation such as Switzer- The association considers this the perfect land’s Financial Market Infrastructure platform for addressing issues such as Act (FMIA), the third series of Corporate confidentiality clauses that are imposed to Tax Reforms, and an increasing number buyers by government and State-Owned of popular initiatives that could weaken Enterprises (SOEs) or National Oil Com- the industry raise some concerns. Is Swit- panies (NOCs), or the necessity to standar- zerland’s role in global business and the dise EITI reporting between countries in country’s image as a stable, predictable, order to allow the adjustment of informa- open place to do business under threat? tion systems. The currently missing parti- Stéphane Graber, Secretary General of cipation of governments, SOEs and NOCs the Swiss Trading and Shipping Associa- in this working group is a necessity for tion (STSA), sheds some light on current moving forward. issues and the steps that his association is taking to address them. human rights are at the centre of lively debates in switzerland. what is the position what are the most critical challenges to the of sTsa? swiss commodity trading hub? The STSA is an active member of the The commodities trading industry reco- Ruggie multi-stakeholder advisory group gnises the need for regulation in line with that supports the development of gui- other countries, and the necessity for a le- dance for Human Rights and Business in vel playing field, as well as clear rules for commodity trading. Among other things, all market participants, and adequate trans- ©point-of-views.ch the association has been entrusted with parency and enforcement. There seems the Institute for Human Rights and Bu- however to be some confusion between siness with the mapping survey of the financial and commodity markets, and a Stéphane Graber. Secretary General of the SwiSS commodity trading sector. This will serve «one-size-fits-all» approach would be de- tradinG and ShippinG aSSociation (StSa). as the basis for elaborating the Ruggie gui- trimental and create tensions. The sector 2005 Doctoral degree in business management. deline. The survey data will be analysed fears both misguided and over-regulation 2005-2012 Delegate at the Economic Development Office in charge by the University of Geneva and will be which would be particularly damaging of worldwide Direct Investment Promotion with a special made available to local authorities to im- for small and medium-sized enterprises. focus on China, helping companies to relocating to Geneva. prove their understanding of the industry. In order to be effective, it is necessary that 2012-2015 President of the Swiss-Chinese Chamber of Commerce, The STSA is also working at developing regulation be internationally harmonised Geneva Chapter. a Code of Conduct to advocate positive and consistent for a commodity trading since 2012 Secretary General of STSA. contributions in the Swiss commodities sector that is looking primarily for stabi- industry which will also explain how its lity and predictability. Barriers to mobility members are fulfilling their roles as res- of human capital are another main threat. The sector is intensive in human ponsible corporate citizens. This Code should encapsulate best practices, resources and expertise. The ability of the industry to access the best availa- and is intended as a source of inspiration for members who will be expec- ble global skills, and not just at executive level, is critical for Switzerland to ted to comply by virtue of their STSA membership. retain its position as one of the world’s most important hubs. The public at large does not seem to fully grasp what commodity traders actually what is the impact of the increasing level of new and pending regulation? do. are you addressing this? Generally speaking, the continuing trend towards more regulation and Promoting a better understanding of commodity trading in the general more transparency – a result of the 2008 financial crisis – adds complexity, public and improving its social integration is one of our main objectives. uncertainty and insecurity to companies operating in Switzerland. Smaller To this end, the STSA spearheaded the launch of the Swiss Research Ins- companies experience difficulties to cope with this increasing burden com- titute in Commodities (SRIC) as a multi-stakeholder platform to gather pounded with a trickier access to finance – caused by a decrease in local knowledge and expertise about commodity trading. It is intended to pro- bank support – and rising supply disruptions. We observe the beginning mote the development of scientific research on the industry. The STSA also of a market consolidation and the disappearance of mid-sized firms and attends public exhibitions, where it presents its economic role, as it did at related jobs. the Journée de Genève last November. what are the keys to overcoming such challenges? how did sTsa view the young socialists’ initiative (otherwise known as Juso) to The focus must be on well designed answers to the current regulatory and ban financial speculation on agricultural derivatives? transparency challenges, with the objective of keeping Switzerland as a The STSA took the economic lead of the campaign against this initiative, central and competitive hub. Special attention should be given to applying in close collaboration with the Parti libéral-radical (PLR) who lead the po- a smart mix of binding regulation and voluntary standards. Commodity litical front. This campaign brought the STSA closer to the general public trading is a global business; its regulation requires international coordi- than ever before in order to address several misconceptions about com- nation and a level playing field in order to avoid the chance of legal and modity trading. It has also addressed the clear lack of understanding of regulatory arbitrage. Swiss expertise in commodity trading should be used commodity markets and the role of the different actors involved. It appears whenever possible to foster private-public dialogue and cooperation on crucial to pursue these communication efforts in the future. regulation, development and environmental issues as well as to promote good practices. In this respect, the industry needs to have a voice in the what are the next steps? regulatory debate. Our sector has greatly evolved over recent years and is plainly more trans- parent and engaged with the general public in Switzerland. The dialogue how does the industry contribute to progressing issues? between all stakeholders of the commodity value-chain should be further There are three principal areas in which the commodity trading industry encouraged. We need to pursue our efforts in the search for innovative and contributes: transparency, human rights, and engagement with the gene- creative answers to back the necessary evolution of regulation and transpa- ral public. rency requirements, locally and internationally. The STSA and its members are committed to working towards building a more sustainable commodity Can you be more specific on transparency? value-chain in order to contribute to a long-term competitive commodity The STSA supports initiatives that improve transparency within the com- trading hub in Switzerland and to our nation’s good standing. modity trading industry. A good example of this is the Extractive Industries Transparency Initiative (EITI), which has the potential to bring transparen- Interview Nicolette de Joncaire
page 12. speCial edition March 2016 Commodities The RegulaToRy landsCape | | ||| World rules and Regulatory big data interplay with for OTC derivatives Switzerland By imposing an obligation the obligation to report transactions to repo- to report, regulators are aiming sitories, it can be assumed that the first Swiss companies will start reporting their derivatives Françoise deshusses to shed light on the previously transactions to the Trade Repository from SIX consultant commodity Market risk or a foreign transaction repository recognized by & compliance intransparent area of OTC- FINMA in the second half of 2016. The repor- derivatives trading. But data ting obligation is likely to enter into force for all s a reaction to the major financial upheaval of parties subject to reporting obligations and all 2008, governments introduced new regulations alone is not enough to monitor derivatives by the end of 2018. to prevent the return of another crisis. These re- The reporting obligation will not only impact gulations not only apply to financial institutions financial risks. financial counterparties such as banks, but all but also to companies active in commodity tra- companies that carry out derivative transactions A ding, both on the physical and the derivatives – even those outside of the financial sector. This markets. Each commodity hub – mainly the US, the EU, Singapore will result in over 5,000 companies connecting and Switzerland – has developed a set of rules to regulate trading. to transaction repositories in the EU alone, with However inconsistency between regulatory sets may create poten- these companies reporting over 330 million tran- tial arbitrage between countries. thomas Zeeb sactions each week. Thanks to the one-sided re- The set of regulations being put in place is structured at two main division ceo SiX Securities Services porting obligation, the corresponding volume in levels. The general framework is given by a text of law – Dodd- the US is estimated to be slightly less at around Franck Act in the US, Commodity Trading Act in Singapore or et us travel forward to the year 250 million per week. FMIA (better known as FinfraG) in Switzerland – or of a direc- 2025: A central bank (CeBa) recei- If we assume that each transaction report avera- tive in the European Union (MiFID, EMIR or MAD/R). The se- ves news that a major bank is ha- ges seven kilobytes in size, the combined annual cond level is the regulation’s implementation set out by a regu- ving trouble meeting its payment data volume across both the EU and US amounts lator: CFTC in the US, ESMA in Europe, and FCA in the UK. obligations. CeBa can access its risk to 200 terabytes. This corresponds to around 350 In Switzerland, both the Government and the FINMA issued an L system and then, at the touch of a million standard A4 pages, which if stacked one Ordinance. This second level provides more details to institutions button, check the volume of the bank’s payment on top of the other, would reach 30 kilometers on how to understand and apply the text of law. Often a consul- obligations to its largest counterparties. In addi- into the sky, and the introduction of the Swiss tation period allows the industry to comment before the final text tion to providing an overview of the bank’s colla- reporting obligation is likely to add another two is published. However, in the EU, another level of complexity is teralised and uncollateralised obligations by cur- to three kilometers to this stack each year. added because the application of the directive needs to be compa- rency, the system provides a separate view of the Nevertheless, a huge volume of data on its own tible which each country’s legal framework. Tier 1 capital ratios of all the banks affected. The is not enough to identify systemic risks on a glo- The purpose of these regulations is to minimise systematic coun- regulators carry out “worst-case” calculations to bal level. In addition to having a complete set of terpart risk, increase transparency and prevent market abuse and directly establish whether the bank requires any data, the data must also be of a high quality and fraud. The Dodd Franck Act governs the reporting of OTC deals, support measures. comparable. Thus far, however, the poor quality swaps regulations, position limits and disruptive market practices At present, such a scenario only and comparability of information has presented to mention the most important. In Europe, EMIR implemented swiTzeRland exists on paper. However, regu- regulators with a problem that is almost impossi- in 2014 a reporting obligation for cleared and non-cleared tran- lators across the world are wor- ble to solve. Many of the reports are not only in- sactions, MAD/R which enters in force in July 2016 prevents and inTRoduCed king hard to develop such a risk correct, but have been entered numerous times. sanctions market abuse and enforces transparency. Each commo- The obligaTion system. This, for example, has resulted in the nominal dity exchange has its specific rules and most have position limits OTC derivatives conceal a lar- volumes published in the trade repositories as in place. In addition, MiFID, the umbrella framework for Euro- To RepoRT ge proportion of the financial per the November 2015 Report of Financial Sta- pean rules, defines derivatives, the companies targeted by the rules oTC-deRivaTives risks in the markets. To moni- bility Board being three and a half times higher and the instruments in scope. It imposes a harmonised approach to TRansaCTions tor systemic risk when it comes than the figures that appear in the statistics issued the calculation and application of position limits for commodity to derivatives, so-called tran- by the Bank for International Settlements (BIS). derivatives (ESMA RTS 21). The methodology describes which in JanuaRy saction registers have been set This is one of the reasons why various internatio- positions can be netted or considered as a hedge. The application 2016. up. Across the globe there are nal committees are working to define standards of MiFID has recently been delayed to January 2018. FinfraG already 20 of these official tran- that can be used to identify the parties involved, mirrors in one text of law most subjects above. It is applicable saction registers, which record the transactions and the products, and which will since last January with some authorised exemptions for better ali- data related to derivative tran- in future help to ensure that data is recorded in gnment pending application of international regulations. sactions. In some countries, institutions that re- a uniform manner. However, continuous regula- These regulations categorise companies by type of activity and by semble transaction registers are permitted; here tion induced adaptations after a trade repository’s size in order to define which obligations they fall under. However, more straightforward admission criteria apply. initial implementation tend to be cumbersome each region has a different approach to classifying companies. The The idea of collecting data on derivative tran- and very expensive for service providers. Swit- US considers the type of activity such as producer, trader, dealer sactions can trace its origins to the Pittsburgh zerland’s financial community will need to bear to categorise an institution. The EU performs tests to determine Conference of G20 leaders in 2009. Three years this in mind going forward. whether the derivative activity is ancillary to classify the com- later, the US implemented the Dodd-Frank Act, Furthermore, to maintain a global overview of pany as non-financial (NFC) and also evaluates its size for NFC and in doing so became the first country to in- the risks for certain underlying instruments and and NFC+ labels. In Switzerland, FinfraG inspired by both the US troduce an obligation to report OTC-derivatives counterparties, regulators require full, cross-bor- and EU uses both activity type and size criteria to assess between transactions. Since then, such transactions have der access to the necessary information. Though, FC+, FC-, NFC+ and NFC. For each category there is a clear set been sent by US swap dealers subject to the re- only a few countries – one of them being Swit- of obligations. For example, under EMIR, the category indicates at porting obligation to so-called “swap data repo- zerland – allow foreign regulators direct access which frequency a company must perform risk mitigation. Under sitories”. At the start of 2014, the EU introduced to data, and trade repositories themselves do not FinfraG, the obligation to clear OTC deals applies to all OTC tran- the European Market Infrastructure Regulation provide regulators with a standardised way of sactions unless executed between two “minus” companies (FC- or (EMIR), which imposed an obligation on coun- accessing data. This is why the Financial Stabi- NFC-). This framework imposes regular reviews of companies, es- terparties in derivative transactions to report the- lity Board recently carried out a study to esta- pecially small ones who need to prove that they remain under a gi- se to trade repositories. There is now some form blish a system for globally aggregating data. In ven threshold to retain the “minus” label and therefore have fewer of reporting obligation in most G20 countries. addition to facing a number of technical hur- obligations to comply with than if they were labelled as “plus”. Switzerland introduced such an obligation as part dles, such a global aggregation system also has The intermingled international framework creates an intricate ma- of its Financial Market Infrastructure Act (Article to tackle the obstacle of the different national trix (not to say a maze) of rules that a company must comply with 104, FinfraG), which entered into force on 1 Ja- legislation in place. At present, the EU is trying st depending on where it resides and on which exchanges it operates. nuary 2016. In contrast to EMIR and in a similar to ensure that at least its six ESMA transaction One example is that some jurisdictions require single reporting of a manner to the Dodd-Frank Act, the FMIA stipu- registers are able to provide an aggregated over- trade whereas others demand double reporting (with large numbers lates a one-sided reporting obligation for Swit- view of EU data. of unmatched trades by centralised repositories). The complexity zerland, i.e. only one of the two counterparties is One thing for certain is that regulatory big data of implementation required at each level (exchanges, legal systems required to report a derivatives transaction. This in the area of derivatives is yet to provide any and regulators) not only adds responsibilities, administrative bur- eliminates any overlaps in reporting and removes relevant information as regards systemic risks. den and costs to most actors in the commodity business but potenti- the need for the various transaction registers to As such, it appears that it will be a long time ally opens the way to legal arbitrages. To the detriment of the spirit reconcile the transactions reported to them. before this information can be used to better of each regulation. Based on the transitional provisions concerning evaluate risk.
page 13. speCial edition March 2016 Commodities The RegulaToRy landsCape | | ||| The Financial Market Infrastructure Act (FMIA) came into force on 1 January 2016. The associated Swiss Federal Council’s Ordinance st FMIO and the FINMA’s Ordinance came into force as of the same date. New Swiss rules on OTC derivatives to the ban on insider trading and market mani- iT is bRoadly transactions to trade repositories that are either pulation. It was submitted to public consultation authorised or recognised by the FINMA. Such from 20 August to 2 October 2015 and adopted aCCepTed ThaT reporting obligation will apply at the time the on 25 November 2015. esTablishing transaction is executed, any time it is modified georges raCine The FMIO-FINMA contains the implemen- and upon its termination. partner, lalive ting provisions on reporting requirements for RegulaTion securities trading, on clearing for derivatives, equivalenT To THE RISK mitigation obligation will apply he Swiss Federal Act on Finan- as well as on disclosure and takeovers. It was where a derivatives transaction is not cleared by cial Market Infrastructures and also submitted to public consultation from The eMiR was a central counterparty authorised or recognised Market Conduct in Securities and 20 August to 2 October 2015 and published on of viTal by the FINMA (e.g. where one or both counter- Derivatives Trading, otherwise 9 December 2015. parties benefit from an exemption). known as the Financial Market It is broadly accepted that establishing regula- iMpoRTanCe To Similar to the EMIR, the FMIA distinguishes T Infrastructure Act (FMIA also tion equivalent to the EMIR was of vital im- The swiss oTC between financial counterparties (FCs) and non- known as FinfraG), came into force on 1 Janua- portance to the Swiss OTC commodity deriva- CoMModiTy financial counterparties (NFCs) in determining st ry 2016. The associated Swiss Federal Council’s tive market participants. Indeed, up to 95% of the availability of exemptions to obligations. Ordinance on Financial Market Infrastructures OTC derivatives transactions in Switzerland deRivaTives FCs include banks, securities dealers, (re-)insu- and Market Conduct in Securities and Derivati- are concluded with a foreign counterparty, of MaRkeT rance companies, parent companies of a finan- ves Trading, otherwise known as the Financial which 78% are made with the European Union Market Infrastructure Ordinance (FMIO), and (EU), 10% with the United States and a mere paRTiCipanTs. siMilaR To eMiR, The fMia the Swiss Financial Market Supervisory Autho- 2% with Swiss counterparties. Prior to the entry disTinguishes beTween rity (FINMA)’s Ordinance on Financial Market into force of the new rules, Swiss regulation Infrastructures and Market Conduct in Securi- did not meet the recent and more demanding finanCial CounTeRpaRTs and ties and Derivatives Trading (FMIO-FINMA), standards developed by international bodies, non-finanCial CounTeRpaRTs also came into force as of the same date as the in particular the Committee on Payment and FMIA. The rules contained in these new ins- Settlement Systems (CPSS) and the Technical in deTeRMining exeMpTions. truments considerably alter the legal landscape Committee of the International Organisation of relating to over-the-counter (OTC) commodity Securities Commissions (IOSCO) of the Bank derivatives. for International Settlements (BIS), for impor- cial or insurance group or financial or insurance tant financial market infrastructure institutions conglomerate, fund management companies, THE OBJECT of the FMIA is to regulate the such as central counterparties and central secu- collective investment schemes, asset managers organisation and operation of financial market rities depositories. of collective investment schemes, occupational infrastructures, and the conduct of financial The FMIA will help fill the gap. It will also pension schemes and investment foundations. market participants in securities and derivatives contribute to Switzerland meeting the recom- The FMIA categorises any entity that is not an trading, including shareholding disclosures, pu- mendations of the Financial Stability Board FC as an NFC. The latter include commodity blic takeover offers, insider trading and market (FSB). Switzerland’s underlying aim is to ensure trading houses, amongst others. manipulation. Financial market infrastructures the proper functioning and transparency of se- In contrast to the EMIR, the FMIA establishes a curities and derivatives markets, the stability of subcategory of FCs: small FCs. An FC is deemed The fMia is inspiRed fRoM the financial system, the protection of financial to be small if the rolling average for its gross po- The us dodd-fRank aCT market participants and equal treatment of inves- sition in all outstanding OTC derivatives tran- sactions calculated over 30 days is below CHF 8 tors, while at the same time safeguarding Swiss of July 2010 and fRoM competitiveness. The FMIA is also a response to billion at financial or insurance group level. The The euRopean RegulaTion the so-called “third-country rules” contained in FMIA also establishes a subcategory of NFCs: the EMIR. small NFCs. A small NFC is an NFC whose known as eMiR. OTC derivatives transactions for each relevant THE FMIA introduces clearing, reporting and category of derivatives have a rolling 30-day risk mitigation obligations. It also contempla- average gross position that is below minimum include stock exchanges, multilateral trading fa- tes the introduction of an obligation to trade thresholds set by the Swiss Federal Council. The cilities, central counterparties, central securities standardised OTC derivatives over recognised latter thresholds vary depending on the catego- depositories, trade repositories and payment sys- platforms, where a counterparty is subject to ries of derivatives (e.g. 3.3 billion for commodity tems. The FMIA is inspired from the US Dodd- the clearing obligation. However, transitional derivatives). An NFC’s OTC derivatives transac- Frank Wall Street Reform and Consumer Pro- rules provide that such trading obligation will tions for purpose of hedging risks are not facto- tection Act Title VII (Dodd-Frank), which was only be implemented if it becomes necessary as red in the above calculation if such transactions signed into law on 21 July 2010, and Regulation a consequence of international developments, in are directly associated with the NFC’s business No. 648/2012 of the European Parliament and particular with respect to final requirements un- activity, liquidity management or asset manage- of the Council of 4 July 2012 on OTC Derivati- der the EU’s Markets in Financial Instruments ment of the NFC or its group. ves, Central Counterparties and Trade Reposito- Directive II (MiFID II) and Markets in Finan- Certain exemptions from the clearing obligation ries, otherwise known as the European Market cial Instruments Regulation (MiFIR), neither of are available for small NFCs and certain intra- Infrastructure Regulation (EMIR), which came which are yet in force. Subject to very limited group derivatives transactions. Various exemp- into force on 16 August 2012. exceptions (e.g. multilateral development banks tions from the risk mitigation obligation are also In view of their extraterritorial reach, both the and social security institutions, which are only available to small FCs and small NFCs as well as Dodd-Frank and the EMIR have an impact on subject to the reporting duty), the FMIA will for intra-group derivatives transactions. Switzerland. The FMIA is part of a larger legis- apply to any counterparty to an OTC deriva- lative package including the draft Swiss Federal tives transaction that has a registered office in THE FULL impact of the FMIA will ultimately Financial Services Act and draft Swiss Federal Switzerland. depend on the types of derivatives to which the Financial Institutions Act. It was submitted to The clearing obligation will entail counterpar- clearing obligation will apply, as determined by public consultation from 13 December 2013 to ties having to clear certain OTC derivatives the FINMA, and the exemptions made availa- 31 March 2014 and adopted by the Swiss Parlia- transactions by a central counterparty autho- ble. Given the remaining legal uncertainty, espe- ment on 19 June 2015. rised or recognised by the FINMA. The types of cially for smaller and mid-sized companies, swift The subordinate FMIO specifically governs the derivatives transactions that will be subject to clarification by the Swiss authorities will be authorisation conditions and duties for finan- the clearing obligation will also be determined welcome. Regardless of the final outcome, mar- cial market infrastructures, the duties of finan- by the FINMA. ket participants ought to start (if they have not cial market participants in derivatives trading, The reporting obligation will require that all already done so) reviewing internal procedures the disclosure of shareholdings, public takeover counterparties (including central counterpar- and documentation with a view to complying offers and the exceptions that apply with regard ties) report details of any OTC derivatives with the upcoming changes.
page 14. speCial edition March 2016 Commodities The RegulaToRy landsCape | ||| | Regulatory changes in commodity trading ping relationship between the underlying phy- TRanspaRenCy ces come in the form of formal regulations. sical commodity and the financial markets. We In some cases regulations that are not on the face have seen the introduction of new legislations of supply Chain, of it applicable to commodity traders, effectively viCtoria attwood sCott including REMIT and Swiss REMIT which huMan RighTs become so as they are passed through to tra- Global Head of compliance seek to regulate certain markets holistically ders indirectly through financiers and business Mercuria energy Group taking into consideration both financial and and CsR aRe partners. physical activities. It is important to remember subJeCTs whiCh The commodity trading industry spends an in- t cannot be denied that the regulatory that the drivers of price formation in the com- creasing amount of time working with many environment for commodity trading modity markets are market fundamentals inclu- aRe aCTively stakeholders on how we can make positive companies is changing and some of the- ding supply, demand and logistics, each of the disCussed on changes to the industries in which we are active. se changes will likely and have already commodity markets themselves are fundamen- Transparency of supply chain, human rights and resulted in market structural changes tally different and therefore a “one size fits all” TRading flooRs CSR are all subjects which are actively discussed Iand new processes. So what do these approach to commodity markets regulation can and in around the trading floors and in management changes and the new regulations mean for com- be problematic. ManageMenT meetings. Many commodity traders have dedica- modity traders? Some of the new financial regulations will ted teams focusing on developing their business The Swiss Financial Market Infrastructure Act result in new obligations for trading companies MeeTings. in a way that can contribute to positive develop- came into force on 1 January 2016 and aligns towards the Swiss and other financial regulators. ments in each of these areas. st the regulation of financial markets with interna- For Swiss trading companies it is impossible to One thing that is for sure is that the various evol- tional requirements and market developments. only think about and implement Switzerland’s utions of regulation, policy and calls for transpa- The regulation will introduce new requirements regulations and in fact many of the obligations rency are impacting and driving change within in relation to trade reporting, risk mitigation that arise from the Swiss regulations are obliga- the commodity trading industry on many fronts. and central clearing of derivative business for tions that Swiss trading companies have already The industry is becoming more transparent, de- Swiss companies. Commodity traders are acti- implemented and are already complying with dicates time to working proactively with regula- ve users of the financial markets to hedge their in other jurisdictions across the globe. By way tors, NGOs and governments and is developing various exposures and as such financial market of examples transaction reporting systems have “investment bank style” control functions and regulations impact traders however this is just and continue to be developed within the tra- policies, these developments can only be a good one piece of the regulatory puzzle. A commo- ding community and the range of authorisations thing for all concerned. Regulations and CSR dity trader’s primary business is the purchase, required by traders has already increased in are core to our industry and as such are inte- sale, storage, transportation and transformation some markets. With international business acti- gral to the activities and strategy of any major of commodity products and as such the regula- vities taking place within many different types trading house. tions that apply to traders include environmen- of regulatory environments around the globe, With all of the global and local changes and tal, health and safety and other laws in each of traders are used to working with new and evol- developments and the continuation of internal the jurisdictions in which they operate. Traders ving regulations. and external pressures applied to commodity must constantly stay on top of the complex web When contemplating and implementing chan- traders it is inevitable that there will be lots to of changing regulations across the many diffe- ges commodity trading companies need to think keep us all busy in the coming months and years. rent aspects of their businesses. much more broadly than just changes in the As a result maybe a career in Compliance will be Regulating commodity markets can be compli- financial regulatory space. Not all evolvements one of the more attractive options for the next cated given the close and in some cases overlap- of processes, procedures and business practi- generation! UN Guiding Principles: a sectoral approach The Ruggie Principles apply Assess actual and potential human rights impacts, The Thun gRoup driven approach allowed banks to openly share to all industry sectors. Could Integrate the findings and take action to pre- developed their understanding of the UNGP, explore how vent or mitigate potential impacts; various types of business might have an impact commodity traders emulate Track and communicate their performance. a disCussion on human rights, and analyse how to link this to existing policies and processes. This exchange Processes to provide or enable remedy to those the sector approach taken by harmed for impacts caused or contributed to by papeR foR The equipped the participants to raise awareness for the Thun Group of Banks? the company. iMpleMenTaTion this subject matter among senior management and to conduct training in their respective institu- The Thun Group process. The UNGP do not of The ungp. tions. Ongoing challenges in the implementation contain any industry-specific provisions. Any foCus was of the discussion paper are to balance the need company is expected to develop its own unders- for information (quality and quantity) in due di- tanding of what they mean for the business acti- on poliCy ligence with time constraints, understanding the bruno bisChoFF vities in its respective industry, its supply and va- CoMMiTMenT bank’s level of influence, and the change of pers- deputy Head Sustainability affairs lue chains, and for its relationships with its own pective, i.e. to focus on the impacts on the right credit Suisse aG employees, contract workers, customers, and and huMan holders and not (just) on the risk to the bank. with the communities living around their opera- RighTs due n June 2011, the UN Human Rights tions. In order to develop a shared interpretation diligenCe. Value of UNGP implementation for commo- Council endorsed the Guiding Prin- of the UNGP in the banking sector, UBS and dity sector. The UNGP are increasingly referen- ciples on Business and Human Rights Credit Suisse co-initiated the informal “Thun ced in policy instruments by international or- (UNGP). The UNGP establish a glo- Group of Banks”. In a collaborative process ganisations and national legislators, such as the bal point of reference on the respective stretching from 2011 to 2013, with workshops OECD MNE Guidelines, the OECD Due Dili- Iroles of businesses and governments to (at Lake Thun, hence the name) and conference gence Guidance for Responsible Supply Chains ensure that companies respect human rights in calls, a group of major international banks de- of Minerals, and the National Action Plans on their own operations and through their business veloped a discussion paper for the implementa- Business and Human Rights (under develop- relationships. They were developed by the UN tion of the UNGP, focusing on the overarching ment in more than 40 countries, incl. Switzer- Special Representative on Business and Human policy commitment and a description of how land). They are shaping the regulatory environ- Rights, Prof. John Ruggie, in a six year research to conduct human rights due diligence in retail ment for every sector. Commodities companies and multi-stakeholder consultation process. The and private banking, corporate and investment may benefit from pursuing a business-driven UNGP are based on the “Protect, Respect and banking, and in asset management, respectively. collective process to reflect on the application of Remedy” framework, i.e.: The process was supported by representatives the UNGP to their business, and to engage in The State duty to protect human rights against of the University of Zurich Competence Center the policy discussions affecting the industry. At abuse by third parties, incl. business, through ap- for Human Rights, who helped set the broader the company level, the application of the UNGP propriate policies, legislation and regulations, context of the UNGP, challenged banks’ pers- can lead to informed and improved risk manage- The corporate responsibility to respect human pectives and provided input from non-business ment, some protection against reputational harm rights, points of view. A draft of the discussion paper if negative impacts nevertheless occur, access to And the need for access to remedy for victims, was shared with a small group of renowned ex- business opportunities with governments, finan- through judicial and non-judicial means. perts on business and human rights, who pro- ciers and customers who increasingly expect The corporate responsibility to respect human vided valuable feedback on general direction, their business partners to identify and manage rights requires companies to have in place: scope and contents of the paper. human rights risk, and improved relationships A statement of their policy commitment to with workers, communities and other stakehol- respect human rights, Experiences and challenges of applying ders, resulting in greater trust and a stronger so- A human rights due diligence process to: UNGP in business. The Thun Group’s business- cial license to operate.
page 15. speCial edition March 2016 Commodities The RegulaToRy landsCape ||| | | Responsible gold sourcing Pioneering and leading Due diligence on a risk based approach (taking due diligenCe The responsible sourcing standards in the pre- responsible sourcing standards into account the country and the counterpart ris- pRoCesses aRe cious metals industry are fairly new and need to ks). Such due diligence includes collecting and as- establish their credibility within the downstream for the precious metals industry. sessing information, with an onsite visit if neces- audiTed markets. Therefore, it is imperative that the rele- sary, before entering into a business relationship. vant standard-setting bodies implement the fol- A unanimous approval process of the supply independenTly. lowing: chain by three bodies (relationship manager, The ResulTs aRe Set criteria for qualified auditors, accredit each compliance department as well as the executive of them and provide proper training on the stan- management committee). passed onTo dards. olivier demierre The daily review of transactions to identify The appRopRiaTe Critically assess the audit reports and take in- Senior vice president, corporate Social possible anomalies. dependent decisions on their findings. responsibility, MKS paMp Group An immediate suspension of the relationship RegulaToRy Thoroughly investigate credible suspicions and in the case of serious doubt on the compliance body: finMa confirmed non-compliance occurrences. recious metal supply chains inputs with due diligence requirements and, if applica- oR The london Implement decisive sanctions in the case of consist of either doré from mines, ble, reporting to the Financial Intelligence Unit. non-compliance. investment bars from the financial Our due diligence processes are regularly audi- bullion MaRkeT We are also a firm proponent of extending the markets or scrap from collectors ted by independent auditors. The results of such assoCiaTion. responsible sourcing standards, that currently and the industry. These materials audits are transmitted to the corresponding re- only cover gold, to other precious metals, namely Pare then transformed into a wide gulatory body (such as FINMA or the London silver, platinum and palladium. Furthermore, it range of products spanning from the electronics Bullion Market Association) and published on is imperative that environmental and social cri- to the jewellery industries. our website. teria to also be included as an integral part of the The MKS PAMP Group decided a number of responsible sourcing standards. As a group and years ago to design and implement processes that SOURCING RISKS AND DUE DILIGENCE MEASURES since inception, we have extended our respon- ensure responsible sourcing practices in its pre- sible sourcing due diligence processes to cover cious metals supply chain. Simultaneously, the Risks Framework AML- CTFT Law LBMA RGB* RJC CoP ** SA 8000 *** MKS PAMP Policies all precious metals as well as environmental and group led key industry and international bodies social practices. in drafting various responsible sourcing stan- Money Laundering, Counter-Terrorism Financing In addition, we also propose “Beyond Precious ” TM dards. The table below shows the key challenges Conflict Financing products in all precious metals that not only involved in responsible sourcing along with the Human Rights Abuses comply with extended due diligence require- Health and Safety measures taken to mitigate them. Business Practices ments but can also provide for positive impact at Those risks are widely spread over the precious Environmental and Social Practices source. Such products bear the Beyond Precious metals supply chains. Monitoring and mitigating Other Reputational Risks logo. Considering that responsible sourcing is an them is thus critical in order to be able to source Mandatory Measures London Bullion Market Association – Responsible Gold Guidance integral pillar of the precious metals industry, responsibly. The due diligence processes to be Voluntary Measures Responsible Jewellery Council – Code of Practices we continue to lead by example and spare no External Audit Social Accountability International - Socially acceptable practices in the workplace conducted can be summarized by the following effort towards a global, fully comprehensive and key steps: Source: MKS Pamp Group ©2016 accountable responsible sourcing model. TRADE WITHCONFIDENCE Our Global Commodity Trading Platform brings together over 50 years of experience in designing and managing risk and insurance solutions for the industry. Our experts based in key global hubs around the world design tailor-made risk management and insurance programs that address your strategic challenges. • Marine cargo stock throughput insurance. • Hull insurance. • Cyber insurance. • Protection and indemnity liability insurance. • Credit and non-payment insurance. • Employee health and benefits. • Charterer’s liability insurance. • Political risk insurance. • Claims support. Our platform provides you with the speed, accuracy, flexibility, and global reach you need to succeed. ENABLING YOUR SUCCESS WORLDWIDE For more information, please contact: Ziliante Mariotti, [email protected] or Maurits Quarles van Ufford, [email protected].
page 16. speCial edition March 2016 Commodities The RegulaToRy landsCape | | ||| Why acting responsibly is good business Commodity traders need But part of the blame can also be laid at the door iT is iMpoRTanT and responsible processes in place to manage the to do a better job at explaining of commodity trading firms themselves, for the To ReCognise large volumes of potentially dangerous or pollu- ting materials that we move around the world industry has in the past done a spectacularly poor themselves. Some firms are job of explaining itself in public, indicating that ThaT The global and the infrastructure assets that we own. it has a care for the world around it, or assessing A second reason is that the industry depends on taking the first steps. and reporting on its impact on society. sCale and sCope a unique network of partnerships to maintain It is important, even for private companies, to of The TRading and grow our business – including governments, recognise that the global scale and scope of the resource-producing and processing companies, trading sector bring with them heightened scru- seCToR bRing banks and capital market investors. Our partners tiny and a need to explain, just as it did for ex- wiTh TheM rightly require that we operate to the highest tractive companies when public concern over standards. The third reason – and a factor that andrew gowers their environmental and social policies grew heighTened should encourage commodity traders to continue Head of corporate affairs, trafigura loud 20 years or more ago. sCRuTiny and a further along this path – is that there is a compe- In recent times several groups have stepped up need To explain. titive advantage to be gained from this agenda. o counter their unfortunate re- public disclosures concerning their finances and Our business partners, for example, have warmly putation trading firms should do their business activities. The next step is in the welcomed our membership of the Extractive more to demonstrate they are res- area of social and environmental impacts. The Industries Transparency Initiative and the steps ponsible and transparent. firm I work for, Trafigura has published its first we have taken under its auspices to disclose pay- Asked for a view on the charac- standalone Responsibility Report late 2015. ments for purchases of crude from national oil T teristics of commodities trading Commissioning independent authorities to companies in EITI implementing countries. Our firms, most passably well-informed citizens review the business and producing educational banks draw comfort from the lengths we go to would probably not name corporate responsibi- reports explaining the role of commodities tra- in explaining our procedures for managing risks. lity as the first thing that comes to mind. ding to a wide audience is another area to ex- The NGO community is also welcoming and On the contrary: the trading sector suffers from pand. So is seeking to engage with governments encouraging the new dialogue with the industry. an unfortunate reputation, most obviously typi- and civil society concerning the most frequent- From the point of view of senior management fied by the label of “Switzerland’s most toxic in- ly expressed concerns about the industry – for and Boards, positive reactions are an important dustry” stuck on it by a Swiss NGO a few years example in the areas of revenue transparency validation. There is no contradiction between ago and still not entirely shaken off. and of supply chain due diligence. acting responsibly and transparently and conti- Some of this is undoubtedly unfair, born of gene- The reasons for undertaking these activities are nuing to run a healthy and profitable business. ral lack of awareness about what commodity tra- clear and firmly rooted in business logic. We Far from the two goals being contradictory, they ding firms actually do or the service they provide believe that we have to earn and maintain a are mutually reinforcing. Defining ourselves, ac- to the world economy. Some arises from contro- licence to operate in the many countries in which ting and being seen as acting responsibly has the versies and notorieties of the past and some from we are active. Trafigura has experience from its potential to reassure our clients, improves access to a generalised suspicion of private companies own brief history as to what can happen when financing, generates pride among employees and operating in what is perceived as a lightly-regu- an incident puts this licence at risk. So we are increases companies’ appeal to potential recruits. lated jurisdiction. committed to demonstrating that we have safe What better argument to follow this course?
page 17. speCial edition March 2016 Commodities The RegulaToRy landsCape ||| | | interview | JaCques de watteville FdF The interplay of Swiss and international regulations n recent years, Switzerland has swiss ngos are particularly critical of the confirmed its commitment to in- commodity trading sector. is this justified? ternationally-recognised standards. In Switzerland, everyone has the right With the Corporate Tax Reform to express their views, irrespective of Act III, with the Financial Mar- whether these views are justified or not. Ikets Infrastructure Act (FMIA also Some of the criticism from Swiss NGOs known as FinfraG), with the disclosure of has to do with the fact that commodity payments to governments and govern- traders were quite secretive about their mental agencies for the extractive industry business until some years ago. However, and with other initiatives, Switzerland is this has changed in recent years. The in- aligning with regulation in the US and in dustry has started to engage in construc- the European Union. An interview with tive dialogue with the public. In our po- Jacques de Watteville, State Secretary in litical system, we are used to constructive the Federal Department of Finance and dialogue with all stakeholders. chief negotiator with the EU. are you not concerned about the impact on The commodity trading sector represents a trading houses and the risk that they may significant part of the swiss economy. how leave for other hubs? important is this sector in your view? The activities of some Swiss NGOs seem According to estimates, the contribution to be unsettling the commodity trading of the commodity trading sector to GDP sector. But I do not think that critical was approximately 3.9% in 2014. Hence, NGOs are a reason for companies to lea- this sector continues to play an important ve as long as the industry recognises that role for the Swiss economy. The Swiss Switzerland is pursuing a coherent and commodity cluster is very diverse and not balanced policy. only consists of commodity trading com- panies, but also comprises banks that spe- switzerland encourages dialogue with multi- cialise in the financing of commodity tra- ple stakeholders. do you view this approach ding, companies that provide inspection as strength? why? services, shipping companies, insurance This dialogue is an important pillar of companies and consultants. the recommendations made in the bac- kground report on commodities published switzerland is aligning with us and eu regu- by the Swiss government in 2013. We are lations impacting the sector such as rules on JacqueS de watteville. State Secretary in the pleased to see that the dialogue particu- derivatives markets. how important is it for federal department of finance and chief larly between the industry and NGOs switzerland to be in line with international neGotiator with the eu. has improved since then. Through this regulations? 1951 Born in Lausanne. dialogue, mutual understanding among For Swiss companies, it is important to 1982 Entry into the diplomatic service of the Federal Department stakeholder has increased. Only if all sta- have a level playing field at the interna- of Foreign Affairs (FDFA). keholders work together are real improve- tional level. Global standards define the 2007-2012 Ambassador, Head of Swiss Mission to the European Union ments possible. For example, NGOs and framework that allows for such a level in Brussels companies are preparing guidance for the playing field and consistent rules across 2012-2013 Swiss Ambassador to the People’s Republic of China, implementation of the UN Guiding Prin- jurisdictions. The implementation of in- the Democratic People’s Republic of Korea and Mongolia. ciples on Business and Human Rights in ternationally agreed key standards is thus 2013 State Secretary in the Federal Department of Finance (FDF). the commodity trading industry. in the interests of Switzerland and its 2015 Chief negotiator in negotiations with the EU. economy. We should continue to parti- There is a strong push to encourage compa- cipate actively in the further elaboration nies’ responsible behaviour along the value of such standards. This fosters confidence, stability and legal certainty. chain. Can and should switzerland be a leader in this area? Furthermore, it increases the credibility of Switzerland in international First, let me stress that responsible behaviour concerns not only commo- fora and enhances our ability to defend the interests of Switzerland in an dity companies, but all companies. Second, I think that we should indeed efficient way. be among the leading countries in this area. In my view, this is already the case today. However, it is important to recognise that unilateral ac- how important is it for switzerland to avoid being too strict in order to avoid tion going much further in this area would not be effective. What is more damage to the sector? reasonable and effective is a multilateral approach. The aim of the Swiss government is twofold, i.e. to preserve and improve the framework conditions and to reduce risks, including reputation risks. if so, should it promote voluntary rules/codes of conduct? Therefore, it makes sense for Switzerland to implement internationally Voluntary rules are important instruments for supporting companies in agreed key standards. However, at the same time, we have to ensure that their efforts to behave in a responsible manner. Therefore, Switzerland is our companies do not suffer from disadvantageous conditions. Conse- actively involved in the development and implementation of several such quently, the implementation has to be done in an internationally coordina- initiatives. Examples include the UN Guiding Principles on Business and ted way. I believe that, with these efforts, Switzerland is well positioned as Human Rights, the OECD Guidelines for Multinational Enterprises and a competitive and reputable location for commodity companies. the Voluntary Principles on Security and Human Rights. do you feel that the third series of corporate tax reforms (Corporate Tax Reform are there areas where switzerland should impose binding legislation? act iii) is well balanced and will encourage commodity trading houses to be I am aware of the widely held view that there are no binding rules for established in switzerland? the commodity sector. But actually this is not correct. Just to cite some Yes, I am rather optimistic. First, the reform aims to strengthen Switzer- examples, commodity firms are subject to the provisions on corruption land as a business location and increases legal and planning certainty for and money laundering in the Swiss Criminal Code as well as to the pro- all companies. Second, as part of the reform package, the Confederation in- visions of the Anti-Money Laundering Act if trades are executed for the tends to create fiscal policy leeway for profit tax reductions in the cantons account of a third party, and they are subject to certain aspects of financial if necessary to preserve their tax competitiveness. market regulation. In addition, the Swiss government is preparing a spe- cific proposal for legislation on payments made by commodity companies do you feel that switzerland can fight on equal terms with other commodity to governments within the scope of the revision of the law on companies hubs such as london or singapore and will remain competitive? limited by shares. Again, we are following an internationally coordinated We know that some other locations offer more favourable tax rates. approach, as the EU, the US, Canada and Norway are introducing similar However, even though tax considerations are important, they are not the rules or have already done so. In many cases, however, the most efficient only decisive factor for location. What matters is a business-friendly envi- approach is to work with companies to develop guidelines that achieve ronment overall. This includes the quality of the infrastructure, a flexible specific improvements in responsible behaviour. job market, the availability of a highly qualified workforce and the qua- lity of life, for example. Taking all relevant factors into account, Swit- how do you view the role of swiss authorities in supporting this process? zerland remains a very attractive place for doing business, including for The role of Swiss authorities is to act as a coordinator and facilitator, commodity companies. But since other locations are also making subs- and to bring together all relevant stakeholders at the national and inter- tantial efforts, we need to be mindful to preserve and to strengthen our national level. competitiveness. Interview Nicolette de Joncaire
page 19. speCial edition March 2016 Commodities eneRgy in TRansiTion ||| | | THE PARIS AGREEMENT AND SUSTAINABLE ENERGY An energy system based on value not volume We need to move beyond to renewables. For others, sustainable energy is iT is in The ning and lighting systems, and smart appliances the engineering culture that about getting access to the energy needed for sus- inTeResT of that can manage energy. This approach can only work if suppliers can get their revenues based tainable development. Many people and many brought us to today, where countries depend on fossil fuels for their live- uTiliTies To sell on the quality of life they deliver. They would then make profits by managing their costs to lihoods and their development, climate change energy is a series of commodities. often is not their priority. MoRe kilowaTT deliver these services. We need markets that are Our challenge is to address both perspectives in houRs. fRoM a If we explore the link between the networks and an integrated way. Energy is at the heart of the the energy service providers, quality of service designed explicitly to value matter. We can meet our environmental, social soCieTal poinT can be measured in many ways. Besides keeping and pay for flexibility. and economic development goals, but only if of view, This lights on, how long does it take customer service to answer a phone? How long does it take to get we rethink energy. We need to move beyond the engineering culture that brought us to to- appRoaCh is noT a crew out to repair a power line? Here I propose day, where energy is a series of commodities, to ConsisTenT wiTh that companies be rewarded or penalised for the a new culture of energy services that focuses on susTainable quality of service that they offer. sCott Foster providing value and not volume. Power plants and customers can provide a range director, Sustainable energy division Let me use electricity as an example to explain. developMenT. of services to the networks. Production of elec- United nations economic commission The concept of energy services connects the va- tricity from wind and photovoltaic generation is for europe (Unece) rious links in the electricity value chain. At the highly variable. With that variance and the mi- customer level, customers do not “use” electri- nute-by-minute changes in electricity demand, ast December 187 countries agreed city but rather they use lighting, heating, or coo- it is clear there is a growing need for flexibility to limit greenhouse gas emissions ling. They use the services that energy provides to ensure system reliability and resilience. We to help mitigate climate change. In for all aspects of daily life. And yet at the end of need power plants and consumers who can stop addition, last September the United the month they pay a utility bill for the kilowatt and start quickly, thereby providing the flexi- Nations adopted the 2030 Agenda hours consumed. What customers “buy” is not bility that a robust, integrated system requires. L for Sustainable Development that what the utilities are selling. It is in the interest We need markets that are designed explicitly included 17 specific goals. While only one sus- of utilities to sell more kilowatt hours because to value and pay for the provision of flexibility tainable development goal, number 7, addressed that is how they make money in a cost-plus sys- services. energy specifically, in fact attainment of all of tem. From a societal point of view, this approach Sustainable energy is achievable, but policy the goals depend on having access to energy. Our is not consistent with sustainable development. and regulations must catch up. Thinking of concern is that we are getting the energy equa- We need to transform utilities to become energy energy as a series of services rather than as a tion wrong, and it is essential for us get it right service providers and allow competition from commodity is an important place to start. We if we are going to meet our goals. new players. By making this shift we unleash must regulate energy as a service to improve We depend on energy for everything in our innovative investments by energy service provi- the performance of the energy system and sup- daily lives. It fuels transport, it powers compu- ders who have the technical expertise, can do the port sustainable development and achievement ters, and it charges our mobile phones. For many financing, and have a stable pool of trustworthy climate goals. The result will be innovation countries, sustainable energy is about mitigating contractors to deliver energy efficiency – insula- unchained – improving efficiencies, reducing climate change and shifting from fossil fuel use tion and better windows, efficient space conditio- costs, and better environmental performance. Thinking renewables along the value chain To understand renewables- of renewables-based power. A simple example: invesToRs or windy weather. So production is exogenous- related investment one needs rapidly falling prices for solar modules over the should keep ly determined and volatile. What is even more striking is that the marginal costs to produce last years have sent many solar firms into finan- to differentiate between cial distress – many were forced out of the mar- in Mind ThaT power this way are practically zero. This means, ket. This is neither pleasant for them, nor for even under the assumption that there is no go- technology manufacturing those who invested in the companies. However, invesTing in vernment driven feed-in law, as long as the who- and investment related to for those who buy and use the modules to pro- Renewables lesale power price is larger than zero, it is always attractive to produce and sell power, when wind duce and sell electricity, the story looks different: power production. their costs are falling and their business model is isn’T only a or sun are there. That is different from coal and increasingly attractive. That is why, for example, quesTion of gas based power generation. A gas-fired power prices for renewables technology stocks on the plant is not likely to produce at times when the one hand and investment volumes in renewa- TeChnologiCal electricity price does not even cover the costs of bles based power plants on the other are not mo- ChoiCe buT also the gas. This has obvious consequences for the ving in sync. In fact the structural change may power market. While price volatility increases, pr. ulF moslener even move faster because of this, with invest- a quesTion of the price itself might be very low on sunny, Head of research, FS-Unep ment surging at times when technology com- wheRe in The windy days. Because of the high volatility, other panies are suffering from low prices and strong value Chain. new technologies come into sight. Options to nvestors interested in renewables often competition from Asia. react are more flexible (e.g. gas-fired) power focus on the question “Which techno- But the value chain does not end there. Power plants, better and larger grids to level out wind- logy should I invest in?”; the most com- systems around the globe experience a substanti- availability, measures to make the demand more mon alternatives being wind and solar. al structural change when the shares of renewa- flexible, and – most prominently – electricity While this is obviously important, it is bles rise to levels above around 30%. A main storage technologies such as pump storage or Ionly part of the full picture of the cur- driver is the fact that based on wind and sun, batteries. Batteries are receiving particular inte- rent structural change in electricity markets. A power can only be produced at times of sunny rest as their costs have more than halved over look at investments related to renewable energy the last five years. is revealing: by far the largest section of a total RENEWABLES-RELATED INVESTMENT VOLUME IN USD BN IN 2014 This is interesting in the face of regular intraday 339 investment of about US$270bn is financing the 69 Asset and volatility of more than 50% for peak-power at application of technologies, in other words the 74 270 company the European Energy Exchange. However, the mergers, installation of smaller solar systems or utility- acquisitions, same thought as above applies to the difference refinancing, scale solar or wind farms. Much less (about US$ 171 buy-outs between producing the batteries and using them etc. 30bn) is going to the production of technology in times of low battery prices. Battery producers including R&D, venture capital, private equity Projects might not be happy about the low prices and in or new stocks. Another US$69bn is invested in the long run one should also not forget that in a M&A or buyout transactions, which is unfortu- world with cheap and efficient electricity stora- nately often ignored in the renewables debate ge technologies we should not expect large price as they don’t directly lead to additional power 30 (4) Equipment volatility to persist. That – after all – is what manufacturing generation capacity – although they play an im- 1 7 5 2 15 Scale-up makes storage attractive in the first place. Inves- Technology portant role by providing liquidity and exit op- VC Corp Gov PE Public Total Rein Asset SDC* Total M&A Total development tors should keep in mind that renewable energy tions for initial investors. However, it is key to RD&D R&D markets company ves- finance invest- /B-O transac- investment isn’t only a question of which tech- new invest- ment ted tions etc. equity ment realise the differences between these three parts Source: Global Trends in Renewable Energy Investment, an annual joint publication by the Frankfurt School - UNEP Collaborating nology to invest in, but also at which point in of what we might loosely call the “value chain” Centre, UNEP and Bloomberg the value chain.
page 20. speCial edition March 2016 Commodities eneRgy in TRansiTion ||| | | Sustainable development? The only option We will have to switch NASA. Shortly after, in 1972, the Club de Rome based on The dies confirm the accelerated melting of the entire from a world we perceived published the Meadows report: «The Limits to RaTio of CaRbon western ice-shelves. Another example concerns ocean acidification: we see that surface waters Growth”. These events marked the beginning of as limitless to a world that an awareness of the finite nature of Earth. Until 13 and CaRbon warm up and the level of acidity increases. But then, our planet had seemed too large for us to as it gets warmer, the ocean water should release we will feel is too small. perceive its limits ! 12, we know ThaT the CO2 it previously absorbed and thus its level Unfortunately, this awareness has not yet led The inCRease of acidity should decrease. This does not happen us to consider a different form of development. for the simple reason that the CO2 concentration Today, we continue to massively exploit mineral in Co2 in The in the atmosphere continues to rise, increasing its resources and fossil fuels, as if it had no envi- aTMospheRe absorption, and therefore its acidity. In short, hu- ronmental consequences. But our level of CO2 man activities cause climate disorders along with Jean-Claude keller emissions is such that it has begun to upset the is due To The significant environmental risks, so they could get engineer epF and physicist thermal balance of the planet at a speed that it buRning of out of hand and induce considerable expenses. has not experienced over the past million years. fossil fuels. Action is needed to reduce these risks and we uring the 19th and 20th centu- Among the most serious impacts – with environ- know what to do: we need to decarbonise our ries our economic development mental, economic and social consequences –, we economy! To achieve this, sustainable develop- was based on the exploitation of can list the speed at which water levels rise and ment is essential because it meets the needs of Earth’s fossil energies and mine- ocean acidity increases. We will have to switch the present without compromising the ability of rals without any serious questio- from a world we perceived as limitless to a world future generations to meet theirs. Practically, this Dning of their finite nature. We that we feel is too small ! transition implies an increasing use of renewa- have disposed of our waste into the environment Although there is still doubt in some people’s ble energy, a substantial increase of the energy with little thoughts over our capacity to absorb minds, we must acknowledge facts and face rea- efficiency of all appliances and engines, as well such waste. We have been blinded by the appa- lity. Human activities have impacts on our en- as the implementation of effective recycling for rent endlessness of our planet’s resources which vironment and science has been able to clearly waste and for products that have become obso- we thought we could use as we saw fit, thanks establish such responsibility. For example, it has lete. It also asks for a more restrained and more to cheap oil. Without this oil, which has made been confirmed, based on the ratio of carbon 13 local consumption from all parties involved, and all transport (by air, sea and land) possible, we and carbon 12, that the increase in CO2 in the should meet the needs of the many rather than would have been unable to develop our current atmosphere is due to the burning of fossil fuels. cater to the excesses of the few. Let us not forget economic system of production/consumption: a Theory also predicts that the greenhouse effect that the creation of wealth leads to the destruc- system unsuitable to the large flows of people, should be more noticeable in polar areas and tion of part of the natural resources of the planet. materials and products that we have today. Our this is precisely what we observe. Indeed, some And to make sure that the next generation will vision was of a world without limits. But in parts of Greenland are strongly affected, inclu- not be penalised, all the new techniques inheri- the late sixties, the first photograph of Earth as ding the tips of the Zachariae and Jakobshavn ted from the previous generation must compen- a whole – as a finite body – was published by glaciers; Antarctica is not spared as several stu- sate for the destroyed natural capital. CLIMATE GOALS AND CHEAP OIL Time for an energy policy reboot Post-COP feelgood factor The obvious question for “de-carbonisers” is: CaRbon pRiCing Enhanced R&D spend would be a better use of masks global energy policy “what replaces hydrocarbons?” Today’s solar and Could do MoRe taxpayers’ money than the current patchwork of grants, tax breaks, mandatory market shares wind technologies cannot fill the gap themselves. muddle. Carbon pricing, subsidy These technologies remain relatively inefficient To ReduCe Co2 and subsidized funding. and intermittent compared with more concen- Broader adoption of market-sensitive carbon pri- removal and R&D should trated energy forms like hydrocarbons and nu- eMissions Than cing, via taxes or emissions trading, would be a replace arbitrary renewables clear. Indeed, capping CO2 emissions becomes The aRTifiCial further step towards rationale energy use. Long almost impossible if a widespread nuclear mo- opposed by the oil, gas and coal sectors, there is and de-carbonisation targets. ratorium persists. Diversifying from established sTiMulus of now growing acceptance that this would at least energy forms is prudent policy. So too allowing Renewables. provide investment clarity, compared to the cur- the market to price-in the true costs of using rent muddle of moratoriums, grants and arbi- energy (hydrocarbons, nuclear and renewables trary renewables targets. Let fuels compete on a alike). But simply writing-off hydrocarbons and level, market-oriented, playing field. The existing david FyFe nuclear altogether – 85% of today’s global energy European emission trading scheme is flawed, but Head of Market research and analysis, – is folly. Even the IEA’s “New Policies Scenario” has been unfairly damned, presumably because Gunvor Group (including COP21 pledges) suggests they may market-based systems can at times allow hydro- still provide 80% of global demand by 2040. carbon consumption to rise as well as fall. limate campaigners leaving One solution is to nudge governments away Crucially however, carbon pricing opens the door COP21 talks in Paris heralded from picking technologies. The success rate of to a hitherto stifled technology, but one which, the end of the hydrocarbon age. bureaucrats in picking industrial winners is alongside energy efficiency, could do more to re- Oil analysts foresee months patchy (at best). Europe’s fiscal shift to diesel duce CO2 emissions than the artificial stimulus of sub-$50 oil ahead, boosting and the competitive straight-jacket imposed on of renewables: CCS. Wider adoption of CCS, Cboth oil demand and the econo- German industry since the nuclear freeze are together with a carbon tax, would acknowledge my. Despite appearances, lower CO2 emissions recent examples. Corn ethanol in the US is ano- the key role hydrocarbons will play for the fo- needn’t automatically contradict sustained hydro- ther instance where politics trumped economics, reseeable future, while meaningfully reducing carbon use. But opposing sides in the energy de- leaving only corn producers better off. emissions. Some climate campaigners remain bate seem to prefer megaphone diplomacy, rather Subsidies, for end-users or producers, also distort lukewarm to market-driven policies, precisely than collaboration on better policy formulation economic signals at times of market imbalance. because they mitigate the need to ban the hy- – to limit anthropogenic CO2 emissions, while The world spent nearly $500 billion in fossil fuel drocarbon “enemy” altogether. Such blinkered enhancing developing country access to cheap subsidies in 2014, plus $135 billion for renewa- thinking risks missing CO2 targets altogether, and affordable energy. Collaboration requires bles. That works out at $6 for every barrel oil and ignores the affordable energy and wealth compromise from hitherto entrenched positions. equivalent (boe) of hydrocarbon consumed and creation arguments that favour continued, albeit Were hard-line environmentalists to look beyond $12 per boe for renewables. Governments must enlightened, use of hydrocarbons. speculative temperature models, then unattai- find better ways to enhance social welfare than We should aspire to a future where economi- nable deadlines for “de-carbonising” might lose supporting inefficient technologies and encoura- cally robust renewables combine with rising some of their lustre. The hydrocarbon industry ging wasteful energy consumption. energy efficiency, advanced nuclear technology, too must raise its head from the sand in the glo- In contrast, there is a crucial need to broaden hybrid vehicles, CCS and flue gas desulphurisa- bal warming debate. Now that governments in and deepen government support for technology tion. But this vision requires a change in mindset the US, China and India are walking the envi- research & development (R&D), across the spec- across the entire breadth of the climate debate. ronmental walk, things cannot just continue as trum, from enhanced oil recovery, to carbon cap- The prize is a more sustainable, affordable global before. If both sides dare to consider the wider ture and storage (CCS) and advanced renewables energy system – for the environment, for energy picture, a reboot towards less costly and more ef- technologies, alongside the promotion of more producers and consumers, and for broader eco- fective energy policy might result. energy efficient turbines, buildings and vehicles. nomic well-being.
page 21. speCial edition March 2016 Commodities eneRgy in TRansiTion ||| | | Segregation in the Swiss electricity market While everybody talks about on production costs, while electricity producers sMall ly on the wholesale market currently face mar- equality, the Swiss policy who sell their electricity to larger customers ConsuMeRs ket prices well below the production costs. As a reference, the center for Energy Policy and Eco- face wholesale market prices. Thus, producers maker introduced a segregated are segregated based on how strongly they are CuRRenTly pay up nomics of the Swiss Federal Institute of Tech- nology estimates the average production costs of vertically integrated or, in other words, based on two-class system for electricity whether they have distribution channels to di- To 200% of The Swiss hydro power stations to be approximately consumers and producers. rectly reach small end consumers. pRiCe on The 60 CHF/MWh. Thus, the segregation of the elec- Looking at current figures, these inequalities be- tricity producers into a two-class system leads to come even more striking: According to the Fede- wholesale the current situation in which smaller, vertically ral Electricity Commission, the current average MaRkeT and integrated producers can buy electricity produc- retail electricity tariffs for of a medium sized hou- tion assets (i.e. power plants) at price levels which sehold vary between 60 CHF/MWh in the can- subsidise TheiR large producers could never afford. ton of Glarus and 90 CHF/MWh in the canton veRTiCally Whenever the policy makers were talking about dr. martin p. everts of Geneva. In contrast to this, on the wholesale remodeling of the Swiss energy sector, they most chief economist, axpo Holding aG market the same product is priced at around 40 inTegRaTed probably had something different in mind. Arti- CHF/MWh at the European Energy Exchange. eleCTRiCiTy cle 1 of the Electricity Supply Ordinance states he Federal Constitution of Swit- As a result, small consumers currently pay up to pRoduCeRs wiTh that the policy makers shall set the conditions to zerland postulates the equality 200% of the price on the wholesale market and maintain and strengthen the international com- of all persons before the law, in- subsidise their vertically integrated electricity 20 To 50 Chf/Mwh. petitiveness of the Swiss electricity sector – a dependent of someone’s origin, producers with 20 to 50 CHF/MWh. Because of principle which seems to be put into question by race, gender, age, language, or these subsidies, the usually smaller, vertically in- the observed inequality. Instead of letting market T way of life. In what seems to be tegrated producers are still able to make a profit, forces increase the competitiveness of all electri- a contradiction against this fundamental princi- while large electricity producers which are com- city producers, the Swiss policy makers protect ple of equality, Article 4 of the Electricity Sup- peting for large customers on the wholesale mar- and favor smaller, vertically integrated producers ply Ordinance states that most end consumers of ket are currently struggling with the extremely with monopoly-like rules. electricity with a consumption smaller than 100 low wholesale market prices. The inequalities consumers and producers face MWh have to pay retail tariffs based on produc- On the basis of Article 4 of the Electricity Sup- are due to a failed market liberalisation in Swit- tion costs. Larger customers with a consumption ply Ordinance, the Swiss policy makers enforce zerland. A partially liberalised market as we are of more than 100 MWh however, can buy their a structural change in the electricity market. observing now is the worst option for the Swiss electricity at wholesale market prices. Vertically integrated, usually smaller producers energy sector and was never intended to be a per- Article 4 of the current Electricity Supply Or- are able to sell the electricity of their production manent one. Currently, the respective time-limits dinance does not only create inequalities for the assets above production costs to the extent that for creating a fully liberalized Swiss electricity Swiss electricity consumers, but it also creates a they sell their electricity directly to small end market are being disregarded. As the proverb sta- two-class system for producers. Electricity pro- consumers and therefore profit from the quasi- tes, policy makers should be “in for a penny, in ducers who deliver their electricity to small end subsidies provided by the small end consumers. for a pound” and quickly aim for a full liberaliza- consumers are allowed to base their retail tariffs Larger producers who sell their electricity main- tion of the Swiss electricity market. BIOMASS FOR BIOFUEL Challenges and opportunities in the development of a new market There are opportunities to make environmental and social benefits, using certain To ensuRe sation is not compensated, the produced biofuels current agricultural practices types of biomass – in particular, food crops – for susTainable may not comply with the RFS. Efforts are being fuel also raises a number of environmental and undertaken to overcome the technical challenges more sustainable and more social concerns. use of bioMass of cellulosic biofuel but until there is a signifi- Biofuel can be produced from a wide range of cant increase in their availability on larger scales, resilient to future requirements biomass feedstock, examples of which include foR biofuel, we the bulk of US renewable volume obligations for biomass feedstock standards. starch crops (e.g. corn), oil seeds (e.g. soy), wood should Take inTo (RVO) must be fulfilled with food crops. chips and straws. Each type may entail environ- All said, biomass demand continues to increase mental or socio-economic risks. Dedicating food aCCounT The in response to growing demand for regulatory- crops to biofuel production can impact food effeCT of feeds- compliant sources of energy. In addition to pro- ghasideh pourhashem, phd market prices. Conversion of land to crop pro- ToCk ChoiCe and viding sustainable energy, it is also critical to postdoctoral fellow at the Baker institute duction, less frequent crop rotations, and over integrate the benefits of an improved and sus- for public policy’s center for energy application of fertilisers for crop yield impro- The sCale of tainable agricultural system into biomass selec- Studies and the department of earth vement can deteriorate soil quality, pollute wa- tion criteria as technology and policies evolve in Science at rice University ter, and release the carbon stored in the soil to pRoduCTion the future. atmosphere. Meanwhile, the food-versus-fuel on biodiveRsiTy, If designed strategically, there are opportuni- uring the past decade, invest- debate has drawn more attention to non-food soil, hydRology ties to make current agricultural practices more ment in biofuel programs has biomass resources, as well as to sustainability sustainable and more resilient to future requi- grown and expansion of bio- criteria when a type of biomass is considered and landsCape. rements for biomass feedstock standards. For mass feedstocks for biofuel pro- for biofuel production. To ensure sustainable example, coupling annual and perennial agri- duction has expanded, mainly production and use of biomass for biofuel, the culture or short rotation multipurpose forests Ddue to regional and national effect of feedstock choice and the scale of feeds- may enhance soil carbon stock, biodiversity, and energy policy mandates. Biofuels have also been tock production or residue use on biodiversity, landscape when the land is harvested for bio- increasingly viewed as a means to secure the soil, hydrology and landscape should be taken mass production for biofuel. Using biofuel co- future of rural communities that traditionally into account. products, such as biochar, has also been shown depend on cultivation of food crops. Therefore, In spite of these facts, due to the current regu- to improve soil quality and biomass production support of the agriculture-based economy is latory landscape and available technology, food while at the same time reducing water pollution. another important policy driver of biofuel deve- crops are currently used to meet part of the glo- This, in turn, will open significant opportunities lopment by governments, and biofuels produc- bal biofuel demand. For example, in the United for sustainably produced biomass to endure in tion provides an additional market for biomass States, the Renewable Fuel Standard (RFS) Pro- the market in larger scales, which can also ensure feedstocks thereby increasing farmers’ revenue, gram mandates a significant portion of biofuel farmers a positive return to new and sustainable especially for agricultural residues and wastes. production from food crops versus crop residues farming practices. A more resilient agriculture In addition, it provides the socio-economic bene- or wastes. Collecting agricultural residues for that can adjust to requirements for new sour- fit of additional rural jobs and increases broader biofuel production generates an added value for ces of biomass can preserve, and perhaps even economic opportunity through multiplier ef- these (often low value) materials and does not improve the market share of those agricultural fects associated with retaining more money in interfere with the food market. However, as stu- products and promote a sustainable and healthy the rural economy. While offering promising dies show, if soil carbon loss due to residue utili- rural economy.
page 22. speCial edition March 2016 Commodities eneRgy in TRansiTion | | ||| Africa’s energy transition and COP21 World Energy, a share of 3.2%. The continent The Cop21 and NGOs felt that the end of fossil fuels was will therefore need a diverse energy mix to meet in sight but this opinion is not very realistic. The its growing demand. also inTends COP21 promotes renewable energy and energy In theory, Africa should benefit from several To pRoMoTe efficiency of course but natural gas is the clea- FranCis perrin provisions of the Paris agreement reached at the nest fossil fuel and it should play an important editor in chief of the oaG africa newsletter COP21. This agreement emphasises that the spe- univeRsal role in the energy transition. Africa often has cific needs and concerns of developing countries aCCess To more an oil than a gas profile but the region has he concept of energy transition must be taken into account, that responsibilities several major gas producers, including Algeria, for the African continent is cer- are common but differentiated and that it is ur- eneRgy ThRough Angola, Egypt and Nigeria, and Mozambique, tainly not a new one and it has gent for developed countries to provide support Renewables, Tanzania and Senegal will join them. Tanzania been discussed for decades within to developing countries in the form of financial and Mozambique will become producers of li- various international fora but the resources, technology and capacity building. The paRTiCulaRly quefied natural gas and the second country will T meaning of this term has evolved. objective of funding of at least $100 billion a in afRiCa. be in the next decade one of the largest LNG In the past, one of the key issues was the tran- year for developing countries was reaffirmed exporters in the world. sition from traditional energies (wood, charcoal, and many funds (the Green Climate Fund, the Gas resources and reserves of Africa will be and biomass) to commercial energies (petroleum, Global Environment Facility, the Least Develo- an asset for the post-COP21 era as well as its natural gas, liquefied petroleum gas) in order to ped Countries Fund, the Special Climate Chan- considerable potential for renewable energy, reduce deforestation and desertification and to ge Fund and the Adaptation Fund) exist or are especially solar and biomass. On this last point, improve the living conditions of the population, set up to help developing countries. the key issue will be funding and it remains to especially women and children. More recently, The COP21 also intends to promote universal be seen how the promises and commitments especially since the COP21 in Paris in Decem- access to energy, particularly in Africa, through in this area will be fulfilled. In addition to fun- ber 2015, the energy transition refers to the rise renewable energy. Like other developing coun- ding, three other issues are essential for Africa to of modern renewable energies such as solar and tries, African countries have no obligation to move significantly toward this energy transition: wind power as well as certain forms of biomass reduce greenhouse gas (GHG) emissions. To the attractiveness of the region for foreign in- exploitation. limit the average temperature increase to below vestors, appropriate state energy policies and the These two concepts are not mutually exclusive 2° C compared to pre-industrial times, the cap- strengthening of regional cooperation, which in fact. The growth of energy consumption in ping of greenhouse gas emissions should take remains very insufficient. Africa will be very significant due to the expec- place as soon as possible at the worldwide le- Beyond the national policies of African coun- ted increase in population, urbanisation and eco- vel but this cap will take longer for developing tries, the Paris agreement at the end of the nomic development. There were 1.1 billion Afri- countries. COP21, whose direct intrinsic importance has cans in 2013 and that number could rise to 2.4 Advantages of gas, solar and biomass derived often been exaggerated, could create or develop a billion in 2050 and 4.2 billion in 2100. Howe- energy in Africa are great. Of the 54 states of momentum for renewable energy development ver, for 2014, commercial energy consumption the African continent, there are about fifteen within civil societies, the private sector and local in Africa was estimated at 420 million tons of countries producing oil and/or natural gas and authorities. If this trend materialised, it would oil equivalent (420 Mtoe) only on a world total several others will become producers in the co- undoubtedly be one of the main merits of the of 12,928 Mtoe by the BP Statistical Review of ming years. After the COP21, many observers Paris agreement. The value proposition of commodity traders in renewable energies Commodity traders can support city produced. In the biomass energy, there are TRadeRs will For Biomass fuel trade: the renewable energy market two trading angles: power trading, similarly to pRospeR by Storage/Logistics – intercontinental flows, other technologies, and opportunities on the fuel seasonal production and consumption patterns growth providing a wide range supply chain and logistics. offeRing a require intensive logistic and storage capacity As renewable technologies are more and more for a smooth operation of biomass assets and of services on the power trade competitive, fewer subsidies or other kinds of wide Range markets; or on fuel supply sides. government support are needed for their deve- of innovaTive Inventory Finance – biomass used for hea- lopment. The sector is maturing and its products ting is produced mainly during summer and are becoming “commoditised”. As a result, a fas- seRviCes and consumed during winter. Inventories need to ter growth is expected in the short future. Managing a be financed to bridge the average 6 months’ gap. In general, commodity traders are not pioneers Commodity traders with strong balance sheet of new markets, but catalysts of growing mar- CoMplex seT are great partners for such transactions; pablo FernandeZ kets. With regulations and risk management of inCReasingly Marketing Services – International flow Head of environmental Markets tools in place, traders bring liquidity, dynamism requires international presence. International Mercuria energy Group and innovation to support the market growth. disTRibuTed traders can use their vast footprint to open new Traders tend not to be fixed asset holders but ser- and inTeRMiTTenT markets for biomass flows. he year 2015 was a historic one, vice providers who catalyse the deployment of asseTs. Credit Sleeve – Given a strong balance sheet, it was the tipping point towards fixed asset projects and/or help the optimisation traders can enhance the credit quality from a sup- renewable. For the first time in of the return from such assets. plier or a final buyer and support the Project Fi- modern history the investments To accelerate the growth of renewable energy nance from upstream and downstream projects. on renewable energy was greater in some consolidated markets such as the Euro- Commodity traders have a wide range of activi- T than the investments in fossil fuel pean or American markets, some of the services ties along the commodity value chain that goes energy. In addition, positive news on renewa- and value proposition from a commodity trader way beyond the traditional buy/sell transactions. bles and climate change are related to its future are: Structured transactions increase and widen the prospects. After the COP21 in Paris, the go- For Power trade: value proposition along the renewable energy vernments from all around the world indicated Access to Market – especially in Europe sector. It will vary from marketing to traditio- that they will all, in a way or another, support there are numerous small scale (10 MW) solar nal trading services or from logistic to financial renewable energy and carbon pricing as ways to and wind projects, Traders act as entities who services. tackle the climate change. provide access to spot and future power market; The successful trader of the future is one that The four main technologies that compose the re- Flexible Pricing contracts – Subsequently, learns how to capture and position himself into newable energy landscape are: solar, wind, hydro Floating vs. fixed price contracts can be nego- growing markets. Renewable energy is growing and biomass. While the first three sources are tiated giving cash flow visibility to asset holders and will grow even faster. A trader who mana- considered as “fuel free” technologies, conver- and/or customers; ges to offer a wide range of innovative services ting natural energy into electricity, the last one Weather risk management – with genera- (marketing, logistic and financing services) and converts bioproducts (biogas, agricultural waste, tion mix being more related to weather, sunny who manages a complex set of assets that are woodchips or wood pellets) into thermal energy or windy days might lead spot energy prices increasingly distributed and intermittent will and/or electricity. close to zero while storms or other natural disas- prosper. Moreover, this doesn’t require the tra- The first group presents opportunity for com- ters may lead to energy generation close to zero. ders to forge a new business model, but to be modity traders mainly on the power side, al- Weather risk is a growing concern for all electri- open to embracing the challenge of catalysing lowing trade and services around the electri- city players, specially the intermittent ones; the fast evolving market of renewable energy.
page 23. speCial edition March 2016 Commodities eneRgy in TRansiTion | | ||| interview | isabelle Chevalley member oF parliament Making a success of the energy transition ollowing the nuclear reac- The public is not necessarily aware of the tor accident at Fukushima efforts needed. would better education in 2011, the Swiss govern- improve the current status? ment devised a national Unquestionably. Education and better in- energy strategy to be im- formation is the key to the success of the Fplemented by 2050. This transition. SIG offers its customers Acti- strategy is based on three pillars: more véco, a tool that allows them to measure energy-efficient buildings, machinery their electricity consumption in order to and transport, increased use of renewa- monitor their savings. Similar tools and a bles, especially hydropower, and phasing broader education can lead to significant out nuclear power. Any supply shortfalls improvements. will be covered by electricity from fos- sil fuels and by imports. The aim of this would appropriate carbon pricing make a new strategy is a 3 percent reduction in true difference? energy consumption per capita by 2020 If CO2 was correctly priced, there would and a 13 percent reduction on 2000 levels be no need to subsidise anything and re- by 2035. Measures include decommissio- newables would become profitable. Stop- ning Switzerland’s five nuclear power ping fossil fuel and nuclear subsidies in plants by the end of their operating life, 2018 will automatically raise the price of upgrading the electricity grids, a rise in CO2. In the case of Switzerland – and of the CO2 levy, and the extension of the most developed countries – it would also energy-efficient buildings programme. be beneficial to apply a different policy in How does a country implement such a carbon compensation. In the current sys- transition and how does it integrate mar- tem, 1kg of CO2 in Switzerland is balan- ket forces? We have turned to Isabelle ced by 1kg of CO2 abroad. But the cost Chevalley, MP for the Parti vert’libéral of a kilo of CO2 in Switzerland is much and president of Suisse Eole. higher than in developing countries. The compensation should be value-based and what does switzerland need to make its not volume-based, taking into account planned transition a success? production costs and power purchasing It is all about the rules of the game. Swit- parity. Using such ratios would mean zerland needs to improve legal certainty, that 10 million tons of CO2 in Switzer- predictability and flexibility in order to land could replace a higher CO2 produc- guarantee a clear legal framework that tion – say 12 million tons – elsewhere. ensures that efforts and investments are persistent. For example, it has im- will the need for oil disappear? plemented a feed-in tariff at cost for Certainly not. Power should be produ- promoting electricity production from iSabelle chevalley. mp for the parti vert’libéral ced primarily from solar, wind, biomass and preSident of SuiSSe eole renewable energy sources where the go- and geothermic sources as well as hydro vernment covers the difference between 2000 PhD in chemistry. sources with the complement being gas the production cost and the market price. 2010 Founded the Green liberal party of the Canton de Vaud, a center- generated. Oil will remain indispensa- In other words, it guarantees producers right political party for a responsible environmental policy. ble to produce the enormous amount of of renewable electricity a price that cor- 2012-2016 President of Suisse Eole, Association for the promotion of wind products from the petrochemical indus- responds to their production costs. The energy in Switzerland. try such as plastics and synthetic fibres. tariffs are defined on the basis of refe- 2011-2016 Member of the Swiss National Parliament. Such products can also be produced rence power plants for each technology from liquefied coal. and output category and are applicable for 20 years. Such tariffs must be maintained for existing installations. In switzerland imports large amounts of electricity. how would it do without these Switzerland, anyone who wishes to produce electricity should be able to imports which are generally of fossil fuels or of nuclear origin? do so. The current waiting list for solar projects is huge. Listed initiatives The shortage of electricity in Switzerland is a myth. The reality is that would ensure a production equivalent to that of the nuclear reactor at Switzerland “launders” fossil fuel and nuclear energy of foreign origin to Mühleberg. resell it as “clean” hydroelectric power. Geographically, Switzerland is a node and is in a position to buy cheap electricity at night (from German isn’t it unfair to subsidise renewables? coal units or French nuclear plants for instance), in order to resell it during As long a fossil fuels and nuclear energy are subsidised, renewable energy peak time to Italy as hydroelectricity. should be subsidised too . The EU reports €10 billion of subsidies for coal, This transformation has generated vast profits for the Swiss electricity dis- 1 €7 billion for nuclear power and €10 billion for wind power. It says that tributors although they have lost some of their market because of German it will cease all subsidies by 2018 and the Swiss Council of States (who solar power . If you look at the export-import balance, you will see that 2 represents the cantons) has decided to stop renewables subsidies six years Switzerland is a net exporter of electricity. It is also revealing to analyse after the law came into force. This is too short. The renewables market is the CO2 emissions from Swiss production (21 grams CO2 /kWh) and not quite ready. Swiss consumption (91.1 grams CO2 /kWh) published by the Swiss Fede- ral Office of Energy (SFOE). These figures clearly indicate that Swiss citi- Can renewables be profitable? zens consume dirty electricity which does not correspond to the country’s It is purely a question of willingness and pricing. BKW’s first wind power production. site at Mt-Crosin was entirely financed privately with energy sold under the label “wind power”. The operation breaks even. Customers should switzerland has decided to phase out nuclear power but radioactivity travels far. be able to choose which power they wish to use and at which price: the are you not concerned with the significant number of nuclear power reactors commune of Leysin for example has chosen to be green and accepted to under construction in China? pay accordingly. It is also a question of marketing. When electricity in The Mühleberg plant, with its cracks in the reactor shell, and the Beznau Geneva was deemed too expensive by the Federal Electricity Commission Nuclear Power Plant, which houses the oldest commercial reactor in the (ElCom), rather than lower their prices, the SIG (Services Industriels de world, are a much bigger worry. So is the aging European nuclear pool in Genève) chose to offer a basic “Blue” tariff for hydroelectric, a more expen- general. The biggest concern is the lack of desire for transparency in the sive “Green” tariff for renewables and a cheaper “Grey” tariff for gas. As a European nuclear industry. It has a culture of secrecy and lies. result, 90% of households are on the Blue or Green tariffs. People couldn’t be bothered to make the required changes for the cheaper Grey tariff. in summary, what are the keys to energy transition? On these grounds, SIG has announced that 100% of its electricity will be Pricing and information. from renewable sources by 2017. Companies committed to energy saving should be encouraged (and they are by way of renewable tax exemptions). Interview Nicolette de Joncaire There is room to charge households more – up to 20%. Such charges could easily be balanced off by increasing efficiency, for the most part by savings made through the use of less wasteful household equipment. Equipment (1) in 2013, the international energy agency (iea) estimated that consumer subsidies for fossil fuels spending 20 watts in standby mode should be systematically replaced by amounted to US$548 billion, while subsidies for renewable energy amounted to US$121 billion, newer units with a single watt standby mode. There is a clear need for a on a worldwide basis. legal framework to support such a conversion. (2) German solar power peaks are balanced by units producing electricity from coal and other fossil fuels.
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