(Bloomberg) — The last time Engelhart Commodities Trading Partners traded physical commodities at scale it lost almost $500 million over three years. Now its boss says things are different as the firm bets big on buying and supplying natural gas and power.
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London-based Engelhart agreed last month to buy Trailstone Group — a deal that will see the spinoff from Brazilian bank BTG Pactual roughly double in size. Its focus will pivot from derivatives to becoming a significant trader of physical natural gas and electricity in markets from Japan to the US.
Engelhart’s move is emblematic of a trend across the commodities industry that’s seen trading houses and hedge funds from Mercuria Energy Group to Balyasny Asset Management piling in to become physical buyers and sellers of electricity across deregulated markets. Growth of wind and solar power across the world means huge price swings when those sources are plentiful or fade away.
But the shift won’t be the start of a return to other physical markets for Engelhart, its Chief Executive Officer Huw Jenkins said in an interview.
“You’re not going to see us trading aluminum in Shanghai — this is a very focused play on being a physical player in power and gas markets, very much focused on renewable clients,” he said.
Engelhart knows first hand about the potential pitfalls of such a move, having shut its desk that traded physical metals and cotton six years ago, and more recently winding down origination businesses for other agricultural commodities.
“Diversification in financial markets is a good thing, but diversification of physical markets is a really bad idea because of complexity, credit risk, accounting, VAT — all the things you can think of which are very specific to a particular commodity,” Jenkins said. “If you try and do that in too many markets, you just create complexity.”
While some of its peers have made spectacular profits over the past few years, Engelhart is emerging from a period of low margins. It made just over $20 million in 2022, according to accounts filed in the UK. It also struggled last year, although its audited accounts are not yet public, according to people familiar with the matter.
The firm wasn’t active in cocoa during its historic surge in prices, and was one of many players to get caught wrong-footed by Brazil’s surprise record sugar crop.
“We’ve had very strong fundamental views, which either we’ve got wrong because we fail to see the amount of inventory that we’re sitting on the farmer’s field, or just because the market can spend a long time being gone before it accepts the reality,” Jenkins said. “It’s fair to say we were amazed by the miracle of the amount of production of sugar that Brazil was able to produce last year.”
Trailstone offers pricing services to small and medium-sized wind and solar units, and the combined company will be able to provide a portfolio of price options to trade around, as well as data and analytics for forecasting. Jenkins is betting that the addition of Trailstone’s weather modeling capabilities and proprietary intelligence from its physical business will complement investments Engelhart has already made in data and analytics. Both firms are doing well year to date, he said.
Other Trailstone business units include North American natural gas storage and marketing, while its power trading unit in Japan will act as a base for Engelhart to expand into Asia.
“This acquisition moves our gas and power business forward by two to four years,” said Jenkins. “It’s a huge accelerator for our business.”
–With assistance from Ambereen Choudhury.
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