Czech traders face high commodity prices and additional collateral requirements

Electricity and gas traders continue to face high commodity prices. In addition to having to pay higher prices to purchase commodities, the amounts traders must post as collateral to guarantee fulfilment of their obligations are also increasing. Traders contacted by Reuters have already confirmed that they had to transfer additional funds to counterparties as part of their trading activities. 

Energy commodity prices are rising on European and global markets. Natural gas prices for delivery in November rose above 160 EUR/MWh during Wednesday before ultimately ending trading 55 EUR lower. Although commodity prices fell sharply in the second half of the week, they remain more than twice as high as at the start of the year.

The sharp rise in commodity prices and market volatility in general have already claimed several "victims" among traders. In the United Kingdom alone, at least 10 suppliers serving more than 1.7 million households have gone bankrupt. Another casualty was Denmark's Nordstrom Invest A/S in mid-September.

The problem naturally also affects Czechia. As reported by Ekonomický týdeník, a number of alternative suppliers are raising prices, and the first suppliers are also shutting down – small supplier Eagle Energy has ceased operations. Bohemia Energy, one of the main alternative suppliers, is also substantially increasing prices and has even ended its operations in Slovakia altogether.

The problem primarily affects traders that did not hedge supplies on the wholesale market on an ongoing basis and hoped they would be able to secure commodities at a lower price. Given current developments, this has proved substantially unprofitable.

However, it is not only about high commodity prices. As prices rise, so does the amount of collateral required – a requirement for the buyer to deposit an advance payment of a certain amount with the seller. If the buyer subsequently fails to meet its obligations, the collateral amount goes to the seller.

Collateral is a common part of wholesale contracts, particularly for more complex contracts and derivatives. Calculating the required collateral is generally not entirely straightforward, as it depends on a number of market factors, with the current commodity price being one of the main factors.

As a result, many traders must pay not only higher prices for the commodity itself but also larger amounts of collateral, threatening the amount of cash available for day-to-day trading. As Reuters sources confirm, traders are already often being asked to increase the amount of collateral they provide.

Smaller suppliers may particularly struggle to provide additional collateral. They must borrow the extra funds or provide them from their own resources. As a result, they have less money available for trading itself.

One of the traders that had to provide additional collateral is the Cypriot company Gunvor. Although this did not threaten its operations, it has loans totalling $2.5 billion for collateral purposes (out of total loans of $18 billion).

Smaller trader Kolmar Group has had a similar experience. Although the amount was substantial in its case, its day-to-day operations were not put at risk.