We met with Filimon Antonopoulos, Managing Director of Tallon Cowmmodities Ltd, in a number of regional events over the course of this year where he presented emphatically the value of price risk management which more casually is referred to as hedging. As the world is going through a major fundamental change in the energy sector, Mr. Antonopoulos strongly believes that the ones that adapt faster to the new rules will have better chances to thrive. “Tallon can assist companies to adapt to the new market conditions”, he told us, and then he explained how to stand up to the challenge by accessing the powerful skillset of price management.

 

Dear Mr. Filimon Antonopoulos, is the concept of hedging a new proposal for the industry? What has triggered the recent request for such services?

The concept of hedging is not new at all. It originates back in the 1850s in Chicago when US farmers needed price certainty to produce adequate grain volumes for the winter. Without any assurances from the wholesalers on the purchase price, farmers would only produce a limited amount of grain over the summer for their own needs leaving most likely an undersupplied market over the winter period. As a consequence, the first fixed-price contracts were put in place which was actually written on a blackboard.

By comparison, this is the same “assurance” power producers ask for when they offer a PPA – Power Purchase Agreement. Power producers seek the assurance of a fixed return on investment (ROI) by offloading a 10-year price risk to the buy side (large corporates) in order to secure funding.

This period, after a more than 1,000% price rally in power and gas prices since the summer of 2021 and a more than 500% rally of Carbon Emissions since the spring of 2020, the concept of managing commodity (especially energy-related price-risk), has resurfaced.

 

In this extreme price environment, how is Tallon assisting clients to react and obtain a comparative advantage?

We provide our clients with a complete and integrated service, offering the venue and access to commodity markets, the strategy, the procedures and execution together with any regulatory reporting requirements.

Tallon is a regulated commodities trading company under the FCA and we have the advantage of being incorporated and supervised in London while at the same time our strategic shareholder (Motor Oil Hellas) and us (the management), have a long trading experience in Central & Southeast Europe and we are well acquainted with the regional culture and practice. As a consequence, we go with the rule “think globally act locally” or better “act regionally”.

Our Risk Management services to medium and large corporates start with the risk analysis, continue with the design of hedge strategies and the structuring of derivatives products, and ends with the execution (implementation of strategy) at the global financial markets. We can go literally from A to Z and our range of services usually depends on the experience and sophistication of each client. What we however always try to establish above all, is a relationship of trust where we can work together with our clients and identify all the factors and parameters that may be affecting their cost structure or expected profit margins and therefore address any other worry that they may have at any given time.

 

So how can corporates “regain control”? What advantages can derivatives offer to corporate customers? Please elaborate with real examples.

The current team of Tallon has been trading commodity derivatives for almost 20 years now Through these years and accompanying economic cycles, companies had more of a choice in mitigating arising price risks in the physical markets duet the existence of substitutes. Power was generated mainly from coal which bared no (or very low) cost of carbon emissions and therefore power was not moving in concert with gas. European gas was also contained in a low tight range with gas pricing formulas which usually dictated a discount of gas to oil.

As a result, never before had companies ever experienced the perfect storm of today where power, gas, oil and carbon emissions skyrocketed all at the same time. In a matter of a few weeks, most managers lost control of their costs, expected revenues and budgets, passively observing energy prices daily and hoping that a warm winter or a resolution of the Ukrainian-Russian crisis will save the day.

Energy derivatives, however, can offer solutions that do not exist in the physical markets and make managers regain control which now seems lost.

• Manage energy price over a specific period: After having reached a high of 338 euros per MWh in August 26th TTF prices dropped twice below the 100 euros mark and any company could fix in the derivatives market a relatively low price for the winter or year ahead or any chosen period.
• Fix cost for a tender or project: Any industrial that offers a price based on today’s energy and raw material costs to win a tender can fix these costs with derivatives and be sure that any price move in the weeks/months ahead will not destroy the expected IRR.
• Switch/change terms of an existing nonflexible physical contract: If a company feels engaged in a physical contract (i.e. a 12-month fixed term) and it cannot be renegotiated, we structure a derivative strategy that changes the term that is not desirable (i.e. fixed to floating) for the full quantity or part of the quantity.
• Bridge time gaps: A trader may be buying gas on a Month Ahead basis and sell spot which creates a 30-day risk. We can create a derivative to bridge this gap for any monthly gap.
• Anticipate other potential risks: Such as a late winter in 2023 like in 2021 or an escalation of the Ukrainian-Russian crisis.

The above are just samples of what derivatives can do. Such strategies can extend to additional geographical arbitrages between US, Europe and Asia, other regional differentials between North and South prices (TTF vs PSV), or seasonal spreads such as heating vs cooling seasons etc.

 

What are the main challenges that Tallon faces in the current market?

Using derivatives to manage the price of traditional physical markets requires a change of the traditional physical approach. Physical traders are used to spot prices and can take time to understand the concept of forward curves (prices of the months ahead). That can make them reluctant to fix a medium- or long-term price at what seems worse than the spot at the time and eventually lose the opportunity to manage the underlying risk. That is a very often trap.

A clear example is the first half of 2021 where companies could fix gas prices for the rest of the year or even two years ahead at a price level of 35-40 euros per MWh when spot was at 25. No one hedged at the time on what seemed 15 euros worse from spot and they stayed exposed to the market rally and eventually paid 85 euros/MWh average for the rest of the year with highs reaching above the 200 euros/MWh mark.

 

Advantages when working with Tallon

• Partner by your side Trading with Tallon brings a team of experts by your side to assist you to navigate through the major transition of energy markets the next decade.
• Fast market access Once setup a company can execute at the markets within seconds (compared to lengthy negotiations in the physical markets)
• Anonymity Tallon executes on behalf of the client and as a result clients position remain anonymous to competition.
• Position management Clients can reverse or amend positions in terms of maturity or size or direction, at any time at market rates.

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This article first appeared in the printed edition of Energynomics Magazine, issued in December 2022.

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