Angus Macpherson: Forward trading could beat PRN uncertainty

Just over 40% of these PRNs were traded forward. The fourth quarter of 2009 was particularly busy for forward trading, when, for the first time since the forward markets started in 2003, more PRNs traded through them – mainly in the 2010 markets – than the spot market.

Forward markets were introduced at the request of participants who were looking for increased price certainty, and regular and reliable payment. Our traded t2e forward contracts provide a known price for a known volume of PRNs to be delivered at a known time. They meet the Environment Agency’s requirements for inclusion in compliance plans. As a result, compliance schemes and direct registrants alike are increasingly using them.

While some have benefited from this price certainty, others have lost out. For steel PRNs, for instance, £50 a tonne looked like a good price from a buyer’s perspective for most of 2009. However, by the time delivery of the December contract came, the price of steel PRNs had fallen significantly and so it was the sellers that were relieved.

Looking at 2010, steel PRNs are trading at between £25 and £30 a tonne, but whether that price will sustain the export glut that ultimately transpired in 2009 remains to be seen. What is certain for all those that have traded those contracts is these steel PRNs will be delivered at that price on a known date in the future. It makes budgeting simple.

A noticeable trend has been the resurgence of China in the paper and plastic markets. This can be seen not only by the increased volumes through traditional buyers but also the significant growth of new Chinese-owned trading companies seeking these secondary raw materials. Good news for material prices that are soaring, but bad news for PRN prices in these materials.

As more PRNs come to the market, the traditionally over-supplied general recycling pot is flooded and prices are kept low. As we move towards the end of the compliance year, those buying plastic and paper PRNs have enjoyed competitively priced PRNs offered on our trading boards in both 2009 and 2010 compliance years. We will see whether this position is sustainable.

So what does 2010 hold? Perhaps counter-intuitively, the national obligation is expected to increase, so there may be more demand. Does supply need to increase? Currently most suspect not and therefore PRN prices are low. But you never know. And in an uncertain market, perhaps forward contracts are a safer way to trade.

Angus Macpherson is managing director of PRN trading platform The Environment Exchange. Contact him
at angus.macpherson@t2e.co.uk.

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