Finding potential in a volatile commodities market

Macquarie is uniquely positioned to offer clients a range of products, expertise and experience across the commodities space. Nick O’Kane discusses the bank’s approach to commodity markets and what he expects next

Commodity markets have been especially challenging in recent months, with extreme volatility, geopolitical and trade tensions, and climate concerns posing significant risk. To navigate these and other challenges, commodities firms need counterparties that properly understand their business and the nuances of commodity markets. Macquarie’s impressive track record in this sector and strong physical capabilities are what make it an attractive counterparty. “There is no substitute for a long-term commitment to operating in the markets day in, day out – on good days as well as at times when liquidity is low and volatility is high,” says Nick O’Kane, Macquarie’s head of commodity markets and finance division.

At a time when many banks were slimming down their commodities offerings, Macquarie increased its presence, most notably by acquiring Cargill’s petroleum and North American gas and power businesses in 2017. This is reflected in this year’s Energy Risk Commodity Rankings, with Macquarie swooping in to take first place in North American power. Macquarie’s commodities business now comprises around 530 employees in 16 countries, across metals, agriculture and energy. 

Regulation, particularly capital charges, have made it increasingly expensive for banks to operate in commodities markets. How has Macquarie been able to maintain its commodities presence?

Nick O’Kane: Our unique combination of physical capabilities and fundamental expertise with financial hedging and capital offerings has allowed us to develop a one-of-a-kind offering that has been well received by clients in all market conditions. Macquarie has been operating with capital discipline for many years, so we are well versed in operating in a highly regulated environment. This has allowed Macquarie, even in the current challenging markets, to increase its market share in areas such as North American natural gas, power, and crude and product hedging.

With large acquisitions, such as that of Cargill’s gas and power business, it can take a while for the businesses to fully merge. Where are you on that journey now?

Nick O’Kane: With Cargill we gained an experienced, talented team that brought with them an analytics platform that is second to none, new client relationships and a strong physical presence. We’ve worked diligently over the past year to bring together the entire North American gas and power platform, and to provide clients with a holistic product offering spanning the entire region. Our gas and power team has a shared vision for our clients and for Macquarie, which is a testament to the time and care spent on all aspects of the acquisition.

What were the greatest challenges encountered in the North American power market last year?

Nick O’Kane: Weather and volatility presented both challenges and opportunities for us. Our experience and broad product offering allows us to provide risk management solutions for customers in various market conditions – particularly in those that are volatile.

What major themes are you keeping an eye on for 2019?

Nick O’Kane: Environmental standards are at the forefront of the energy revolution. With new regulations such as IMO 2020, to be imposed by the International Maritime Organisation (IMO), and the retirement of coal-fired power plants looming, the energy markets are seeing a great deal of change. With this change comes increased volatility. Macquarie’s presence as a commodities expert allows it to help de-risk clients from these exposures by offering tailored structured solutions.

What is your commodities strategy for the next three to five years? 

Nick O’Kane: Our strategy – as it has always been – is to go where our customers are and provide them with the products and services they need to be successful.

How big a deal do you think IMO 2020 is going to be? Are firms prepared enough? 

Nick O’Kane: IMO 2020 will have a significant and lasting impact on the market and will affect many companies throughout the value chain and in numerous industries. They are preparing for the fuel specification change in many ways, some of which are straightforward, such as utilising derivatives to reduce the risk associated with uncertainty around the change’s impact on their portfolios. Others are tackling the problem through capital investment, such as adding scrubbers to their ships or retooling a refinery. Ideally, the many approaches being taken to prepare for the change could act to reduce the magnitude of the impact in 2020.

What impact will climate regulation have on the business models of fossil fuel firms in the next 10 years? 

Nick O’Kane: Climate regulation will revolutionise all our businesses. Our landscape will look completely different in 10 years’ time. We are currently seeing this in coal and we anticipate this trend to continue. This is why Macquarie has been and will continue to facilitate the transition to a low-carbon economy. For instance, Macquarie’s Green Investment Group has one of the leading global pioneering green investment platforms in the industry, offering a full suite of services with more than 200 green energy specialists. We are looking forward to the new opportunities on the horizon.