JPMorgan Chase & Co has made heavy losses from bad coal-price bets, traders dealing with the U.S. investment bank said, at a time when proprietary trading at deposit-taking banks faces increased regulatory scrutiny.
In recent months, JPMorgan has aggressively bet on the unusual discount of coal in Europe to South African coal, but was caught out when demand in Europe picked up and the discount narrowed, they added, confirming a recent press report.
Coal delivered into Europe is normally more expensive than that bought on a free on board (FOB) basis in South Africa because the European price reflects the cost of shipment.
It was the implied freight which racked up the losses. We think around $175 million loss in April and another big loss in May, said a source at a large European utility, which is an active player on the coal swaps market.
The story was first reported by the New York Post, which said JPMorgan may have been hit by a loss of $250 million this quarter, due to wrong bets on coal.
Kristin Lemkau, a JPMorgan spokeswoman in New York, said the New York Post story was incorrect, and declined to comment further. A spokeswoman in London declined to comment, saying the bank did not speak about trading positions.
JP Morgan shares were 1 percent higher at $37.09 at 1521 GMT, outperforming the Dow Jones blue-chip index, which was 0.12 percent stronger.
The impact of the trading loss would be minimal for JPMorgan, the New York Post said, but would provide ammunition to politicians, who advocate the curbing of such proprietary trading by deposit-taking banks.
The coal swaps and physical markets are extremely illiquid and immature compared with the oil market, and trading counterparties tend to know each other well because there is very little central clearing and settlement.
Coal can be vulnerable to aggressive trading, but its direction can be hard to predict, because the market moves rapidly from physical glut to tightness.
JPMorgan had been selling European physical coal delivered into Amsterdam-Rotterdam-Antwerp and API2 coal swaps, which settle against physical prices, hoping to maintain the unprecedented spread between the European prices and the API4 South African swaps, traders said.
But it was caught out as the discount of API2 to API4 -- known as the implied freight because it normally indicates just shipping costs -- had shrunk to a few dollars at most, they said.
API4 coal swaps settle against the API4 physical index which is a benchmark for FOB Richards Bay South African coal cargo prices. API2 swaps settle against the API2 physical index, the delivered Europe coal price.
(Additional reporting by Sakthi Prasad in Bangalore and Elinor Comlay in New York; Editing by Douwe Miedema and Simon Jessop in London)