Friday, August 28, 2020

Coking Coal Derivatives Markets Are Developing Liquidity and Global Trade Volumes

Coking coal derivatives markets are developing liquidity and global trade volumes, with interest in the market seen globally, according to traders at the S&P Global Platts Singapore coking coal conference.

Register Now Growth in participants and greater volumes across multiple market segments have helped liquidity and pricing indications on the forward curve, SSY Futures coal derivatives broker Stephanie Idulca said in a webinar at the event.

"We've got quite a full spectrum of entities trading, all with different motivations, all with different views, which has really increased the liquidity we've been seeing in the market " Idulca said.

First and second-tier coking coal producers, financial institutions including banks, funds, international traders, and traders across the regions, along with end-users are active, according to the inter-dealer brokerage. Activity is growing from traders in Singapore along with the US, Europe, India, China and Japan among other locations.

Volumes and open interest have risen this year on the SGX's cleared market, from a weaker 2019.

This is making it easier to find tighter pricing bands and execute forward strips and hedge entire vessel quantities more easily, with options trade looking to pick up, participants said.

The top 10 active coking coal futures participants may make up around 50-60% of the volume, with the balance made up of many other entities, with growth in interest over the past two years, she said.

Diversity has grown in the market and the types and numbers of participants have changed as volumes expanded, said Cheong Jin Yu, director of commodities at Singapore Exchange with responsibility for the coking coal market.

Liquidity in the main cleared premium hard coking coal FOB Australia futures market is helping mange risks for imports into China, said Tao Huang, director of trading group Exen Resources.

Hedging may be harder when the FOB Australia market and CFR China pricing is less correlated, while the price gap this year has been smaller.

"We're using swaps to hedge our existing CFR positions -- it's not the perfect hedge, but it still helps."

Steel mills have increased participation in the coal derivatives market, along with miners interested in hedging margins and several involved in market making.

For end-users, a notable shift in managing coking coal price risk with derivatives has been seen, along with miners with private equity owners, said Myles Perrin, vice president of trading and marketing at trader Square Resources.

Coal and steel margins may be hedged with basis risk and efficiency improved based on trading terms aligned with the liquid TSI premium HCC market, according to the participants.

It may be difficult to trade some coal types such as PCI based on TSI's PHCC benchmark, Perrin said.

Shifting coal price relativities could limit interest and potential for hedging, Exen's Tao said.

Establishing a need for common terms in the chain, and checking historic data may help hedges to be placed appropriately.

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Source: S&P Global