Critical ingredients for success
When analysing the potential for coking coal futures markets, we consider the three critical ingredients for a successful commodity derivative:
VolumeSeaborne coking (met) coal trade in 2013 is estimated at 270m tonnes, with close to 1bn tonnes produced globally, half of this accounted for Chinese domestic production. The appetite for trading coking coal swaps in large volumes certainly exists. The Dalian Futures Exchange has launched two contracts. Coke Futures, available since April 2011, has traded close to 2bn tonnes. Dalian Coking Coal Futures, available since March 2013 has traded 1bn tonnes. Year to date swaps volume in 2013 is 80,000 tonnes, up from 45,000 tonnes in 2012.
VolatilityCoking coal prices are inherently volatile with highs of $224.5 and lows of $135.5 in the 12 months to mid-2013. With profitability of steel companies so dependent on marginal changes, there is a clear opportunity to manage input costs and improve price risk management. It is sometimes said that a move to index-pricing increases volatility but we do not agree. Rather, the move to short term pricing increases price transparency and creates an opportunity to manage price fluctuations far more efficiently than by using long term contracts.
ValueThe value proposition for coking coal swaps is that the changing steel market will encourage more mining, trading and manufacturing entities become involved in managing their costs up and down the supply chain. With physical exposure now almost completely index-linked, companies using swaps to hedge and trade on price direction will have a competitive advantage over those that do not.
Coking Coal Market Indices
There are now three indices against which coking coal swaps can be traded. These are:
- Australian Coking Coal (Platts) Low Vol Futures against which the first lots traded have been concluded.
- Australian Coking Coal (TSI) Premium Coking Coal FOB East Coast Australia.
- China Coking Coal (TSI) Premium Coking Coal, CFR Jingtang.
- As during the development of the iron ore swap market, FIS remains open-minded as to the market’s preferred choice of index provider and will work to assist the development of alternatives as needed.