UPDATE 3-China thermal coal futures make strong debut

Thu Sep 26, 2013 10:36am EDT

* Steam coal launches as 5th most traded contract on bourse

* Offers miners, traders access to hedging tool

* Regulators also may allow trade in crude oil futures (Recasts, adds analyst comments in paragraphs 6,7)

By Fayen Wong

SHANGHAI, Sept 26 (Reuters) - China's first thermal coal futures contract debuted as one of the most heavily traded contracts on the Zhengzhou Commodity Exchange on Thursday as miners, traders and investors were eager to trade it.

Although China is the world's top coal consumer and producer, its coal derivatives market is relatively undeveloped, and there is growing demand for hedging tools, particularly given that domestic coal prices have fallen steeply this year.

The rollout of China's first thermal coal contract will also give Beijing greater influence over global prices, analysts said. The move comes as China looks to gradually open up its financial sector in a drive to make economic growth more consumption-oriented.

China is the world's top coal consumer and producer and in 2012 churned out 2.74 billion tonnes of thermal coal, which accounts for nearly 80 percent of its total power output.

Top miners Shenhua Group, China Coal Energy Co , Inner Mongolia Yitai Coal and coal traders have all indicated their interest in trading Zhengzhou's physical delivery-backed contract, sources said earlier this month.

"The perspective for the coal futures contract is quite rosy," said one coal analyst in Singapore, who declined to be named because he was not authorised to speak to the press.

Trading of thermal coal futures could rise to several times the yearly physically traded volumes of around 3 billion tonnes as the contract attracts more institutional investors, he added.

The January steam coal contract rose 2.8 percent to close at 534.4 yuan ($87.32) per tonne, up from a base price set at 520 yuan. With over 300,000 lots traded, it was the bourse's fifth-most traded contract for the day.

HEDGE AGAINST VOLATILITY

"We're keen and are learning more about the hedging process. Steam coal prices have been falling and will stay volatile in the future, so it's a good idea to start hedging our risk," an executive from a private coal producer said.

China's coal prices have been steadily declining since December and are down by 16 percent so far this year due to overcapacity and slowing economic growth.

Falling prices, which sank to fresh four-year lows of 531 yuan a tonne this week, have pushed many miners into losses and forced some high-cost mines to cut production.

Only Chinese entities and China-registered wholly foreign-owned enterprises (WFOE) will be allowed to trade the Zhengzhou contract, which will be based on coal with a calorific value of 5,500 kcal/kg and be denominated in yuan.

A source at a foreign bank with a licence to trade on China's commodities exchanges said the firm planned to trade in the contract.

Other large miners and power companies are enthusiastic about the contract and about learning more ways to hedge, said Liu Yi, an analyst at Galaxy Futures, but adding that most of the trading will initially be dominated by retail investors.

A Singapore-based coal market source said the introduction of coal futures in China could also draw more Chinese players into the international paper market.

"They seem to be really comfortable with anything that's done by the Chinese exchanges. Hopefully they can have the same kind of interest in international swaps," the source said, which would potentially amplify any market influence gained from the launch of the new coal contract.

Investors are required to put up a minimum 5 percent of the value of the new futures contracts. The exchange has set each lot size at 200 tonnes and circuit breakers at 8 percent above and below the opening price on a given day.

Regulators are also considering allowing trade in futures contracts for crude oil, iron alloys and a slew of agricultural products.

The Zhengzhou Commodity Exchange already has a dozen other futures contracts including wheat, sugar, methanol and cotton. ($1 = 6.1200 Chinese yuan) (Additional reporting and writing by Rebekah Kebede in Perth, Editing by Tom Hogue and Jane Baird)