* Zhengzhou contract to help China gain stronger pricing
* Miners, traders signal strong trading interest amid
* Contract to be backed by physical delivery
By Fayen Wong
SHANGHAI, Sept 6 China's Zhengzhou Commodities
Exchange will launch a steam coal futures contract as early as
the end of the month, exchange officials said, aiming to tap
growing demand for hedging tools in the world's top producer and
importer of the resource.
A rollout of China's first steam coal contract will give
Beijing greater influence over global coal prices, and would
come as Beijing looks to gradually open up the financial sector
to make the country's growth model a consumption-oriented one.
Top miners Shenhua Group, China Coal Energy Co
and Inner Mongolia Yitai Coal and coal
traders have indicated their interest in trading Zhengzhou's
physical delivery-backed contract, sources said.
"Thermal coal is a major energy source fueling China's
economy. It is also an open market with a lot of players in the
supply chain, so we think that will help liquidity to grow
quickly," said an exchange official involved in the contract
China's total coal output was 3.66 billion tonnes in 2012,
of which steam coal production stood at about 2.9 billion
tonnes. Steam, or thermal, coal is used in power generation
while coking coal is used in steelmaking. The country's first
coking coal futures contract was launched in March on the Dalian
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 the yuan currency.
The launch would come amid a slump in China's thermal coal
market, which has seen prices persistently falling since
Hit by a slowing economy and oversupply, spot prices have
dropped 14 percent so far this year, forcing many firms into the
red and higher-cost miners to halt production.
"The futures contract will be an important hedging instrument
for us to reduce risks and protect our earnings," said a company
executive at China Coal, which reported a 43 percent fall in its
first-half net profit.
Sources at futures brokerages, which have been reaching out
to miners to offer hedging services, said Shenhua and Yitai have
also signalled that they will trade the contract.
Shenhua and Yitai could not be reached immediately for
According to the exchange's draft contract, each lot size is
200 tonnes with a minimum price fluctuation of 0.20 yuan per
tonne. Minimum trading margin requirement is set at 5 percent of
the contract's value.
With spot coal prices hovering near 550 yuan ($89.87) a
tonne, the minimum trading margin for each lot size would be
about 8,800 yuan, a level which analysts expect would draw
strong participation from individual and institutional
"Given how thermal coal is closely-tied to the economy, many
other institutional investors will also be keen to add coal
futures to their investment portfolio," said Li Ji, a coal
analyst with Galaxy Futures.
Asia-focused steam coal futures contracts are offered by
exchanges in Singapore and Europe but they are settled in cash.
The Zhengzhou contract may boost liquidity for Singapore
Exchange's (SGX) South China coal-swap contract as investors can
participate in both markets to utilize arbitrage opportunities.
"We're looking forward to the Zhengzhou futures contract.
It's a way for us to grow our China coal business and we can
also do arbitrage trades on SGX," said a trader at foreign bank
with WFOE license.
The SGX South China swap is based on the API 8 index, which
is an average price of 5,500 kcal/kg grade thermal coal
delivered into Guangzhou, Guangxi and Fujian ports in South
($1 = 6.1199 Chinese yuan)
(Editing by Muralikumar Anantharaman)