--Clyde Russell is a Reuters market analyst. The views
expressed are his own.--
By Clyde Russell
SINGAPORE, Feb 21 There is a growing disconnect
in global coal markets, with the bulk of paper trading happening
in the Atlantic basin, even though the physical market has
shifted dramatically to Asia.
In some ways this mirrors the situation in oil markets,
where the global benchmarks remain Brent and West Texas
Intermediate, even though the vast majority of demand growth
comes from China, India and other developing Asian nations.
What is different is that Asian players are active
participants in the global oil market, but coal trading in the
region is still the preserve of a small number of participants.
While there is little doubt that Asia's coal markets would
ultimately benefit from deep, liquid paper trading, it also
seems unlikely to happen soon as only one of the key drivers of
such a change is in place.
The existing factor is the availability of price indexes,
but the one that counts as far as expanding paper coal-trading
is concerned is the API8, and it's still relatively new and
therefore yet to gain widespread acceptance in the market.
API8 is Argus/McCloskey's index for 5,500 kcal/kilogram NAR
coal delivered into south China and it was launched in May 2012.
It can be cleared through CME Group and ICE Futures is
expected to launch its own contract soon.
But so far volumes have barely topped 1 million tonnes, and
even though this is seen as a reasonable start for a new
contract, it barely qualifies as a spit in the bucket when
compared to the hundreds of millions of tonnes done annually in
contracts linked to the API2 and API4 indexes, which cover
Europe and South African coal respectively.
In fact, API2 has increased its share of global paper trade,
accounting for 73 percent of all coal derivatives in 2011, up
from 50 percent in 2008, according to a presentation by
consultant Guillaume Perret at the Asia Coal Trading Forum in
Singapore this week.
While it is the case that liquidity attracts liquidity, the
API2's dominance shows just how far the Asian market still has
What's missing is a deeper pool of participants in Asian
coal trading, a commitment from producers and buyers to support
the market and appropriate government regulations.
UTILITIES ABSENT FROM THE MARKET
Currently Asian utilities tend not to hedge much in the
paper market, partly because of long-held practices and because
in some countries regulations don't allow this.
Japanese utilities still prefer annual contracts, and in the
new emerging markets of India and China utilities are subject to
a variety of rules that keep them from directly importing or
hedging positions in the paper market.
With the absence of utilities, it's little surprise that
coal derivatives are struggling to gain traction in Asia.
Much of the market in Europe is made by utilities that
actively hedge exposure to the physical markets, and are also
keen to lock in margins as well as carbon emissions liabilities.
Coal has long been one of the more opaque commodities traded
in Asia, and this appears to suit major producers and the
trading houses, as the lack of transparency boosts opportunities
for larger profits.
It's questionable whether Asia's small group of coal traders
believe opening up the market to more operators and the greater
price discovery afforded by a liquid paper market is in their
Attempts to launch a deliverable futures contract have
failed, with an executive from one major regional exchange
complaining off the record that big coal miners and trading
houses all agreed in principle to support a contract, but when
it came to actually providing volumes, nobody showed up.
This means that despite the best efforts of index providers
such as Argus Media and Platts and exchanges such as CME
and ICE, it's highly unlikely that coal trading
will take off in Asia.
What it will take is changes to government regulations to
allow buyers to actively trade and hedge.
But authorities also face a quandary, as freeing up one side
of the utilities' businesses by allowing them to buy and trade
coal freely, but keeping price controls on the electricity they
produce is unlikely to produce a sustainable business model.
As long as electricity prices are controlled by authorities
in order to provide power below market cost, coal trading is
likely to be muted in Asia, thus depriving the region's
consumers of the benefit of a transparent market.