Hedging Against Rising Coal Prices using Coal Futures

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ICE Coal Futures

ICE Coal Futures Monthly Report

The ICE Coal Futures market is our most transparent window on the world of financial coal trading. This free monthly report analyses volume and price trends on a monthly basis to help you draw a picture of market development.

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Issue No. 134 Date: Mar 2020

March Market Highlights

  • 95,779Mt of ICE Futures and options cleared in March which is the highest volume of coal cleared in 2020.
  • Despite the spread of the Covid-19 virus and its impact on global markets, Q1 20’ cleared thermal coal volume remained a robust 278,015Mt- 2% higher than Q4 19’ volume.
  • Rotterdam remains the most actively traded contract with 74,056Mt cleared in March, although Q1 volume of 213,846Mt is 17% below Q1 19’ levels. Conversely Newcastle saw 17,602Mt clear in March and 52,346Mt in Q1 which is 10% higher than Q1 19’ volume.
  • All the coal hubs recorded a degree of price volatility which is likely to have increased due to the operational impacts and uncertainly brought by the Covid-19 virus as well as the large movements seen in related energy and FX markets including Brent and WTI crude oil.
  • Freight rates dropped to record low levels primarily the result of a slowdown in the import/export markets.

ICE Coal Futures Price Trend (Cal 2020)

ICE Coal Futures Spreads (Cal 2020)

ICE Coal Futures Volatility *

* Historical 30-Day Annualised Volatility is calculated by taking the standard deviation of the last 30 days’ natural logarithm of daily percentage change in the price of the Cal+1 contract, and annualising it by multiplying it by the square root of 252 (as the number of trading days in the year).

Relevant Exchange Rates

ICE Coal Futures Monthly Volume & % Screen Executed

ICE Coal Options Volume

Futures Volume by Expiry

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Hedging in Coal Contracts under the Acid Rain Program

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Analysis: CME met coal futures market poised for takeoff on record May volumes

Singapore — Traded volumes of metallurgical coal derivatives on CME surged through the 1 million-mt mark in May alone, as physical end-users’ expansion of their hedging activities amid steep volatility in spot prices ignited expectations that the nascent market is primed for a takeoff this year, according to industry sources this week.

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Total May volumes cleared by CME ClearPort hit a monthly record high of 1.13 million mt, data provided by the exchange showed. The contract is settled against Platts Premium Low Vol FOB Australia assessments.

The May figure raised CME-cleared volumes so far this year to 2.53 million mt, compared with 1.89 million mt in the whole of 2020.

Article Continues below.

The share of coking coal futures traded on the CME was 89% of the total over January-May.

In comparison, the Singapore Exchange’s equivalent futures trade volumes, based on The Steel Index’s FOB Australia Premium Coking Coal Futures, saw 0.11 million mt transacted in May and 0.33 million mt for the first five months of the year.

“We are at an escape velocity [for coking coal derivatives]. It’s like a plane about to take off,” said a source who is an active trader of met coal derivatives.

The sharp rise in liquidity in the derivatives market — long dominated by trading firms and banks — could be partly attributed to the entry of European and Asian steel mills, as well as downstream consumers of steel products not directly exposed to met coal prices, sources said.

Market participants also view the record CME May volumes as a signal that a liquid paper market could soon materialize for hedgers to lock in margins, as well as for speculators to trade in sizes relative to their risk appetite.

Coking coal futures are used as a proxy to hedge against steel price movements, which compliments their existing iron ore exposure, two sources suggested.

“The growing open interest indicates the shift of the physical industry to systematically hedge their trading/consumption volumes rather than just sporadically or opportunistically react to the market moves,” said Yvonne Zhang, CME’s director of metal products based in Singapore.

Zhang indicated the diverse pool of players including banks, physical players and traders suggested “maturing hedging practices.”

Open interest, an indicator of overall market trading activity, in the CME coking coal futures rose from 0.68 million mt on January 27, to 1.06 million mt on May 31, while volumes on SGX stood at 57,000 mt.


Steep volatility in premium hard coking coal prices over the last two months has caught large trading firms off-guard and compelled them to hedge using CME derivatives to reduce the risk of physical trading, sources said.

Volatile markets heighten the ease of paper trading because of differing views over forward price directions, a source from a large Asian trading house explained, adding that monthly volumes of 1 million mt traded on CME would be sufficient liquidity for physical players to start hedging their books.

“You can’t survive by being a pure physical trader these days,” an Australian mining source said. A third trader concurred, saying that trading in derivatives, as well as supply chain ownership, are some areas that met coal traders need to be exposed to now.

Another significant driver of the liquidity seen in CME was the entry of new participants including several European steelmakers, downstream steel consumers and proprietary trading firms.

Steel mills and downstream steel product buyers have been using CME coking coal futures as a proxy to hedge against steel price movements, three sources reported, adding that simply trading iron ore paper was an insufficient hedge.

Some of these new entrants are fronted by international banking institutions, and typically trade further down the forward curve — particularly quarterly and calendar year strips — rather than on the front months, sources said.

This stemmed from a belief that met coal was already lingering at a long-term bottom with further output cuts possible, according to one derivatives trader.

European mills, in particular, think “the next two to three years, fundamentally, will carry a supply response that brings the market into [supply-demand] rationalization,” the source said. “Everyone wants to buy any [long-term forward position] below $90/mt [FOB Australia].”

Two-thirds of trades on CME over January-May were done on quarterly contracts, 26% for calendar years, and the rest for month period trades, the exchange’s data showed.

Most of the quarterly trades are conducted by futures and physical traders who prefer to trade the front quarter or the following quarter where there is visibility on physical cargoes traded.

Financial institutions on the other hand, are likely to trade the yearly contracts as outrights or time spreads, sources said.

“The pricing of the forward curve has recently gotten considerably tighter on the nearby months and quarters and we now have consistent interest on both sides of the calenders going forward. [Traders believe they] can now get out of whatever positions they have got into with good liquidity available down the curve,” said Mark Richardson, head of SSY Futures.

Traders have also expressed interest in the met coal arbitrage between the CME contract and the hard coking coal contract on the Dalian Commodity Exchange.

Meanwhile, proprietary traders that have little or no positions in the physical market, have also jumped into the derivatives market to gain a toe-hold in the commodity.

At least two such companies that typically deal in other bulk commodities are trading over 100,000 mt of CME met coal derivatives each every month.

“It can be an independent revenue churner [for proprietary traders],” one Asian trade source said. MORE LIQUIDITY GROWTH NEEDED

However, a few market participants said it would be more ideal if trade liquidity in the derivatives market swells further before met coal paper trading can truly become mainstream for the market.

“We see the market growing very positively from this point, but would also say that this market is probably in the second stage of a five-step development into a fully mature derivatives market so it’s still very early days,” Richardson said.

A senior procurement source at a global steelmaker believes current liquidity was still wanting, saying he will only be encouraged to participate if paper volumes reach 20% of total seaborne trade, which is estimated to be 280 million mt in 2020 according to Macquarie Bank.

Continued indexation of physical met coal cargoes, increased participation of major physical buyers or sellers, as well as the growth of complementary products such as scrap derivatives are key to taking met coal derivatives trading to the next stage, a source said.

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