Full Steam Ahead for New Asian Coal Markets

BRISBANE, Australia - June 23, 2013 - PRLog -- With Europe and South Africa representing mature markets, Asia is its emerging cousin. It already clearly wins in term of physical volumes, being host to the two largest exporters, Indonesia and Australia, and the three largest consumers, China, India and Japan. Now the financial side of the trading business is showing signs of awakening in the form of dedicated derivative offerings.

The established international market has been largely dominated by 6,000kc NAR quality coals. This was the grade that Europe purchased and South Africa and Australia supplied in abundance. With this being the bulk of the physical seaborne trade at the time of coal’s commoditisation, indices and derivatives followed this lead and mirrored the physical business. These mature market prices are predominantly settled against the API benchmarks, which are the mean average of two separate price assessments conducted by IHS McCloskey and Argus Media, and GlobalCOAL’s Newcastle index.

Currently, around 90% of the estimated $250bn international coal derivates market is settled against either the API 2 (delivered CIF price for coal into the ports of Amsterdam, Rotterdam and Antwerp) or API 4 (the export FOB price from the South African port of Richards Bay).  

However, with the increasing importance of Chinese demand in determining international steam coal prices, attention has been shifting to lower calorific value (c.v.) materials. China is a significant demand hub in the coal trading universe and with the recent weakness of coal prices it has increasingly become a buyers’ market. India is also enjoying an explosion in demand for imported coals and its significance in influencing global prices is also on the rise.

Both India and China have the flexibility to pursue value up and down the myriad of c.v. grades on offer and are becoming increasingly indifferent to what is happening in the traditional 6,000kc NAR markets.

Asia, by and large, is not a 6,000kc NAR market. It is a multi grade, multi origin market, and one where the buyer has significant choice and flexibility. Simply applying the existing market framework over the top of this dynamic market does not work.

Over the past couple of years a number of new indices have been developed in an attempt to track the value of the most relevant coal grades being traded in Asian markets; those with a c.v. of 5,500kc NAR or 4,900kc NAR.  

According to Mat Thomas, Global Head of Coal at Marex Spectron, “The depressed global prices and the on-going bear market, brought about by a general oversupply, has seen a shift towards spot based market pricing across global commodities. As such it has become increasingly critical that producers have flexibility in FOB (export) and CFR (delivered) to price spot and term deals.”

“Added to this”, says Thomas, “is the general decline in coal quality, in terms of calorific value. For Chinese and Korean buyers price is largely more important than quality and supply relationships.” For Australian producers this has “led to a narrowing of yields on washed coal and higher strip ratios.”

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