Paper trading needed in Asian coal market

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 per cent 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 to travel.