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April25th, 2017
OTCCokingCoalTrading:AReasontoCheerorJeer?
StephenDoyle,PresidentBtuBaron,LLC
EurocokeSummit2017
HotelNikko,Düsseldorf
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About BtuBaron LLC
www.btubaron.com
Email: [email protected]
Website: www.btubaron.com
Twitter: @btubaron
Work: + 1 970 256 1194
Cell: +1 917 363 3719
Page 3www.btubaron.com
Discussion Topics Setting the Stage A status report on the OTC and
futures markets The primary drivers: price volatility
& the elusive hot metal spread Which exchange will win the
‘swaps war’? Will the evolving OTC and futures
markets help or hurt the steel mills, merchant cokeries and coal miners?
Marching Orders: Educate yourselves quickly!
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Trading is rarely embraced by the ‘traditional market’
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OTC Coking Coal Trading
The Anti-OTC Coking Coal Trading Crowd
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Steve Doyle/The Coal Trading Handbook 2007
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“Coking Coal makes up 30% of the seaborne coal trade and yet itdoes not even make a small blip in the OTC radar screen. Unlikesteam coal, which is essentially a product based on heating content(with sulfur playing a minor role), coking coal has so many importantvariables, it would be next to impossible to standardize a contractthat could provide the user with a meaningful hedging tool and stillattract enough trading liquidity. Perhaps in the very distant future,the coking coal market will develop a standardized contract based onone or two Australian coking coal qualities. Theoretically, US andCanadian coking coal could trade at a basis to a standardizedAustralian coking coal; however, the chances are very remote –unless the buyers and sellers make a commitment to create andsupport a market and thereby attract speculative liquidity.”
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Metcoke Conference 2012: OTC Coking Coal Timeline
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Mar 2010-Platts launches Oz & China cc indexes
Mar 2010- Energy Publishing launches Oz & US cc indexes
Apr 2010- BHP pushes for quarterly settlements.
Apr 2011- BHP pushes for monthly settlements.
Aug 2011- Credit Suisse trades first cc swap.
May 2012- Argus/IHS McCloskey launches API C1 index.
Feb 2009: LCB brokers first iron ore swap
Nov 2012- globalCoal launches standardized physical cc contracts
Mar 2009-rebar futures start trading in Shanghai
Aug 2012 – BHP rumored to have executed contracts linked to cc index
Feb 2011- over 15 separate cc indexes from various companies.
Oct 2012 – World Steel Assoc ‘re-evaluating’ official position on swaps.
Sep 2011- CME starts trading scrap futures.
Jul 2012- Dalian Exchange (China) launches futures contract.
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Setting the Stage
• Coking Coal Spot Market: During 2016, there were 799 spot coking coal transactions (57 mm MT) in Asia-Pacific: 44% premium cc, 22% second-tier cc, 19% PCI and 15% semi-soft cc. 17% higher than 2015 (Source: Platts Feb 27, 2017)
• Indexing: 60 – 80% of coking coal transactions with end-users are priced to an index (Source: my informal industry survey)
• Price Volatility: Here to stay. Four +$300 price surges during the past ten years (2008, 2011, 2016 and 2017).
• Quality Basis Volatility: Here to stay. (Premium cc vs Second-tier cc vs PCI vs Semi-soft cc)
• #*!@ Happens: The next market-moving event is right around the corner …!
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A Friendly Reminder: #*!@ happens!!
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Definition of a Swap
A financial transaction between two parties to exchange a fixed price for a floating price
at some fixed date or dates in the future
Swap
BuyerSwap
Seller
Fixed
Floating
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What is a Swap?
• A sign that a commodity has ‘arrived’• One of the most misunderstood risk management instruments• One of the most versatile risk management instruments• Incredibly easy to settle• The best way to manage your price risk without effecting your
physical supply channels• The only way to trade a commodity without the additional
burden (and overhead) associated with scheduling, delivering, weighing, sampling, testing, maintaining inventories….
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The Index Test:• Does the index track a liquid, traded physical spot market?• Does the index track a standardized product?• Is there a liquid swaps market that trades around the index?• Does the index track a product in a free market economy or
in a ‘command & control’ economy?• Is there price transparency?• Is the index methodology detailed and defendable?• Can the index be manipulated?• Is the index sustainable over time?
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Specific Risks Associated with Swaps• Index does not match spot price• Your product does not match the
index (quality, location, transportation mode)
• Problem with the physical shipment• No liquidity (No bids or offers)• A new index comes along• Force Majeure (on the physical leg)• Volume Issues• Credit Issues• Fraud
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Lifecycle of OTC/Futures Coking Coal Trading
Prime Adult
Teenager
Child
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2015/2016
2017/20182019 & Beyond
Infant
2011We are here
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Price & Basis Volatility 2013 - 2017
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Price & Basis Volatility July 2016 –April 2017
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Spark & Dark Spread Trading
OR
Coal or Natgas
Ocean Freight
Carbon Credits Electricity
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Hot Metal Spread Trading
Why coking coal swaps might eclipse thermal:Coking coal is scarceBigger market (iron ore, steel, ocean freight)Steel is a global market; electricity is regionalCoking coal prices are more volatile than thermal
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Coking Coal
Iron Ore
Scrap Steel SteelOcean
Freight
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Three Tradable Products (but do you understand the difference between the index and the swaps market?)
FOB Vessel Queensland, Austr. The Steel Index Platts
globalCOAL (branded &
unbranded)*Type Index (SGX swaps) Index (CME swaps) Physically-settled
Moisture (ar) 10.00% 9.70% 10.00%
Ash (ad) 10.00% 9.30% 9.50%
Sulfur (ad) 0.45% 0.50% 0.60%
Volatile Matter (ad) 21.00% 21.50% 23.0%
CSR 71% 71% 68%
Phosphorous (ad) 0.05% 0.05% 0.05%
FSI 8 8 8
Timing Transactions that load within 60 days
Transactions that load within 60 days
Loaded during contract month
Index (Apr 13, 2017) $314/MT $302/MT N/A
Mkt Settle (Apr 13, 2017) $285/MT $280/MT $282/MT & $280/MT
www.btubaron.com(*globalCOAL branded: Illawarra,Goonyella, Moranbah North, Oaky Creek, North Goonyella)
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Understanding the difference between the index and the swaps market
SGX CC Swaps* CME CC Swaps*
Index Compiler The Steel Index (a unit of Platts) Platts
Index Name TSI FOB Australian Premium Coking Coal
Hard Coking Coal (Premium Low Vol) FOB Australia
Index (Apr 13, 2017) $314/MT $302/MT
April Swaps Contract (end-of-day Apr 13) SGX: $285/MT CME: $280/MT
Mathematical average of daily indexes (Apr 1–13, 2017) $250.92/MT $257.33/MT
Implied average of daily indexes (Apr 18-28) $319.08/MT $302.67/MT
*Note: The monthly coking coal swaps contracts are financially-settled against the mathematical average of that month’s daily indexes.
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Which exchange will ‘win’: SGX or CME?
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(est.)
(est.)
(est.)
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What’s in it for me?• Lightning-fast price discovery & price transparency• Ability to turn an indexed supply contract into a fixed-price
contract (and vice versa)• Transact with ‘bells & whistles’ such as price caps and
price floors.• Major benefits when commercial decisions are separated
from operational decisions.• Profit from differences between operational basis and
market basis• Accurately price volume options• Creditors and long-term investors reward companies who
can provide predictable marginswww.doyletradingconsultants.com
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Conclusions and Marching Orders Price volatility & basis volatility are
here to stay and we finally have effective tools to manage the risk.
While the market matures, take advantage of the time to educate yourselves on how to use these tools.
Understand the benefits of trading while recognizing the risks (and your limits). Use third parties, if necessary.
The only successful way to implement trading in an organization is the ‘top-down’ approach (i.e. full support from the CEO).
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For Detailed Quality Data, Price Methodology & Price Adjustments on Each Product:
• Platts Index (CME Exchange) Specs & Methodology– www.platts.com/IM.Platts.Content/MethodologyReferences/MethodologySpecs/
metcoalmethod.pdf
• TSI Index (SGX Exchange) Specs & Methodology– www.thesteelindex.com/files/custom/Procedures%20&%20Methodology%20pag
e/TSI%20Coking%20Coal%20Index%20-%20Methodology.pdf
• globalCOAL Specs & Methodology– www.globalcoal.com/scota/specifications.cfm
• Dalian Exchange Specs & Methodology– www.dce.com.cn/DCE/Products/Industrial/Coking%20Coal/491878/index.html
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