Coking Coal Swaps Contract Launched – Will It Be a Panacea for Price Volatility?

MetalMiner guest columnist Brad Clark is a senior derivatives broker who leads the St. Louis office of FIS Ltd., the London-based global commodity interdealer brokerage firm. Clark brokers physical and derivative deals on steel, iron ore, scrap and freight with a focus on the domestic US market. Arne Petter Kolderup, senior broker of coking coal for FIS Singapore, contributed to this week’s commentary.

A couple months back we wrote about how the launching of the coking coal swaps contract on the CME has completed the final link in the “virtual steel mill. This week FIS is excited to have been part of the first trade completed on this coking coal swap contract. The deal was for 9,000 metric tons of Platts Premium Low Volume coking coal for the Q1 2012 period, priced at $245 per metric ton, with clearing at CME.

In a very short time from this contract’s launch, it is already gaining attention and interest from a wide range of clients in both physical and financial markets. And it appears it couldn’t have come at a better time.

During a week when practically all financial and commodities markets took a beating on renewed fears that global growth is in jeopardy, this new risk management tool was put in place to help protect market participants from increased volatility in prices.

A Bit of Background

Some background on the coking coal markets helps shine a light onto this new contract’s attractiveness for the trade.

Seaborne coking coal trade volume has increased steadily over the last 20 years to an estimated 270 million tons worth $80 billion in 2011. Despite global output growing by almost 50 percent since 1991 to 891 million tons in 2010, quality coking coal has become harder to source, driving increased price volatility. Spot prices have moved over the last year from below $200 per ton to just under $350 at the start of 2011 and to around $270 this summer.

At a time of high input costs for mills, which drive increased price volatility and prices for finished steel products, end users have yet another tool to help insulate themselves from this changing price dynamic.

With any new financial instrument there will be a period of adjustment and a learning curve for new users of such tools, but the signs we are seeing already from coal producers, traders, and steel mills are extremely encouraging.

Obviously, we have a bias towards the promotion of these financial tools, but that bias is borne out of the measured understanding of the risks inherent in volatile commodities markets. All signs point to the volatility in the steel complex increasing. Uneven demand in the developed world, increasing demand from China and new supply coming in from non-traditional sources has all created a potent mix of volatility and uncertainty. We see this new coking coal swap as yet another potential safe haven for off-loading physical price risk.

— Brad Clark and Arne Petter Kolderup

The views and opinions expressed in this post are held exclusively by FIS Ltd., and may not necessarily be shared by MetalMiner.