Hedging a key tool in coking coal amid increasing environment of price volatility

• Australian FOB contract key market for coking coal on SGX
• Mine accidents may impact near-term spot supplies, prices

BigMint recently hosted a webinar jointly with the Singapore Exchange Group (SGX) on “Futures Trading in Coal: Decoding the Challenges & Enablers”.

The webinar explored ways to navigate the coal futures trading options platform gainfully. Futures are an instrument that allows the buyer to hedge against fluctuations in commodity prices by fixing the price at which he would buy at a later date. It gives the buyer some benefits allows him to handle his cash flows better, and get a buffer against price volatility and thus protect his bottomline more efficiently

In India, the scope for coal futures trading is somewhat limited. There is no dedicated coal futures exchange yet. And overall, futures trading is yet to gain more traction overall. Greater price fluctuations are inevitable as geopolitical factors take hold and the tariff hegemony gains momentum.

BigMint spoke to Jin Yu, Senior Vice President, Commodities, SGX, and T.K. Jiang, Met Coal & Coke Trader, at CCS Singapore.

Key takeaways

• SGX is the dominant exchange in terms of coking coal and iron ore outside of China. Last year, SGX traded 6 billion tonnes in iron ore and 15 million tonnes (mnt) in coking coal.
• Australia’s dominance as a coking coal supplier has come down but it still remains the largest exporter of the commodity to India, which is the most important buyer. If not, it will certainly become so because of its infrastructure development, even as it diversifies its sourcing regions.
• Australia is the largest coking coal exporter in the world and, apart from India, its coal goes to China, Japan and other countries. The Australian FOB contract is the key market for coking coal, which is slightly different from the iron ore contract which is the CFR China, since 70-80% of the global iron ore exports end up being delivered to China
• A key aspect of coking coal is its volatility and recent geopolitical actions have been a key contributing factor to the same. But coking coal has been traditionally a volatile commodity because of the dominance of Australia in exports and the variability of its weather.
• So hedging and risk management in coking coal will increasingly become important within India and the market in general.
• Significant interest is coming back into coking coal contracts on the SGX after a decline during the Covid period. The open interest (contracts left on the exchange overnight or over time) is starting to build up again, which shows there is a genuine requirement of hedging contracts.
• The year 2024 was the best in terms of volumes traded on SGX at 15.30 mnt, which is projected at 13.2 mnt in 2025. The current calendar started slow but volumes are expected to pick up and 2025 may come into the top three years.
• Futures are always a tool to hedge any extreme price supply disruptions or a sharp demand spurt.
• Geopolitical development in the last couple of months impacted prices. The US-China trade war and China’s announcement of tariff on US coals especially after the Lunar New Year have seen a lot of distressed cargoes coming into the FOB market, suppressing the PLV FOB. So, in such a scenario, hedging will be the best option to secure against any downside price risk.
• DCE contract is closer to the Mongolian quality. But any coking coal that fits that specification can be delivered on the DCE. Mongolian coking coal sells at lower prices because of quality differences.
• Coking coal inventories are rising at ports and one may think people may not buy too much and prices should decrease. But, in the past three weeks or so data suggests Indian port inventories have been well above 5 mnt. But prices have been firm for May contracts and that could suggest that the PLV FOB pricing is now not only determined by the Indian market but JKT physical buyers are now also coming into the picture.
• The price of coking at around $170-180/t FOB is very close to the miners’ cost. So, many feel these prices are not supportive. Whether prices will stay 10-15% up or down from here for the next 2-3 years is difficult to say. There is some supply shortage anticipated in the short term because of accidents in the Appin and Moranbah mines, affecting the near-term supply, especially spot material.
• A lot of prompt cargo requirement is being seen not only from Indian players but Southeast Asia and the JKT region. Thus, prices may stay relatively firm compared to the previous few weeks in the next 2-3 weeks ahead. It is uncertain whether prices will go back to $200/t or even the previous $160/t. Mine closures can also affect coking coal prices.
• The steel market in China is fundamentally ok. Demand has been similar to the past few years. Pig iron production has been growing by 2.40 mnt daily for past one week and this is expected to grow to 2.45 mnt, which is a relatively high level. And that will ensure stable demand for met coke from the small and medium mills and hence the first round of coke price uptick concluded in China. It is uncertain whether 2-3 more are slated to come.
• The US tariffs scenario is a bearish direction in terms of coking coal. There may not be a direct impact. No impact felt yet because of the supply disruptions.