Futures and options have become an integral function of trading in other energy commodities markets. Is the coal sector making any steps in this direction?
Some participants have questioned the reliability of the API indices, which is understandable as the underlying physical coal market is not the most liquid and transparent of markets.
There are moves afoot to introduce the convergence of the physical and derivatives markets through coal futures contracts.
The Australian Securities Exchange plans to launch a deliverable FOB Newcastle contract, while globalCOAL will be launching a financially-settled Newcastle contract and a physically-settled ARA contract later this year.
The emergence of futures contracts should have no initial negative effect on the existing indices.
As one coal market source explains, there may well be some initial resistance to these new products.
"Coal is still quite a young market that is controlled mainly by the larger physical players," he says. "In this kind of market, you tend to find that the existing players don't want to get other markets developed, such as a futures market.
They don't want all these outside players coming in and start messing around with the price - it's just another variable that they have to deal with.
"Right now in the OTC market they can obviously decide who they want to trade with and who they don't want to trade with so they can keep a lot of third players out of the market, but a futures market tends to disrupt that. However, despite the reticence, I think it's inevitable, it's going to happen."
The emergence of futures contracts should have no initial negative effect on the existing indices, and could actually benefit them through the extra liquidity that they are likely to bring.
The new futures contracts are looking to settle against the existing indices but over the course of time, as they become more liquid they can settle against themselves, and have their own daily closing price. This presents a classic chicken and egg situation.
A futures contract needs liquidity first before it can settle against itself, but some players may stay out of the market because they don't want to trade futures against the indices.
So for the foreseeable future, the coal derivatives market will continue to flourish, and even if the futures contracts do take off, it is difficult to see swaps being replaced overnight.
At the moment, an OTC swap (in particular that of the API2 market) is the only product in the coal market delivering sufficient liquidity to market players, and Platts Forward Curve - Coal provides an independent benchmark of daily coal derivatives values based on actual transactions, bids and offers.
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