Trading volumes in the metallurgical coal derivatives market has breached the 1 million mt mark between January 1 and April 11 as trading houses ramp up deal-making on greater hedging and speculative opportunities, the latest transaction data showed.
Total volumes traded over the period were 1.01 million mt, data provided by the Chicago Mercantile Group (CME) showed. The contract is settled basis Platts assessment for Premium Low Vol FOB Australia.
Market participants expressed hope that the high volumes in the first quarter of 2016 could signal a break-through year for the nascent met coal derivatives market.
Greater paper market growth will be important for a maturing physical trading space in which index-linked and spot pricing have gained further relevance, sources said.
The annualized volume would total 3.74 million mt -- nearly matching the highest annual figure of 3.8 million mt in 2014.
"This year can potentially be a game-changer for coking coal swaps, as more participants are entering the market from different sectors this time, coming from disparate strategies and views, adding compelling bid and offers," derivatives broker at brokerage Tullett Prebon Olivia Cailao said.
The Singapore Exchange's equivalent futures contract saw 211,000 mt transacted so far this year.
Open interest, an indicator of overall market trading activity, in the CME coking coal futures rose to 874,000 mt, while SGX's stood at 31,000 mt as of Tuesday.
The last transactions concluded for CME coking coal futures were a 24,000 mt second-quarter, 2016 strip settled at $88.50/mt FOB Australia, as well as a 24,000 mt Cal 17 trade fixed at $86/mt FOB Australia.
HEDGING OPPORTUNITIES GROW
Paper and physical market participants attributed the increase in liquidity to greater price volatility and market uncertainty at the start of the year.
While the pool of bids and offers remained relatively shallow compared with the iron ore market, large trading companies were now able to hedge a portion of their physical trade volumes on the CME contract, according to sources.
A source from an international trading house said the paper market had enabled his company to avoid losses losses in March when prices staged a 7% rebound.
However, the market still lacks the participation of steel end-users and consumers -- most of whom remain resistant to derivatives trading.
"I'm not buying to make margins and I don't want to take a position to make money or lose money," a procurement manager from a international steel mill said. "I'm not a trader."
Furthermore, met coal trading volumes still pale in comparison to that of the thermal coal or iron ore markets which far exceed physical volumes.
"[Coking coal trading volumes] are still far from thermal coal which has traded 5.5 billion mt roughly in 2015 , though coking coal tends to grow exponentially, so we think it is a healthy indication, but it has a long way to go," Cailao said.
