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Coaltrans China - The rise of the coal futures market

China's fledging coal futures market has seen a sustained growth in volume. Market participants at the 12th Coaltrans China Conference believe that the coal futures trading will have a bigger role to play in the upcoming market climate.

China's fledging coal futures market has seen a sustained growth in volume. Market participants at the 12th Coaltrans China Conference believe that the coal futures trading will have a bigger role to play in the upcoming market climate.

 

"Price volatility will continue, although a steep rise is unlikely, periodical or structural changes are expected. Coupled with the shrinking profit, hedging against risks is a way out for industry players," said Li Hongjiang, Deputy Director General of Dalian Commodity Exchange (DCE), a keynote speaker at the Conference held in Shanghai.

 

The coal industry has entered into what Li termed as "an era of low profit margin". According to his statistics, the sales profit ratio of coal industry has seen a continuous slide from 12% in February 2010 to less than 7% at the end of 2013 and a further drop to 5% by February 2014.

 

In addition, the price of coke and coking coal fluctuated at a growing pace since July 2012, with the variability ranging from Rmb2,000/tons to Rmb800/tons in April 2014. 

 

Li said that as China's internal demand remains steady, the trading volume will stay at a high level. In March alone, the trading volume of coking coal at the DCE recorded a total of 260 million tons, which is larger than the annual volume of Chicago Mercantile Exchange (CME) in 2013, which stood at 168 million tons.

 

But coal, coke and steel players have not yet fully explored the futures market. "They know the industry in and out. They should take advantage of the futures under this market climate," he added.

 

Speaking at the same session, Yu Xiaopeng, General Manager of China Galaxy Security Jinan Branch summarizes the reasons why companies failed in hedging in futures market.

 

"Companies opt for futures markets only when they face problems. However, they need to know what they want and make their choice," said Yu.

 

A typical example was an airline company purchasing futures contracts in fear of increasing fuel costs. However, it does not want to bear the loss in the futures market if fuel price drops. It eventually sold the put option at a very low price in exchange for the option premium, but suffered a huge loss when oil prices fell drastically.

 

"In addition, the procurement plan is always in line with the production. You need to make sure your trader has a good knowledge of your production plan," Yu added.

 

The DCE launched coke and coking coal contracts in 2011 and 2013 respectively.

However, coke did not have a successful start-up, with the price dropping from Rmb2,400/tons to Rmb1,000/tons causing losses to many producers. It was not until the second half of 2012 that trading became stable and maintained growth thereafter. By April 2014, the total trading volume of coke was 172 million contracts (17.2 billion tons).

 

At the one year anniversary for the launch of coking coal at the DCM, its trading volume had reached a total of 48.25 million contracts (2.896 billion tons).

 

 

This content is provided by Coaltrans Conferences for informational purposes only, and it reflects the market and industry conditions and presenter’s opinions and affiliations available at the time of the presentation.

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