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Latest developments in the coal physical and financial markets

Since the start of 2016, we have seen very interesting developments in the coal physical and financial markets. This is all the more relevant as we study these particular patterns in-depth during the Coaltrans Coal Trading And Risk Management Course.




Since the start of 2016, we have seen very interesting developments in the coal physical and financial markets. This is all the more relevant as we study these particular patterns in-depth during the Coaltrans Coal Trading And Risk Management Course.

The first major development has been the brutal evolution of the forward curve since the beginning of the year, in particular the rapid reduction in the backwardation. Indeed we started the year with the Calendar 2017 API2 contract at a significant $6.25/t discount to spot physical. But the two contracts are trading at parity at the time of writing and we think that Cal.17 could trade at a premium to spot in the coming months.

The switch between backwardation and contango in the financial market illustrates the structural changes in the supply-demand of the physical market worldwide. 
 
Indeed the prompt API2 contract has been supported by relatively robust German demand and the diversion of 4-5m tonnes of Colombian coal to India and the Far East. The back end of the curve is reacting to more fundamental drivers such as a potential structural increase in oil prices, coal-denominated currencies and the cost of coal production.

Further rise in options trading

But this switch in the forward curve has not been a peaceful movement. Quite the opposite, we have seen a sharp rise in the intra-day volatility since the beginning of 2016 (this is a topic we will examine during the course). The increased levels of risk and the changes in the long established bearish trend have prompted a more cautious approach from investors.

Consequently we are seeing a continuous rise in option trading for financial coal. Indeed the option volume for the API2 contract has already surged from almost nothing in 2010 to 610.3m tonnes in 2015.  The trend is firmly established with API2 option volumes surging by 72% in Q116 vs. Q115.

The purchase of options protects buyers against adverse price movements by locking in the maximum loss. As you shall see during the course, it also enables participants to develop more complex strategies by combining their physical and financial positions.



May 2016

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.