ASX and ICE plan to enter the same market, but with marked differences in their approaches. Natalie Coomber analyses the potential of both
Coal was the fastest-growing fuel in the world for the fifth
consecutive year, but when you compare the coal futures market
to that of oil, the difference is indescribable. Now
Intercontinental Exchange (ICE) and Australia Securities
Exchange (ASX) are attempting to reverse this trend with them
both scheduled to launch futures this year.
News came on June 25 that ICE, in conjunction with Global
Coal – founded by the members of the coal industry to
promote standardized screen trading – is to launch its
financially settled offering on September 5. Although
this was the back date that had been pencilled in after the
delays of ICE Clear Europe forced the launch to be after the
traditional summer trading lull, this is still one up on
The Australian exchange is aiming for a 2008 launch of its
delivered contract but has yet to receive regulatory approval.
Anthony Collins, general manager of emerging markets for ASX,
is keen to stress that it is not all about being first to
"A key point is that this is not a race. Swap versus forward
pricing represents two different value propositions, both will
work in the short term, and the most efficient and effective
product will prevail in the longer term," he says.
Speaking before the launch date had been announced, Eoghan
Cunningham, chief executive of Global Coal, told FOW: "First to
market is important but if you launch within a few weeks of
each other, then it shouldn’t matter which is out
the door first."
Global consumption of the black commodity rose by 4.5% in
2007, far exceeding the 10-year average of 3.2%. According to
BP’s latest Statistical Review, consumption growth
is exceeding the average in every region except for the Middle
East, with Chinese usage increasing a massive 7.9%. This means
that Asia is driving coal, and thus energy prices,
While OTC volume has the most liquidity in Europe with Asia
and the US falling short, it still seems a plain choice for
both to make Newcastle, a major coal port in Australia, their
hub. Asia’s thermal coal imports in 2007 made up
70% of the international market and were worth a total value of
$25 billion. Contributing to a lot of that figure is Japan,
which continues to be the largest importer of thermal coal by
quite some margin.
Peter Sceats, director at TFS Brokers, was involved in the
first feasibility study that looked at the possible success of
a coal futures market back in 1997 – culminating in a
proposal which was at the time flatly rejected by the then
International Petroleum Exchange.
"[They] saw no future for coal derivatives in the coming
years despite the electricity liberalization process that was
sweeping Europe at the time," he says. Then the loosening of
regulation led to a need for power stations to become more cost
effective and therefore more flexible in the types of coal used
for electricity production. Sceats says that the details that
came out of this feasibility study went on to form the
blueprint for its TFS API index series, which is one of the
building blocks of the coal derivative market that is now more
than five times the size of the physical market on which it is
More than 10 years later, they see the situation as very
different. In 2003 came the development of the cash settle swap
market and, for the first time, producers, merchants and
consumers are able to manage their price risks better.
Jason Pegley of ICE Europe says that, although the exchange
already lists two coal contracts, it felt that partnering with
Global Coal was necessary for the successful development of its
Newcastle-based contract. He says the potential of the contract
"In many ways coal is very similar to oil – it is
an international product that can be moved globally. Down the
line I think it has the potential to be as big as the oil
futures market," says Pegley.
By not having to fulfil the International Swaps &
Derivatives Association’s master agreements for
bilateral trading, Cunningham thinks new players will be drawn
to the market.
"It is a very efficient way to access the market for the
players that can’t at the moment hedge
effectively," he says. "Then you will have the hedge funds
which will see the prices and volatility, and want a part of
Collins argues that introducing a deliverable contract makes
sense for price discovery, arbitrage trading and not least in
attracting the utilities to the market. He cites Japan as one
area where there is yet to be any traction.
"We could even argue that it is too early for anyone to be
listing such a product, but I would much rather be too early
than too late," he says.
For the Sydney-based exchange this is part of a suite of
energy-related contracts, including futures and options on gas,
renewable energy certificates and Australian-issued emission
permits. It will also allow users to take part in exchange for
physical or exchange for risk transactions enabling the
physical commodity or related derivatives with futures
contracts. The aim of this is to provide market participants
with the flexibility to manage their OTC positions.
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