Coal benchmarks lose liquidity as market focus turns to China
Physical coal market indices are being pushed to the margins as Asian buyers source coal based on price rather than quality.
The physical market has suffered a drop in demand for several reasons. An overall mild winter has left European utilities with high stocks, curbing physical coal demand in the first four months of 2012 and turning the focus of the coal markets towards Asia, where economic growth while also slowing - is still better than in the eurozone.
At the same time, lack of supply disruptions coupled with increased US coal exports has left the global coal markets awash with available cargoes, with producers forced to cut prices to generate interest.
This has made Chinese traders - who have traditionally always put price ahead of quality - even pickier when sourcing out fresh coal deliveries. Over the past couple of months, market participants observed that the liquidity for high-quality, SCoTA-specific coal has been falling, with more and more "off-spec" coal traded.
So while this means that demand in Asia is still relatively high, the problem is that such deals are often made off traders' screens on a bilateral basis, shrouding the deals away from the eyes of the organised market.
Indexation
In a bid to stay in touch with market changes, the physical coal market has seen the launch of several new indices, most notably a physical price index for FOB Newcastle 5,500kCal/kg physical coal, typically sold into China.
However, sources polled by ICIS were divided on the benefits of such an index. Some suggested that with liquidity in the SCoTA market falling, benchmarks would have to be readjusted to follow the shift in market focus. "Benchmarks need liquidity, otherwise they are prone to manipulation. Therefore, if that is where the demand is, then that is where the benchmarks should be," Nick Campbell, energy market analyst at Inenco said.
Others were less sure, saying market transparency is too poor to form a reliable methodology.
A London-based physical trader said the release of a new index was "pointless" because in a bilateral market, there is no way of confirming whether the trades reported actually happened.
"That's the problem with China, there are a lot of rumours," he said. "Indices are losing importance, as there is no way that all trades are reported because a lot of them are private and confidential."
Chinese indifference
However, rumours are not the only problem the new indices might face. A Singapore-based trader said Chinese buyers never really look at indices, because the price they are willing to pay tends to be below the index.
In fact, he said, Chinese traders have very little interest in FOB RB or FOB Newcastle prices altogether, because those prices don't necessarily reflect the trade going into China. The trader said Chinese buyers always refer to domestic coal for price levels when bidding on imported cargoes.
But even now, when domestic prices are higher than those of imported coal, Chinese demand is faltering, traders said. Bid and offers remain around $3.005.00/tonne apart because Chinese traders are aware the international waters are not short of available physical coal. "The standard coal's lost a bit of traction at moment, and clients are just looking for cheap coal that can be blended," one trader said. MV
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