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China steam coal futures set to launch in Sept, attract miners, traders

China's Zhengzhou Commodities Exchange will launch a steam coal futures contract as early as the end of the month, exchange officials said, aiming to tap growing demand for hedging tools in the world's top producer and importer of the resource.

A rollout of China's first steam coal contract will give Beijing greater influence over global coal prices, and would come as Beijing looks to gradually open up the financial sector to make the country's growth model a consumption-oriented one.

Top miners Shenhua Group, China Coal Energy Co and Inner Mongolia Yitai Coal and coal traders have indicated their interest in trading Zhengzhou's physical delivery-backed contract, sources said.

"Thermal coal is a major energy source fueling China's economy. It is also an open market with a lot of players in the supply chain, so we think that will help liquidity to grow quickly," said an exchange official involved in the contract launch.

China's total coal output was 3.66 billion tonnes in 2012, of which steam coal production stood at about 2.9 billion tonnes. Steam, or thermal, coal is used in power generation while coking coal is used in steelmaking. The country's first coking coal futures contract was launched in March on the Dalian Commodity Exchange.

Only Chinese entities and China-registered wholly foreign-owned enterprises (WFOE) will be allowed to trade the Zhengzhou contract, which will be based on coal with a calorific value of 5,500 kcal/kg and be denominated in the yuan currency.

The launch would come amid a slump in China's thermal coal market, which has seen prices persistently falling since October.

Hit by a slowing economy and oversupply, spot prices have dropped 14 percent so far this year, forcing many firms into the red and higher-cost miners to halt production.

"The futures contract will be an important hedging instrument for us to reduce risks and protect our earnings," said a company executive at China Coal, which reported a 43 percent fall in its first-half net profit.

Sources at futures brokerages, which have been reaching out to miners to offer hedging services, said Shenhua and Yitai have also signalled that they will trade the contract.

Shenhua and Yitai could not be reached immediately for comment.


ARBITRAGE OPPORTUNITIES

According to the exchange's draft contract, each lot size is 200 tonnes with a minimum price fluctuation of 0.20 yuan per tonne. Minimum trading margin requirement is set at 5 percent of the contract's value.

With spot coal prices hovering near 550 yuan ($89.87) a tonne, the minimum trading margin for each lot size would be about 8,800 yuan, a level which analysts expect would draw strong participation from individual and institutional investors.

"Given how thermal coal is closely-tied to the economy, many other institutional investors will also be keen to add coal futures to their investment portfolio," said Li Ji, a coal analyst with Galaxy Futures.

Asia-focused steam coal futures contracts are offered by exchanges in Singapore and Europe but they are settled in cash. The Zhengzhou contract may boost liquidity for Singapore Exchange's (SGX) South China coal-swap contract as investors can participate in both markets to utilize arbitrage opportunities.

"We're looking forward to the Zhengzhou futures contract. It's a way for us to grow our China coal business and we can also do arbitrage trades on SGX," said a trader at foreign bank with WFOE license.

The SGX South China swap is based on the API 8 index, which is an average price of 5,500 kcal/kg grade thermal coal delivered into Guangzhou, Guangxi and Fujian ports in South China. ($1 = 6.1199 Chinese yuan

Source: Reuters