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Newcastle coal market needs transparency to gain credibility

Should there be a debate about the efficiency and transparency of Asian's main thermal coal price indicator, the Newcastle index?

The Newcastle weekly index, which underpins physical and paper trading, has jumped around this year, gaining almost 21 percent between a six-year low on Jan. 9 and a 2015 peak of $73.70 a ton on Feb. 27.

The index, which tracks trades and prices at Australia's Newcastle port, the world's largest thermal coal export harbor, has since given up much of its gains to end at $65.61 a ton in the week ended March 13.

The problem with the price swings is that there was precious little news or fundamental data to justify the movements, resulting in the belief that the market was being pushed higher by trading activity.

Traders and other industry participants said the index was boosted by buying from a major coal player, most likely as part of efforts to secure a more favorable base price for annual contract negotiations with Japanese buyers. Reuters could not determine which company was behind specific trades.

These talks take place early each year and set the price that Japanese utilities and traders will pay for contracted coal supplies for the fiscal year that starts in April.

Let's be clear about some issues involved in these talks.

There is no suggestion of any illegal behavior by any party, or of any wrongdoing by globalCOAL, the organization that calculates the Newcastle index.

The index is compiled from actual trades and from bids and offers seen on globalCOAL's trading platform, and the methodology is regulated by the UK's Financial Conduct Authority.

However, given that many of the trades that are counted toward the index are small-sized part cargoes of 25,000 tonnes, it wouldn't take too much for a determined buyer to snap up most of the available spot coal available, and thus drive the price higher.

Again, this wouldn't be illegal behavior, but it does call into question the overall transparency and efficiency of the market.

PRICE DISCREPANCIES

The sharp moves in the Newcastle index were mirrored in the ICE contracts that are settled against the index.

These futures jumped as much as 31 percent between the 2015 low in early January and the closing high of $80.50 a ton on Feb. 27.

They have subsequently declined 16 percent to Tuesday's close of $67.55 a ton.

The movements in the weekly Newcastle index and the daily futures weren't mirrored in other grades of coal traded in Asia.

The Singapore Exchange has a contract based on the Argus/McCloskey API 5 index, which is for Newcastle coal but with a heating value of 5,500 kcal/kg, rather than the 6,000 kcal/kg used in the Newcastle index.

Between its 2015 low on Jan. 15 and its peak on Feb. 16, the contract gained 4.7 percent, or less than a quarter of the rise in the Newcastle index.

While they cover different grades of coal, it seems highly unlikely that there was such a surge in demand for 6,000 kcal/kg supplies over the 5,500 kcal/kg grade.

The ICE contract for Indonesian sub-bituminous coal, another benchmark Asian grade, rose 18 percent between Jan. 9 and Feb. 6, before surrendering all its gains by March 6.

Market participants are well aware there are often unusual price moves around the time of contract talks with the Japanese, but being cognizant of the practice and thinking it's a good thing are altogether different.

Having a market where a few major players can unduly influence the price to suit their own short-term needs is likely to discourage the market from growing beyond its current participants.

Several steps could be taken to improve the way coal is traded in order to expand the base of investors and participants, something that you would expect to appeal to an industry suffering from weak prices, structural oversupply and a poor public image.

The identity of buyers and sellers of Newcastle spot cargoes could be made public by globalCOAL.

Ideally, no company should do in private what it wouldn't do in public, and this is currently the situation in Asian coal markets.

source:http://www.reuters.com