No future(s): Asian financial coal trading dries up as
Noble declines, Glencore rules
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[October 23, 2017]
By Henning Gloystein and Vera Eckert
SINGAPORE/FRANKFURT (Reuters) - Financial
trading of thermal coal has virtually ceased in Asia as a result of the
woes at one major trading house and the growing dominance of another,
despite the region being by far the world's biggest consumer of the
Asia gobbles up some 70 percent of all coal used for power generation,
and the unprecedented demise of its futures market poses significant
risks for utilities in particular.
With coal prices rising sharply this year, power generators would
usually hedge or protect themselves by taking positions in related
"With Asia's futures pretty much gone, that greatly increases our risk
for supplies in that region. It may mean that we source less from there
going forward," said a risk manager with a big European utility,
declining to be named as he was not authorized to speak publicly about
Data from several exchanges shows that since its heyday in 2015, Asia
coal futures trading activity has declined by over 90 percent.
Two senior coal brokers and six senior traders at merchant houses,
utilities and miners spoken to by Reuters pointed to the shrinking role
of Singapore-listed commodity merchant Noble Group <NOBG.SI> as the
single most important factor in the decline of Asian coal futures
Noble has sold-off assets and slashed trading operations following
allegations from Iceberg Research in 2015 that it had overstated its
assets by billions of dollars, sending its share price tumbling.
"Noble is a massive loss to the market. Its troubles seriously dented
liquidity," one merchant trader said.
Noble declined to comment for this article, but said in a letter to
Singapore Exchange in May "very thin trading liquidity" in hedging
instruments had contributed to its first quarter losses.
Many traders also see a link between declining Asian coal futures and
the growing dominance of a single company in supplying physical Asian
Swiss-based, London-listed Glencore <GLEN.L> is the world's biggest
producer of thermal coal, exporting well over 50 million tonnes from
Australia alone in 2016, a quarter of the country's shipments. Physical
Newcastle coal prices, which act as Asia's key futures benchmark, have
jumped from around $70 to over $100 per tonne this year.
Glencore, which owns a dozen thermal coal mines in Australia, declined
to comment. But market participants say the firm is not as active in
coal futures trading as many of its peers, instead preferring bilateral
supply deals with customers.
"Doubts over deliberate intervention on the supply side for Australian
coal linger, which kills any enthusiasm to trade the (financial)
product," said Georgi Slavov, head of research at commodity brokerage
Glencore's control and knowledge of actual coal output in Australia and
the influence this has on derivatives contracts means it is difficult
for outsiders to predict price movements, scaring off traders.
"If you don't know what Glencore's mines are up to, it's very hard to
trade Australian coal futures," said one trader with a large European
utility. "It's not Glencore's wrongdoing, just the way it is."
[to top of second column]
Workers unload coal at a
storage site along a railway station in Hefei, Anhui province
October 27, 2009. REUTERS/Jianan Yu/File Photo
Glencore has previously said it is as vulnerable as any other market participant
to commodity price swings, and in the past has also used derivatives to hedge
its own production.
The decline in Asian coal futures volumes stands in stark contrast to booming
oil and natural gas futures.
The amount traded in front-month Australian coal futures on the Intercontinental
Exchange <ICE.N> has collapsed from a high of over 1.6 million tonnes in
September 2014 to under 290,000 tonnes this September.
Data from rival CME Group shows that open interest, which describes the number
of open positions, of its Asian coal futures as fallen from around 2.7 million
tonnes in early 2015 to just 65,000 in August this year, with Indonesian and
Chinese futures totally vanishing.
"In that sort of environment, utilities stop hedging. It's too risky," said a
senior coal trader with a major commodity merchant, requesting anonymity.
Major European utilities that source international coal include Germany's RWE <RWEG.DE>,
Uniper <UN01.DE> and ENBW <EBKG.DE>, Italy's ENEL <ENEI.MI>, Sweden's Vattenfall,
as well as Switzerland's Axpo Holding.
"All coal derivatives markets have shrunken this year… as a result of lower
options trading, and due to some counter parties that have become less active,"
said Joachim Hall, cross commodity trader at RWE Supply & Trading, the trading
arm of Germany's biggest power supplier.
"Europe's API2 (coal futures market) remains liquid, but it does not move in
parallel with physical coal we buy in Asia," Hall said.
VOLUMES DOWN, RISK UP
Noble's troubles and Glencore's strength are not the only reasons for the
Unlike many other markets, no single exchange has attracted enough liquidity to
Instead bourses like ICE, CME and others including China's Zhengzhou Commodity
Exchange (ZCE), Singapore Exchange <SGXL.SI> or the European Energy Exchange
<T3PA.DE> offer contracts with varying delivery options, differing underlying
coal qualities, and in various currencies.
Chinese exchanges like ZCE have grown somewhat, but months can still pass
without trades, and Chinese coal futures are problematic for international
"There has been quite a bit of turmoil in the coal trading business," said Ben
Tait, analyst at British energy consultancy Prospex Research. "China is the
driver. Its coal policy shifts can make prices soar or plunge. This has led to
some big trading losses."
Yet not everybody sees only doom and gloom.
RWE's Hall said he hoped liquidity would gradually improve again over time,
something Pat Markey, managing director of Singapore's Sierra Vista Resources,
"The Asian market is poised for growth in financial trading, but this will take
time as the Asian market is quite fragmented," Markey said.
(Editing by Lincoln Feast)
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