SG IRON ORE WEEK: Mature coking coal market vital for iron ore derivatives

A healthy coking coal derivatives market will generate more liquidity for its iron ore counterpart, according to a senior Goldman Sachs executive.

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Trading in the former – a key complementary input for steelmaking – would act as a catalyst for the latter, Phillip Killicoat, Goldman Sachs Commodities’ executive director, told delegates during a panel discussion at the 2015 Singapore Iron Ore Week conference last week.

However, the coking coal derivatives contract in the Singapore Exchange (SGX) has not been as “successful” as that for iron ore since its launch late last year, Thomson Reuters Asia commodities & energy columnist Clyde Russell, who moderated the session, pointed out.

SGX associate director Adrian Lunt attributed the under-developed liquidity of the contract to the different stage of development in the underlying physical coking coal market pricing mechanism.

“Coking coal is kind of like iron ore five years ago,” Lunt said.

While iron ore pricing has been predominantly index-linked for a while now, coking coal is only beginning the process of transitioning from quarterly term contracts to spot and index-linked pricing, he noted.

But as the spot market grows and indexation in physical contracts becomes more widespread, the demand for its derivatives will also rise, he concluded.

Generally, there is optimism about the outlook of coking coal derivatives, due to their linkage with iron ore, according to Mark Lyons, Citi’s global head of iron ore & steel.

However, until there is a key market participant on the physical side chasing the derivatives product, it will be difficult to find the momentum needed to sustain it.

In the meantime, Citi will continue to focus on the 62% Fe iron ore contract until there are more developments in the indexation of coking coal prices, Lyons said.

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