Coking coal derivatives volumes are booming; quarterly pricing looks to be on rocky ground and spot price volatility is back, in the wake of Cyclone Debbie. TSI takes a look at a fast changing market.

1. © Copyright The Steel Index 2017 1
TSI MARKET WATCH: COKING COAL
April 3rd, 2017
Executive Summary
 SGX metallurgical coal derivatives volumes see breakthrough surge
 Q1 2017 derivatives volumes more than double Q1 2014+2015+2016 combined
 FOB PHCC derivatives market approaches 20 million tonnes per year level: 25% of physical market
 Goonyella rail system announced by Aurizon as out of action for approximately five weeks: Newlands 2-3 weeks
Coking coal derivatives market changes unfolding in lock-step with physical pricing changes
First quarter traded volumes of metallurgical coal derivatives on SGX have ballooned by more than 1,800% year-on-year,
with over 4 million tonnes being traded in the first quarter of 2017. Increasing industry take-up of indexation, coupled with
rampant price volatility, combined to push usage of derivatives to record levels in order to help alleviate price risk.
Year-on-year, the overall market has expanded more than threefold in Q1, with a total of 4,879,000 tonnes traded: SGX
market-share being 83.2% over the quarter. SGX market share has been steadily rising since October 2016, and by March
had reached 92.7%.
February and March were consecutive all-time record volume months, clearing 1.44 million and 1.74 million tonnes through
SGX AsiaClear respectively. The contract is settled against The Steel Index’s Premium Hard Coking Coal FOB Australia
index (TSI PHCC).
Trade over Q1 2017 alone is close to double that of whole year 2015 (SGX and CME) volumes, which stand at 2.4 million
tonnes, and is less than 650,000 tonnes away from overtaking full year 2016 volumes. This level of sustained trading
volume is being hailed as a breakthrough by market actors.
The introduction of a market maker on the SGX contract has spurred liquidity, as has price volatility, with a range of
US$74.3/t seen over the quarter. Coking coal prices had been largely falling over Q1, until Cyclone Debbie caused a change
in direction on Thursday of last week.
In comparison, the Chicago Mercantile Exchange’s equivalent futures trade volumes (based on Platts Premium Low Vol
FOB Australia assessments) saw 0.14 million mt transacted in March and 0.81 million mt for the first 3 months of the year;
an -11.1% fall from Q1 2016.
2017 sees met coal futures liquidity meaningfully unlocked
-
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
Q1 14 Q1 15 Q1 16 Q1 17
SGX
CME26%
growth
65%
growth
328%
growth
SGX cash-settles against TSI’s Premium Hard Coking Coal (FOB Aus) benchmark
ExchangeTonnesTraded

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Market participants view record SGX Jan-Feb-March volumes as confirmation of a liquid paper market forming, which will
inevitably bring in other market actors, further boosting liquidity.
Open interest (an indicator of overall market trading activity) in the SGX coking coal futures rose from 0.68 million mt on
February 1st, to 1 million mt on March 30th
.
For international mills, iron ore derivatives have proven their utility in de-risking price volatility, yet form an insufficient
hedge: liquid coking coal derivatives are required in order to effectively hedge the majority of bulk raw material inputs for
blast-furnace operations.
The consolidation of both the physical and paper markets around TSI PHCC has proven a crucial step, too. Physical
buyers/sellers who are looking to hedge can do so without index basis risk. This is an important point for companies
reducing ‘quarterly’ exposure and increasing index linking to consider, whether buyers or sellers. “Basket-isation”
reduces hedging efficiency.
Paper market growth a reaction to physical pricing challenges
The growth of the derivatives market is not happening in a vacuum. It is happening as a continued part of the theme of
the breakdown in the old benchmark system. The issue with the quarterly fix is that the market is split between those that
use it and those who do not. For those who do, it is effect an unhedged bilateral swap. Using derivatives to mimic and
replicate a quarterly fixed price actually offers more optionality than ‘benchmark’ pricing.
Q1 trade is only marginally short of meeting FY ‘16 volumes
-
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
2014 2015 2016 Q1 2017
SGX
CME
Q1 volumes annualise to an almost 20 million tonne per year run-rate of trading.
ExchangeTonnesTraded
Annualised volume now a significant % of physical market size
0%
5%
10%
15%
20%
25%
30%
-
50
100
150
200
250
300
Australia PHCC Global PHCC Global Met Coal
Market
Market Size
Futures
Volume
Futures % of
Physical (RHS)
MillionTonnes
Two glaring statistics are that annualised volumes are now more than 25% of the total underlying Australian Premium
Hard Coking Coal physical market size and more than 15% of total global PHCC volumes. High correlations will
encourage more non-Australian exposed players to enter as well as buyers and sellers of other grades of coking coal.
Correlations to HCC, SS and PCI are also extremely high

3. © Copyright The Steel Index 2017 3
The market is not yet in its ‘end state’, yet. An additional round of indexation is currently in the process of unfolding.
For an index benchmark to emerge, spot transaction numbers and volumes have to rise, as does the amount of index-
linkage. As index-linkage rises, increasing derivatives liquidity will only serve to assist the migration of further indexation:
allowing the market to fix prices in monthly, quarterly, half yearly or annual strips, as desired.
Derivatives market consolidating around TSI’s PHCC index, too
0
20
40
60
80
100
-
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1,800,000
2,000,000
SGX
CME
SGX Market
Share(RHS)
Tonnes %
Coking coal market evolution entering a second phase
PhysicalCokingCoal
Spot Vs “Benchmark”
Mispricing
Changes to Pricing
Mechanism
OTCSwap
Increase of spot to LT
contract
• High price volatility creating awarenessof weaknessesin Quarterly Fix
• Quarterly Fix pricing pails to reflect actual demand and supply
• Increase of counterparty credit issues
• Largest producer putting more coking coal into spot market
• Other producers moving to slightly shorter term contracts
• Many steel mills holding out for longer term contracts
• Emergenceof long term contracts: with prices linked to index
• Price hedging,using financialproducts, is on the rise
• Index Benchmark conceptbeing accepted by an increasinggportion of the market
OTC coking coal swap to
facilitate hedging and
pricing
Consolidation around a single
FOB PHCC index focuses
physical and paper markets
Increasing use of cleared coking
coal swaps mitigates credit risks
and boosts liquidity further
TSI FOB Premium Hard Coking Coal (PHCC) market evolution
None of the changes below are happeningin isolation: FOB spot transactions numbers and volumes rose, more and more tonnes are being indexedand
as a result,more and more tonnes are being traded in the derivatives market (Q1 ‘17 trebledin size). The next market stage of evolution is likely to be other
grades using the Premium Hard Coking Coal indices for indexation and hedgingpurposes.Non-Australia origin CC is already linking to TSI PHCC, FOB Aus.
TSI’s PHCC index has the most physical tonnes and most derivative market tonnes directlylinked to it.
-
2
4
6
8
10
12
Reported spot
volumes
MillioonTonnes
2014 2016
0
20
40
60
80
100
120
140
160
Reported spot
transactions
2014 2016
0
20
40
60
80
100
120
2015 2016
%ofmarkettonnes
Index-Linked Quarterly
Fixed Annual Spot
-
1
2
3
4
5
6
Q1 16 Q1 17 by Mar
30th
MillioonTonnes
CME (Platts) SGX (TSI)

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Furthermore, the absolute dollar differentials between ‘benchmark’ quarterly and even index quarterly have never been so
wide and are becoming increasingly unsustainable. The third and fourth quarters in 2016 recorded successive new all-
time records for divergences of US$40.7/t and US$66.59/t, respectively.
However, the first quarter of 2017 saw that blown completely out of the water, with the first triple digit divergence ever
recorded: US$118/t.
Both buyers and sellers are now reevaluating whether quarterly pricing remains a good fit for both parties. The increase in
derivatives market liquidity throws the question into sharper focus.
More than ore…
The conditions for further indexation appear to be very much in place. However, it is not only blast furnace operators that
are seeing a rise in possibilities for hedging. The LME’s Turkish scrap contract (settled against TSI’s Turkish scrap index)
is also seeing a ballooning of liquidity. Q1 2017 preliminary volumes are more than 3,000% up on Q1 2016 and already
exceeding full year 2016+2015 figures.
The Turkish scrap benchmark (like Australian coking coal and China-delivered iron ore) is a global price point with high
correlations from American to Asian markets. These high correlations and burgeoning liquidity throws open the gates to
worldwide electric arc furnace steelmakers (and scrap producers and traders) hedging their input costs: something which
only their blast furnace brethren previously had access to, levelling the derivatives playing field.
Quarterly pricing system under greater pressure than ever
Price divergencefrom spot indices is a major factor, as is buyer fragmentation (previously entrenchedbuyer positions are eroding),and seller legitimacy:
if all sellers do not participate in quarterly price formation, tension in inevitable.BF finished sales export competition is high, too: which is made even
more challenging when differentcountries have wildly differentcost bases.
First ‘triple digit price divergenceever recorded:Q1 2017.
-150
-100
-50
0
50
100
75
125
175
225
275
Jan13
Mar13
May13
Jul-13
Sep-13
Nov-13
Jan-14
Mar-14
May-14
Jul-14
Sep-14
Nov-14
Jan-15
Mar-15
May-15
Jul-15
Sep-15
Nov-15
Jan-16
Mar-16
May-16
Jul-16
Sep-16
Nov-16
Jan-17
Mar-17
$ Differential (RHS) Quarterly "Benchmark" TSI PHCC Quarterly
US$/t
US$/t
LME Q1 Turkish scrap trading outstrips all historic volume combined
-
100,000
200,000
300,000
400,000
500,000
600,000
Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017
LME Tonnes Traded (TSI CFR Turkey underlier)
Q1 2017 has been fruitful for ‘emerging’steelmakingraw materials derivatives contracts

5. © Copyright The Steel Index 2017 5
For further information
Please contact:
Tim Hard (Singapore) +65 6530 6413 hard@thesteelindex.com
Jing Zhi Ng (Singapore) +65 6216 1056 jz.ng@thesteelindex.com
Jarek Mlodziejewski (Singapore) +65 6530 6412 JarekM@thesteelindex.com
Note to Editors:
The Steel Index (TSI) is a leading specialist source of impartial steel, scrap, iron ore and coking coal price information based on spot market transactions.
Transaction price data is submitted confidentially to TSI on-line by companies buying and selling a range of relevant steel, iron ore, scrap, coking coal products. TSI’s index
reference prices are then calculated using transparent and verifiable procedures which are fully aligned with IOSCO principles.
TSI’s iron ore and coking coal price indices are published daily at 18:30 Singapore/Shanghai time (10:30 GMT). Steel prices for Northern Europe, Southern Europe and US HRC
are published daily at 14:00 UK time and for ASEAN HRC imports daily at 18:30 Singapore time. Scrap prices for Turkish imports are published daily at 13:30 UK time. Weekly
steel and scrap price indices are published every Monday and Friday respectively, with each price representing the average transaction price for the previous calendar week.
TSI’s indices are widely used by steel mills, miners, traders, distributors and manufacturing companies worldwide as the basis for their physical pricing arrangements. TSI’s
indices are also used as the industry standard in the settlement of ferrous financial contracts.
Singapore Exchange (SGX), LCH.Clearnet (London), CME Group (Chicago), NASDAQ OMX Clearing (Oslo) and Intercontinental Exchange (ICE) all use TSI’s iron ore index for
settling their monthly cleared iron ore financial contracts. SGX also uses TSI’s coking coal indices and hot rolled coil index for ASEAN imports to settle its coking coal and Asian
HRC steel futures and swap contracts respectively. In addition, TSI’s prices are used for the settlement of European hot rolled coil steel contracts on LCH.Clearnet and CME
Clearing Europe, the settlement of Turkish scrap imports contracts on LCH.Clearnet, LME, CME Europe and Borsa Istanbul, and a domestic US scrap contract on NASDAQ OMX
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