The volume of derivatives trading for Indonesian thermal coal on the CME exchange increased in the second month, with trading of a full vessel's worth of coal for the first time. Physical coal prices have declined for six straight weeks but the most recent drop was the shallowest. As derivatives trading provides an option for price protection, volumes on the CME contract are expected to continue growing to meet increased demand for risk management.

1. 4/9/2018 Argus Media: ICI4 FOB Indonesia 4,200kc GAR Page 1
Exchange-traded ICI4 thermal coal
volumes pick up in month 2, at CME.
 CME FOB Indonesia 4,200kc GAR volume swells 266% month-on-month.
 First full vessel’s worth of coal hedged on CME (Handymax).
 Max CME clip size (volume traded) increases 50% month-on-month to 15kt.
 Open interest rising month-on-month.
 Physical prices pressured: six straight weeks of declines recorded.
Background
FOB Indonesian 4,200kc GAR thermal coal export prices have entered a period of downward pressure,
with prices declining for six weeks, back-to-back. By April 6
th
, prices had declined -18.8% from their
March 1
st
US$51.02/t level to US$41.42/t.
Demand from the two main buyers, China and India had remained weak, with an increase in purchase
enquiries not translating into buying. There is optimism voiced in some quarters, however, that softer
prices and reduced inventories may entice buyers back.
Trading
The increase in price volatility has perhaps unsurprisingly spurred activity in the derivatives market. CME
launched the ICI4 contract in February this year – which is cash-settled against the monthly average of
the ICI4 index produced by Argus and Coal Indo.
Market participants had been able to conduct test-trades prior to the recent bout in downward price
pressure, with brokers reporting more companies signing up and readying themselves to trade.
15
FOB Indonesia thermal coal prices take a tumble
Copyright © 2017 Argus Media Ltd. All rights reserved.
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ICI4 4,200kc GAR
US$/t

2. 4/9/2018 Argus Media page 2
Prior to the launch of the CME contract, there was no way for sellers or buyers to protect themselves
against either a fall, or rise in prices, for the most traded coal grade, from the world’s largest exporter.
With a derivatives product now in place, companies are able to do exactly that. 17 trades were concluded
over March as people became more comfortable with the product. Trading has been concentrated in the
nearby months, with the maximum traded size rising from 10,000 tonnes to 15,000 tonnes. One market
actor reported that they have now completed the hedging of their first full Supramax vessel’s worth of
Indonesian coal. Whilst this was concluded in multiple trades, rather than in a single transaction, they look
forward to a future where they can easily hedge a vessel’s worth of coal in a single trade.
The diversity of buyers and end-users looking seriously at the CME’s ICI4 contract will hasten the arrival
of that future state. ICI4 has by far the most market exposure (tonnes linked to it) of any FOB Indonesia
thermal coal index. CME has already seen trade in April, too, getting this month underway.
16
ICI4 derivatives trading picks up
Copyright © 2017 Argus Media Ltd. All rights reserved.
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0
5,000
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atCME(tonnes)
ICI4 price (RHS)
17
Month 2 builds on February’s launch month volumes
Copyright © 2017 Argus Media Ltd. All rights reserved.
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February March

3. 4/9/2018 Argus Media page 3
Going Forward
Market actors have been vocal in calling for a price risk management product for some time, in the face of
sharply elevated volatility. With exchange-traded volumes now increasing, volumes can be expected to
increase as more actors are drawn to the increasing liquidity seen on the CME contract.
Prices are now at their lowest since July 21
st
2017 and some physical market actors note that the most
recent price decline was the shallowest of the recent six. Broker curves are flattening out, no longer in
sharp backwardation (i.e. no longer pricing in precipitous declines).
Indian pre-monsoon demand is now heard to be picking up, in contrast to a weaker Chinese demand
outlook. Physical market interest is heard for both 4,200kc GAR and higher calorific coal. Buyers and
sellers of multiple calorific grades are able to use the ICI4 derivatives contract, as explored in a prior
article, due to high correlations between the grades.
Europe: Freddie Staermose freddie.staermose@argusmedia.com
Asia: Tim Hard tim.hard@argusmedia.com
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ICI 4 M-on-M % change
Volatility picked up sharply since H2, 2016
Copyright © 2017 Argus Media Ltd. All rights reserved.
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-3.5
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0
02 Mar 2018 09 Mar 2018 16 Mar 2018 23 Mar 2018 30 Mar 2018 06 Apr 2018
ICI4 Weekly Price Decline
Recent ICI4 price decline was the lowest
Copyright © 2017 Argus Media Ltd. All rights reserved.
US$/t