Indonesian coal export derivatives market continues to establish itself, setting new 'largest trade' records and seeing a full diversity of the supply chain using the ICI4 futures tool.

1. 5/7/2018 Argus Media: ICI4 FOB Indonesia 4,200kc GAR Page 1
6
40
42
44
46
48
50
52
ICI4, 4,200 GAR
Sellers hold on, whilst buyers enjoy the ride
Copyright © 2017 Argus Media Ltd. All rights reserved.
US$/t
CME ICI4 thermal coal derivatives:
market establishing further
 FOB Indonesia derivatives market size rises 20% m-on-m
 Largest clip size rises 33% to 20kt. User base trader-centric at launch…
 …coal producers and consumers now also using the contract.
 Liquidity centered around CME/ICI4-linked users
Background
Downward pressure on prices has gripped the market since February, when Chinese demand was
throttled back by controls imposed on coal imports in Southern ports: either outright banning of vessel
unloading or controlling customs clearance more closely, in a move widely seen to be aimed at bolstering
the competitiveness of domestically produced coal.
Preliminary import data showed effects were rapid, with volumes retreating immediately as a result of
coastal power plants encountering import difficulties, or a concern that greater restrictions could be
imposed. That Chinese switch to domestic material, coupled with a retreat of seasonal (winter) demand
put thermal export prices under pressure, ICI4 included.
Volatility a Spur and reminder
The physical Indonesian thermal coal export market, including 4,200kc coal, has been on a roller coaster
since peaking on February 23
rd
at US$51.02/t The combined seasonal and policy effects saw prices
plunge -19.5% by April 20
th
, before clawing back a 3.2% rise by Friday, to US$42.57/t. This was
supported by Chinese demand for prompt cargoes (imports to end-users were less affected), which in
turn brought Indian buyers back to the market, amid concerns that Indonesian prices could rise further,
after a rise in prices for substitutable coals from South Africa.
Price moves of up to a fifth underscore
the need for instruments to hedge
volatility: that necessity cuts both ways.
2017 saw a large 24.9% jump in H1
and 2018 saw an early year price rise
of 16.6% from November’s trough.
Since May 2017, there have been
three separate periods of rising prices,
each taking prices higher than the last.
Recent volatility serves as a timely
reminder to producers that the market
contains downside, as well as upside.
Margins in spot or index-linked markets
are not “locked in” and the
‘environment’ can change on a dime
via weather, policy or other unforeseen
factors.

2. 5/7/2018 Argus Media: ICI4 FOB Indonesia 4,200kc GAR page 2
April, 2018 CME SGX
Average Clip Size 7,857 3,833
Min Trade Size 5,000 1,000
Max trade Size 20,000 10,000
Market Share 83% 17%
3
0
20
40
60
80
100
120
0
5,000
10,000
15,000
20,000
25,000
6/4/2018
9/4/2018
10/4/2018
11/4/2018
11/4/2018
13/4/2018
16/4/2018
17/4/2018
18/4/2018
18/4/2018
18/4/2018
20/4/2018
20/4/18
23/4/2018
25/4/2018
27/4/2018
30/4/18
2/5/2018
2/5/2018
4/5/2018
CME SGX CME Market Share (RHS)
CME liquidity rising, along with trade size
Copyright © 2017 Argus Media Ltd. All rights reserved.
%
tonnes
50kt: the magic number
Traded size in the Indonesian thermal coal derivatives market has been growing every month since
launch, with April marking the first 20,000 tonne trade made in a single trade. The ICI4 contract was
launched by the CME in February 2018, clearing 30,000 tonnes in its first full month of availability. The
first four trading days of May has seen 40,000 tonnes traded, by contrast.
With a greater diversity of participants, the contract is now drawing a second wave of interest from
utilities. Whilst a full cargo was reported to have been hedged in April; that was achieved over a number
of trades. Having seen trade size at CME rise from 10, to 15, to 20 thousand tonnes in consecutive
months, utilities are reporting themselves eager to see full Handy/Supramax cargo sizes (50kt) able to be
hedged in a single transaction, before stepping in.
If history from other dry
bulk markets is any
guide, the fastest way to
increase liquidity is to
post a bid or offer in
‘size’ and let the brokers
(Evolution Markets, GFI,
ICAP, Tullet Prebon)
work their magic in
connecting
counterparties.
With or without new
players offering jumbo
sizes, the size of trades
is rising. April was 36%
larger on average than
March and with 40kt has
been done already in 3
trades in May, average
trade is 51% larger than
April, month-to-date.
With such volatility in the market and margins at both ends
of the supply chain vulnerable to the whims of factors
beyond their direct control, demand for price risk
management tools is unsurprising.
Nor is volatility limited to the physical market – May was
being traded at a wide variety of prices from US$39.80 to
as high as US$43.25/t.
More recent paper trades seem to expect a levelling-out of spot-market prices for the balance of May.
The last done trade was at US$42.75 – only four cents below the last print for the physical market. The
forward curve today has June pegged flat at US$42.75, July at US$42 and August at US$41.25/t, offering
some relief from the heady volatility of recent weeks, for those locking prices in.
CME’s ICI4 contract is cash-settled against the monthly average of the ICI4 index. ICI4, jointly published
by Argus Media and PT Coalindo Energy is the most widely referenced index for physical trade.
Tim Hard tim.hard@argusmedia.com