Tsi market watch metallurgical coal 29th january 2015

TSI Premium Coking Coal Indices
Market Developments
January 29th, 2015
Tim Hard, TSI

Executive Summary
• Coking coal markets continue to evolve:
- Pivot from CFR reference to FOB reference for those outside China
- More index-linked contracts anticipated to be used in 2015
- Deeper engagement between industry and price reporting agencies
• Electronic trading platform for coking coal due to open in 2015, providing
further spot market ‘visibility’, liquidity and third channel to market.
• Coking coal derivative market activity rounds off its best year yet in 2014.
Traders and mills who have not used them to date anticipate beginning to
engage derivatives to manage risk in 2015.
• Inter-brand valuation ‘norms’ are disrupted in FOB markets, whilst CFR
markets are unaffected by the same coking coal quality needs.
• Hangover from Chinese policy announcements and steel overcapacity, as
well as freight and currency pair volatility may be coming to an end, or at
least have seen their biggest effects/movements.

- TSI (The Steel Index) Introduction
- Coking coal markets H2 2014
- Coking coal markets now
- Coking coal developments in H1 2015
- Derivatives market activity
- Valuing coal properties, not relativities
- Index methodology
Agenda

• TSI’s iron ore benchmark is used to settle over
99.9% of all cash-settled iron ore futures/
derivatives trading. Over 1 billion tonnes has
traded to date, with Singapore Exchange, CME
Group, LCH.Clearnet , ICE and NASDAQ OMX all
listing contracts using TSI’s price.
• TSI’s HRC steel prices are regional benchmarks in
North & South Europe for physical users and
‘paper’ (hedging), as well as ASEAN.
• TSI’s scrap index for Turkish imports is the pre-
eminent benchmark for physical users and
derivatives in the most-watched scrap market.
• TSI’s coking coal numbers are offered by miners
and traders for physical index-linking. They are also
offered by Singapore Exchange (SGX) for hedging.
Who are The Steel Index (TSI)?

Iron Ore
Coking
Coal
Scrap
Steel
Dedicated pricing service, solely for
international ferrous markets. Founded in
2006, spearheading frequent pricing in the
sector.
Pioneer of data-driven approaches to index
production. We use actual physical spot
market transactions to produce indices.
Proponents of a methodology designed to
maximise participation, minimise
opportunities for manipulation and remove
subjectivity from the process.
Non-Disclosure Agreements signed with
index participants, enabling price data to be
reported confidentially with no fear of
disclosure to the wider market.
Acquired in 2011, TSI continues to operate
as an independent unit within Platts.
What is TSI?

TSI 62% Fe and 58% Fe Iron Ore Fines, CFR China
TSI Turkish HMS #1&2 80:20 Ferrous Scrap, CFR Turkey
TSI North European HRC Steel, TSI ASEAN HRC, CFR Singapore
TSI Premium Hard Coking Coal, FOB Australia and CFR China
Buyers & sellers use TSI to negotiate spot sales & index-link supply agreements.
Those same buyers and sellers can off lay price risk via derivatives, so TSI’s prices are
also widely used by exchanges as the settlement for ferrous derivative contracts.
How is TSI used?

TSI
Indices
Physical
e-trading
platforms
Derivatives
Companies
involved in
physical
spot trade
Long-term
physical
contracts
TSI has over
600 companies
participating as
data providers
TSI: interacting with ferrous markets
Floating deals basis TSI
available on platforms.
TSI used in non-spot (long-
term) floating deals.
SPOT DATA
SPOT DATA
 TSI uses physical market
transactions to produce “daily
spot value” reflective prices.
 Mathematical methodology,
devised to increase
participation and limit
opportunity for manipulation.
 TSI indices suitable for settling
“floating” physical deals as
well as the underlier for
derivatives.
 Using the same index for
physical and financial
contracts minimises basis risk.

H2 2014: Market Summary
Happy New Year and welcome to 2015! A brief summary of events over H2 2014:
• Coking coal producers continue to attempt to de-leverage China spot exposure
wherever possible (albeit in an environment encouraging maximum production).
• Oversupply of some low-vol premium coals leads to a failure to achieve
theoretical value. Largely due to miners attempting to amortise costs over more
tons, combined with a restrained demand environment.
• Meanwhile, a supply pinch on some mid-vol premium coal led to a blow out on
value: overachievement (vs theoretical value) of coal quality.
• FOB liquidity continues to rise. CFR markets clam up in Q4.
• Newer blends/brands began to achieve
transaction levels closer to theoretical value
i.e. ‘unfamiliarity discounts’ have dissipated
as users got familiar with the products.
• Non-Australian origin metallurgical coals
slated to link to FOB Aus – recognising
competition basis with that pricing point

H2 2014: Market Summary
• Revolt by ROW against CFR pricing basis
underway. Concerted shift to pricing basis
‘true’ FOB indices, rather than netbacks.
• Traders offering cargoes against TSI PHCC
(FOB Aus) to JKT, EU, India.
• Chinese traders mull using TSI ‘mid-vol’
indices, making a distinction with indices
reflecting low-vol coking coals.
• Q3 and Q4 shaped up to be different
animals as a series of policy announcements
clouded the outlook.
• Chinese blend appetite decreased, but ROW
snapped them up.
• Continued feeling of “bumping along the
bottom”: post Q1 ‘14, trading conducted in
an unusually narrow band.

Chinese ‘spot’ activity stumbled…
Q3 Q4
Mid-Vol spot transactions Low Vol spot transactions
Whether the import tax, CIQ testing, or tight credit and year-end repayments,
China’s import doors clanged shut to spot in the fourth quarter of 2014, with a
notable slump in numbers of spot transactions seen.
Spot CFR sales

..whilst (reduced) appetites changed
July August September October November December
Low-Vol Transactions Mid-Vol Transactions
Q4 CFR imports spot market activity collapse not a one-off event – but a series of
sustained low volume months through to year end.
Notable, too, is the huge appetite reduction for mid-vol/blends, long a driver of
liquidity. Or perhaps, they are simply able to command higher valuations elsewhere..?
Nor did the more intuitively ‘sticky’
demand for low-vol material escape
unscathed. Many have been perplexed by
the relative collapse in demand for these
types of coals.
Spot CFR sales

Total import volumes shrank in 2014..
Overall import volumes of all grades of coking coal into
China took a leg downwards in 2014: down by (17.5%)
year-on-year.
These volumes are all coking coal imports from premium
to PCI, sourced by spot and longer-term arrangements.
(3,000,000)
(2,500,000)
(2,000,000)
(1,500,000)
(1,000,000)
(500,000)
-
500,000
1,000,000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2014 vs 2013 import volumes y-on-y
Coking coal imports (t)
2012 53,549,230
2013 75,421,167
2014 62,248,163
Sources: China customs

…whilst exports ramped up.
As coking coal import volumes retreat, coking coal exports are surging, whilst
finished steel export volumes from China continue to rise.
0
5
10
Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14
Finished Chinese steel exports
-
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
900,000
1,000,000
January February March April May June July August September October November December
Chinese Coke Exports
tonnes
20142013
Chinese stimulus spurs domestic steel demand
Flagging domestic demand spurs exports
Milliontonnes
Permonth
Sources: China customs

FOB spot activity remains strong
Whilst the numbers of CFR spot transactions fell back at the end of 2014, spot
activity on an FOB basis continued to rise.
January activity levels maintain that trend, with a good variety of transactions
being reported.
Q3 Q4
FOB CFR
Number of spot transactions

CFR prices at a historic low
US$/t
0
2
4
6
8
10
12
14
16
18
20
110
120
130
140
150
160
170
180
190
Spread (RHS) TSI CFR China TSI Fob Aus
Spot activity levels aside, whether FOB or CFR, spot prices have continued their
downward trend, with Chinese spot prices now at historic lows.
That said, FOB (Australia-loading) prices have stood up more firmly than
transaction levels in China (hence the low spread). Indeed, FOB prices have
actually risen from the low seen in October.
US$/t

110
115
120
125
130
135
Low Vol Mid Vol
Jan
‘14
Feb
‘14
Mar
‘14
Apr
‘14
May
‘14
Jun
‘14
Jul
‘14
Aug
‘14
Sep
‘14
Oct
‘14
Nov
‘14
Dec
‘14
Jan
‘15
Falling Market
Rising Market
FOB blue moon event?
Inversion of low-vol and mid-vol prices! Tongues are wagging, though
the event is far from unprecedented in FOB markets. Below points
are statistical means of spot data from each segment for the month.
Low-vol/
mid-vol
spread
highly
variable.

Freight’s fall a boon to buyers
Recent fallbacks in the price of freight have been quite stark, coming not off the
back of any industry-specific dearth of demand, but a step-change in port
efficiency (and high vessel supply).
A fourfold (or more) increase in discharge speed has increased ship availability
hugely, even as overall seaborne trade continues to rise 3-4% y-on-y.
6
8
10
12
14
16
18
2014-01-02
2014-01-14
2014-01-24
2014-02-06
2014-02-18
2014-02-28
2014-03-12
2014-03-25
2014-04-07
2014-04-21
2014-05-05
2014-05-16
2014-05-28
2014-06-09
2014-06-19
2014-07-01
2014-07-11
2014-07-23
2014-08-05
2014-08-15
2014-08-27
2014-09-08
2014-09-19
2014-10-01
2014-10-14
2014-10-27
2014-11-06
2014-11-18
2014-11-28
2014-12-10
2014-12-22
2015-01-05
2015-01-15
China Cape China Panamax India Panamax
Sources: Shanghai Shipping exchange

Aussie $ weakness helpful?
Whilst AUD$ weakness vs the US$ has been seen as being positive for producers,
giving more ‘wriggle room’, uncertainty about direction has perhaps been unhelpful.
Each 0.1 drop in the currency pair saves close to $100,000 on a Handymax quantity,
giving another reason to hold off buying, until some stability is seen.
0.8
0.82
0.84
0.86
0.88
0.9
0.92
0.94
AUD-USD
Sources: Xe.com

Brands & blends: temporary fade?
H2 also saw a radical improvement in the performance of blended coals, relative
to branded coals.
That spread tightening has since ebbed as mid-vol brand price ‘outperformance’
has picked up. The gap they were previously ‘closing’ on mid-vols has widened
as some brands have seen spot appetite soar.
-10
-8
-6
-4
-2
0
Jul '14 Aug '14 Sep '14 Oct '14 Nov '14 Dec '14 Jan '15
Mid-vol brand/blend spread
Mean Brand-Blend Spread

Brands & blends: rising attainment
The outperformance of some mid-vol prices disguises how well the blends are
actually performing.
Blends continue to improve on achieved valuations, relative to ‘theoretical’ value
(the theoretical value comprising the premia/discounts for each element of the
material).
Jun '14 Jul '14 Aug '14 Sep '14 Oct '14 Nov '14 Dec '14 Jan '15
Mean Theoretical value/Blend Spread
Mean Brand-Blend Spread Linear (Mean Brand-Blend Spread)
Theoretical value

Recent market engagement
TSI has just completed extensive face-to-
face market engagement in key coking
coal demand, production and trading
centres over the last 6 weeks.
Key takeaways were:
1) Producers & traders now offer physical
cargoes of premium hard coking coal,
basis TSI’s FOB PHCC index.
2) HCC indices already being used in
index-linked supply contracts
3) TSI’s CFR China indices see physical
interest growing: both our low-vol and
recently launched mid-vol JM25 indices.
4) All users expressed a clear desire to see
‘straight’ TSI-linkage, not ‘baskets’ of
indices, so that they can lay-off price
risk without basis risk.

Deal transparency up,
market continues to evolve
1) Market has become increasingly
transparent over the last 24 months.
2) Trend will continue with the first
electronic trading platform rolling out in
Q2 (GlobalCoal), which will be visible to
participants, as well as price reporting
agencies. This creates a 3rd channel after
producer-end user, trader-end user,
further increasing spot liquidity.
3) Second wave of index-linked physical deals set to take place over 2015, as sellers
and buyers have become more comfortable with indices, and producers and end-
users continue to see less value in continual ‘high-frequency’ bilateral negotiation.
4) Derivatives market will evolve in lock-step with physical indexing.
5) More metallurgical coal production is slated to be coming on-line over the course
of this year from a number of producers. Wild card…could Chinese officials remove
the tax on metallurgical coal?

0
5
10
15
20
25
30
35
40
45
50
0
100000
200000
300000
400000
500000
600000
700000
800000
900000
1000000
Aug-14 Sep-14 Oct-14 Nov-14 Dec-14
CME
SGX share of total volumes
%
Volumes
SGX
Derivatives trade picking up
Cleared swaps and futures tonnages growing: SGX launched in August 2014.
SGX’s recently launched coking coal indices have seen +47% more trading in the first
5 months than total global derivatives volumes for 2011, 2012 and 2013 combined.

SGX curve anticipates price recovery
Albeit, a modest one…
Whilst the back three quarters of 2014 were marked by a lack of volatility, it
seems unlikely that a less than $4 variation in price can be expected over H1
(which is what is currently priced into the SGX forward curve).
100
105
110
115
120
125
130
135
140
CFR China FOB Aus

Normalisation
• Translating all relevant data submitted to a common basis (TSI’s
reference product specification).
Statistical
Analysis
• Running TSI’s algorithm to remove outliers and inconsistent data
points.
Checks &
Balances
• Minimising opportunities for manipulation/data bias.
Spot Market Transaction Data Collection and Screening
Volume-weighted Average Daily Price Calculation
TSI’s methodology (all products)
TSI employs one approach to all ferrous markets covered.

Valuing Coals, from the bottom up
TSI’s approach to coking coal markets is to value the coal based on it’s properties. For
each factor (ash, volatile matter, CSR etc) we assign a value-in-use figure, based on
isolating that variable and performing regressions on spot data history.
The relative value of one brand of coal versus another is immaterial in the calculation
process: market participants attribute their own value during the spot-buying process.
Premium Δ %
-0.955%
-0.775%
>23.5 -0.500%
<20 -1.185%
TM From Standard
Rvmax 0.500%
Fluidity 1.300%
FSI 0.600%
CSR 0.850%
Total Dilatation 0.010%
Vitrinite 0.080%
Ash
VM
Price Quality Adjustment
Base FOB price per 1 unit
change
-0.900%
-0.775%
>23.5 -0.500%
<20 -1.385%
From Standard
0.150%
Y-index 0.050%
CSR 0.500%
Base CFR price per 1 unit
change Premium Δ %
Ash
TM
G-index
VM(20-23.5)
FOB CFR

Noting variance from specification
CSR Volatile Matter Vitrinite Fluidity Ash
TSI Spec 71 21 68 600 10
Coking Coal A 69 18 59 800 10
Coking Coal B 67 19 63 1100 10.5
Coking Coal C 72 24 72 510 11
TSI Spec 71 21 68 600 10
Coking Coal A +2 +3 +9 -200 0
Coking Coal B +4 +2 +5 -500 -0.5
Coking Coal C -1 -3 -4 +90 -1
TSI logs the property differentials between each coking coal product for which spot
data is received and the reference specification of TSI’s coking coal products…

Applying VIU values (normalising)
TSI Spec 71 21 68 600 10
Coking Coal A +2 +3 +9 -200 0
Coking Coal B +4 +2 +5 -500 -0.5
Coking Coal C -1 -3 -4 +90 -1
…Then applies the VIU formula to those differentials.
Premium Δ %
-0.955%
-0.775%
>23.5 -0.500%
<20 -1.185%
TM From Standard
Rvmax 0.500%
Fluidity 1.300%
FSI 0.600%
CSR 0.850%
Total Dilatation 0.010%
Vitrinite 0.080%
Ash
VM
Base FOB price per 1 unit
change
CSR formula for coking coal A is spot value of coal (i.e. $114) x adjustment factor (.85) x
TSI spec difference. In this example, the poorer strength coking coal A is being uprated
to TSI’s 71CSR specification. The process is repeated for each characteristic of the coal….
IE ash formula for coking coal A is spot value of coal (i.e. $114) x adjustment factor
(-0.955) x TSI spec difference. In this example, no adjustment is made.
Some adjustments (i.e. Volatile Matter) have graduated adjustments, rather than flat.
These normalised data points then go into the statistical analysis process.

Trades normalising to
LESS than one standard
deviation from the
mean and the lowest
price are excluded
Data set
included in index
calculation
proceeds to
volume-
weighting stage.
Trades normalising to
MORE than one standard
deviation from the mean
and the highest price are
excluded
NB: Data submissions
exhibiting inexplicable
trends or inconsistencies
are also excluded, as are
those falling outside of TSI’s
published spec (i.e. outside
loading windows, too low a
volume, etc.)
- 1 Standard Dev. + 1 Standard Dev.
Statistical analysis in practise

A volume-weighted average is calculated from
screened, normalised data conforming to TSI’s
stated conditions:
• Data points include transactions and firm bids
and offers.
• Bid/Offer data is given a reduced 10%
weighting (i,.e. a 75kt Handymax bid would see
its volume automatically reduced to 7,500
tonnes). The rationale for weight reduction is
our belief in the primacy of transaction data.
• Transaction data gets full weighting (a 75kt
spot trade gets 75kt weighting in the sheet.
• Checks and balances employed: no single data
provider can comprise more than 40% of the
volume.
• Volume-weighted average produced.
Screened, normalised
transactions
TSI published price
Volume-weighting in practice
TSI statistical and
checks and balances
filter

VIU remains the way to value coals
Buyers are selectively targeting coal properties – disrupting the normal ‘order’.
Supply-tightness for high fluidity coals via Moranbah North’s scarcity has been
positive for valuations of Oaky(s), Goonyella and Illawarra straight coals, as well as
some blends. This is only affecting FOB markets.
Accounting for those valuations through VIU remains explicable and predictable….
Low-vol/
mid-vol
spread
highly
variable.
110
115
120
125
130
135
Jan
'14
Feb
'14
Mar
'14
Apr
'14
May
'14
Jun
'14
Jul
'14
Aug
'14
Sep
'14
Oct
'14
Nov
'14
Dec
'14
Jan
'15
Low Vol Mid Vol

110
115
120
125
130
135
Low Vol Mid Vol
Jan
‘14
Feb
‘14
Mar
‘14
Apr
‘14
May
‘14
Jun
‘14
Jul
‘14
Aug
‘14
Sep
‘14
Oct
‘14
Nov
‘14
Dec
‘14
Jan
‘15
Falling Market
Rising Market
… purchasers buy coking coals based on their characteristics in the blend and in
the oven. You pay for the characteristics you need: even if that breaks low-vol vs
mid-vol or high CSR vs lower CSE etiquettes.
Low-vol/
mid-vol
spread
highly
variable.
As spot buyers ignore relativities…

Normalisation basics
Index
Spec
Low-Vol
Mid-Vol
In ordinary markets, the normalisation process works by equalising all
submissable spot sales to the TSI specification.
The TSI premium hard coking coal specification is slightly ‘worse’ than the low-
vol, high CSR brands, and slightly ‘better’ than the mid-vol premium brands.
Hence, ordinarily, submitted mid-vol prices (which are usually lower than low-vol)
are normalised UP to the TSI specification, whilst low-vol coals are normalised
DOWN.

Normalisation basics
Some have asked why the index has not risen when mid-vol has been seen
transacting over and above the levels of TSI’s Premium Hard FOB index…
Precisely because low-vol has been transacting below the levels set by mid-vol!
As TSI tracks a low-vol, high CSR material, expect the index to track that.
So, in markets where that inverts, expect the normalisation basis to switch, also.
High achieved prices for mid-vols have been normalised down to the levels of
low-vol transactions.
Index
Spec
Low-Vol
Mid-Vol

/41
Background to The Steel Index (TSI)
TSI methodology was conceived, created and
designed specifically to create robust, representative
prices for ferrous market participants.
Participants are anonymous, their data is
confidential. Transaction data received is shared
with no-one
TSI use transaction data only to make indices. We are
not journalists, nor a consultancy. Key tenets:
1. Maximise Participation
2. Minimise opportunities for manipulation.
Participants come from across the supply chain: all spot
buyers and sellers can potentially take part in the index,
with no commercial downside to participation.

Entirely separate indices
Coal brands sold into both markets achieve different prices. Hence TSI produces independent
FOB & CFR indices with zero bleed-through in either transactions, bids or offers.
The total separation of both markets is a clear differentiator between TSI and other indices.
FOB CFR

FOB permissible brands
Saraji
German
Creek
Peak Downs
Hail Creek
Goonyella
Illawarra
Moranbah
North
North
Goonyella
Oaky Creek
Oaky
North
Peak
Downs
North
Wollombi
Goonyella
“C”
Riverside
FOB
Pricing Point: FOB East Coast, Australia
• Minimum Lot Size: 20,000 metric tonnes
• Particle Size: Particle size below 55mm for at least 90% of the cargo
• Transport: Bulk Shipment
• Timing: Loading within 60 days of transaction
• Payment: At Sight
• Currency/Units: US$ per metric tonne
Diverse coal brands from a number
of producers characterise
Australian premium hard coking
coal supply.

CFR permissible brands
Saraji
German
Creek
Peak
Downs
Blue
Creek Elkview
Goonyella
Illawarra
Moranbah
North
North
Goonyella
Oaky
Creek
Oaky
North
Peak
Downs
North
Premium
Standard
Wollombi
Goonyella
“C” Hail
Creek
Pricing Point: CFR Jingtang Port, China
• Minimum Lot Size: 20,000 metric tonnes
• Particle Size: Particle size below 55mm for at least 90% of the cargo
• Transport: Bulk Shipment
• Timing: Loading within 60 days of transaction
• Payment: At Sight
• Currency/Units: US$ per metric tonne
CFR
Chipanga
The CFR market is characterised by
drawing from an even wider pool
of globally supplied premium hard
coking coals and suppliers.

Over 600 data providers deliver their actual
transaction data to TSI on a confidential basis.
Our methodology involves non-standard
products being normalised to common TSI
index specifications.
Quality adjustments are given a quantifiable
value, which is applied to the Delta between
product specifications and the relevant TSI
index specification.
TSI 62%
MNP
SSFG
PB
fines
TSI JM25 Premium Coking Coal
Hail
Creek
German
Creek
Peak
Downs
TSI price production process

For more information on TSI’s methodology, click the image below left.
For more information on TSI’s index history contact mcoal@thesteelindex.com.
For more information on price risk management tools, click the image below right.
Further information

Steel: since 2006
Iron Ore: since 2008
Scrap: since 2010
Coking Coal: since 2012
Regional Virtual Steel Mill: since 2014
Thank you for your attention!
mcoal@thesteelindex.com

Tsi market watch metallurgical coal 29th january 2015

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