January 2017 was a big month for coking coal derivatives - TSI looks at how liquidity is evolving and looks back on the information underpinning the benchmark PHCC index over the year.

1. THE STEEL INDEX (TSI)
TSI Coking Coal – Derivatives and index update
Jarek Mlodziejewski
www.thesteelindex.com

2. Coking coal derivatives update: market awakens in January 2017
Coking Coal Derivatives Update
• Best ever January cleared coking coal derivatives volumes: three times any prior year.
• All-time highest SGX monthly volumes: 870,000 tonnes. January alone was 9% up on full-year 2015 volumes.
• SGX sets exchange record for back-to-back coking coal trading days (15 vs prior 8).
• Share of total cleared market-share increases to 73.8% (SGX), up from 50.2% in December
• Open interest at SGX grows 558,000 tonnes to 701,000 tonnes a 390% rise from December.
• Second highest monthly international coking coal volumes (1.18 million tonnes).

3. Market-maker enters SGX screen-traded contract on Oct-16, providing
liquidity & accelerating volume growth. Voice broking began in January.
0
200
400
600
800
1000
1200
1400
Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17
Thousandtonnes
SGX Volumes CME volumes

4. SGX takes a leading market share of cleared derivatives from December
2016 (SGX clears against TSI’s PHCC FOB Australian index)
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17
CME Share of Market SGX % of Market

5. Exchange trading rises as coking coal prices triple and accelerates as
they retreat
$75
$125
$175
$225
$275
$325
0
200
400
600
800
1000
1200
Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17
US$/tonne
Thousandtonnes
Total SGX/CME cleared volumes TSI FOB Premium Monthly average

6. Coking coal derivatives in January post best volumes ever, by a large
margin
-
200
400
600
800
1,000
1,200
Jan-14 Jan-15 Jan-16 Jan-17
Thousandtonnes
Total Derivatives Trade
Market participants believe that this is a step-change for the future of coking coal derivatives volumes

7. Market participants expect between 10-13 million tonnes to be cleared
over 2017, a big step up on 2016 volumes
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
FY 2014 FY 2015 FY 2016 Jan-17
Thousandtonnes
CME
SGX
One fifth of full year 2016 derivatives volumes have been cleared in the first month of 2017 alone.

8. SGX January trading has been additive to open interest, which has grown
rapidly to 701,000 tonnes at end of month
0
100
200
300
400
500
600
700
800
Thousandtonnes
Cleared Volumes Open Interest
Chinese New Year
The rise in monthly open interest is the fastest seen yet in cleared coking coal markets

9. SGX January trading has been on the front quarters, with trades on the
back of the curve occurring at the end of the month.
0
20
40
60
80
100
120
140
160
180
Thousandtonnes
Q1-17 Q2-17 Q3-17 Q4-17
Chinese New Year

10. Volatility very much present over the course of January. The front month
contract fell US$45.37/t, whilst the index dropped by US$54.60/t
$150
$160
$170
$180
$190
$200
$210
$220
$230
US$/tonne
Front Month TSI FOB Premium Australia index

11. Current market uncertainty expressed through the forward curve
$150
$160
$170
$180
$190
$200
$210
$220
$230
US$/tonne
Q1-16 Q2-16 Q3-16 Q4-16 TSI Premium FOB index
The curve slowly flattens out over the course of Cal17, showing a lack of clarity on future coking coal prices with
market participants trying to mark the mid-term price equilibrium

12. Volatility in the Q1/Q2 time-spread has provided trading opportunities
$0
$5
$10
$15
$20
$25
$30
$35
$40
US$/tonne
Q1/Q2 Spread

13. Coking coal derivatives growth vs iron ore derivatives path
0
500
1000
1500
2000
Yr.1 Yr.2 Yr.3 Yr.4 Yr.5 Yr.6 Yr.7 Yr.8
IRON ORE COKING COAL
A lot of physical market participants (especially mills and traders) ask: “How quickly will the market grow?”. It’s an
urgent question for many who wish to replicate quarterly optionality using derivatives. Using the same growth path
of iron ore shows the next annual volume milestone should be 11 million tonnes traded (2017).
MillionTonnes
0.01x 0.02x 0.04x 0.09x 0.20x 0.39x
0.75x
1.21x

14. Basis risk is significantly higher than in iron ore
-$6
-$4
-$2
$0
$2
$4
$6
$8
SGX vs CME monthly basis risk
Basis risk inverts from
April 2016
Why the growth on the SGX contract? Liquidity is an obvious reason, but basis risk an important consideration, too.
The CME uses the Platts index, whilst SGX uses the TSI index. The majority of premium hard coking coal sold on an
index-basis is linked to TSI’s PHCC (FOB Australia) number. Non-Australia origin coal is also tied to the same index.

15. Strong correlations underpin the global met-coal market between
Australian PHCC, other origins and other grades
$0
$50
$100
$150
$200
$250
$300
$350
TSI Premium HCC FOB Australia TSI HCC FOB Australia
Platts Low Vol PCI FOB Australia Platts High Vol A Coking Coal FOB US East Coast
Platts Low Vol Hard Coking Coal FOB US East Coast export Platts Semi Soft FOB Australia
Correlations to TSI PHCC
FOB Australia Index
TSI HCC FOB
Australia
99.5%
Platts Semi-soft
FOB Australia
98.0%
Platts Low vol PCI
FOB Australia
96.9%
Platts High vol A
FOB US East Coast
98.5%
Platts Low vol HCC
FOB US East Coast
98.0%
High correlations allow other grades and origins to link derivatives to
the TSI PHCC index. The physical market (i.e. North America) already
tie to Australian indices.
The Australia coking coal benchmark is already used for physical sales from other regions. These other regions and
grades can also use the FOB PHCC derivatives market to hedge risk.

16. Index Composition update: Full year 2016
Index Composition Update for full year 2016
• Number of Premium Hard FOB Australia transactions received by TSI grow year-on-year, for the second year in a row.
• Data provider numbers to TSI’s PHCC FOB index grow 30% year-on-year
• Total spot transaction tonnage received into the index increase by 12.3%.
• Index increasingly dominated by spot transactions.
• Proportion of firm bid/offer data in volume-weighted daily calculations reduces from 32% in 2015, to 22.5% in 2016.

17. Transaction volumes on a FOB basis weakened at the end of the year
$70
$120
$170
$220
$270
$320
$370
FOB Australia Bid Offer Transaction

18. 0
100
200
300
400
500
600
700
800
2013 2014 2015 2016
Number of TSI transaction, bid and offer data points (PHCC FOB only)
Transactions Bids Offers
The metallurgical coal market structurally changed in 2015. Miners
increased spot tonnes to intermediaries, improving spot liquidity
# of Spot trades rose 2.4%
The number of spot transactions concluded and submitted to TSI rose 2.4% year-on-year in 2016.

19. TSI methodology gives precedence to concluded transactions (as
opposed to bids and offers) in the volume-weighting of the daily number
171
195
234
2016 Absolute data points
Transaction Bid Offer
10,966,000
14,540,000
17,355,000
2016 Data points by volume (tonnes)
Transaction Bid Offer
10,966,000
1,454,000
1,735,500
2016 Data volume weightings used in
actual PHCC FOB index calculations
Transaction Bid Offer
Firm bids and offers submitted see volumes automatically reduced by
90% in TSI’s volume-weighted PHCC FOB Australia index calculation

20. Spot transactions account for an increasing share of TSI PHCC FOB
Australia index weighting over 2016
10,966,000
1,454,000
1,735,500
2016 Data volume weightings used in
actual PHCC FOB index calculations
Transaction Bid Offer
8,949,000
1,928,000
2,290,500
2015 Data volume weightings used in
actual PHCC FOB index calculations
Transaction Bid Offer
TSI’s volume-weighted index was already dominated by transaction data in 2015 (67.9%). In 2016, the share of
transaction volume driving the index (as opposed to bids and offers) rose to 77.4%.

21. Just under 2.7 million tonnes of FOB PHCC data received in January 2017.
700,000 tonnes was employed in the index
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
January 2017 volumes received Weighting of January 2017 volumes
Transactions
Offers
Bids
As usual, TSI received a high quantity of valuable firm bid-offer information (brand, price and volume) over the course
of January. Transaction data, however, dominated the index weightings in the daily calculations.

22. TSI continues to encourage direct participation in the index. Data
provider numbers grew by 30% in 2016 over 2015
21%
58%
21%
2016 Data providers
End-user Trader Supplier
Data providers to TSI’s coking coal index provide actual spot transaction data, on an anonymous, confidential basis.

23. TSI index specifications and valuations
TSI Premium Hard coking coal (PHCC)
Total Moisure (ar) 10.00%
Ash (ad) 10.00%
Volatile Matter (ad) 21.00%
Sulphur (ad) 0.45%
CSR 71%
CSN/FSI 8
RvMax 1.35%
Maximum Fluidity 600 ddpm
Phosphorous 0.05%
Total Dilatation 80%
Maceral Composition (vitrinite) 68%
TSI Theoretical Brand valutions
German Creek 100.40% Oaky Creek 101.90%
German Creek 8 101.20% Oaky North 100.00%
GlobalCOAL HCCA Spec 98.20% Peak Downs 103.70%
Goonyella 100.00% Peak Downs North 97.00%
Goonyella C 99.60% Riverside 99.60%
Hail Creek 96.60% Saraji 102.00%
Illawarra 102.60%
TSI Premium Hard
Coking Coal
100.00
Moranbah North 100.60% Wollombi 100.60%
North Goonyella 100.70%
TSI's produces daily coking coal prices and weekly supplementary information including brand valuations, value-in-use
data and weekly volumes and ranges. A sample can be viewed here..

24. Questions? Please contact us
Jarek Mlodziejewski
Jing Zhi Ng
Tim Hard
12 Marina Boulevard | Level 23 MBFC Tower 3
Singapore 018982
T: +65 6530 6412
M: +65 9108 4257
E: Jarekm@thesteelindex.com
Reuters Eikon: jarekm@thesteelindex.com
ICE Chat: jarek_mlodziejewski
Wechat: jarekm
www.thesteelindex.com