Coal option volumes reach 2.46 million tonnes

Date: Friday, April 15, 2011
Author: Wendy Chothia, HedgeWeek

LCH.Clearnet Ltd (LCH.Clearnet) has cleared the first single expiry OTC coal options trades. Initial transactions have totalled 670 lots in API 2 options to date, across both quarterly and calendar tenures, reaching volumes of 2.46 million tonnes. 

The use of thermal coal in power generation continues to increase in Asia, driving demand for coal option contracts which offer diversification to hedge funds, banks and physical market participants looking to manage price risk or gain exposure to price volatility. Clearing these contracts increases trading capacity and reduces concerns over counterparty risk, enabling further growth of the market. The API 2* and API 4* indices are the key focus of coal management, accounting for 90% of the world’s coal derivatives trading.

Isabella Kurek-Smith, director, energy and freight, LCH.Clearnet says: “We are delighted to have cleared these first trades. These encouraging figures indicate a strong demand for the benefits of cleared coal option contracts. We look forward to supporting the growth of the market with our competitive, robust and efficient clearing service.” 

Adrian Binks, Argus chairman and chief executive officer says: “International coal markets have enjoyed a resurgence this year, with new entrants adding to already robust activity. Volatile energy prices, including coal, have underscored the need for innovative risk management tools and we are pleased the industry has found the LCH.Clearnet’s service valuable. New clearing and settlement facilities for API 2 and API 4 options will foster continuing growth in these liquid and dynamic markets.”

The coal option contracts are based on Rotterdam in the Netherlands and Richards Bay in South Africa and are traded in multiples of 5,000 tonnes per month.  The contracts exercise into swaps settled against API 2 and API 4 index prices as published by Argus/ McCloskey’s Coal Price Index Report.

John Howland, publisher, IHS McCloskey, says: “The volatility in the world seaborne coal markets over recent months has highlighted the need for flexible risk management. We are pleased that LCH.Clearnet’s innovative approach has been utilised by the market and that clearing for API 2 and API 4 options adds another service that will encourage more liquidity in these vibrant coal markets.”