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M42 Coal futures launched on SGX on 9 April

25 April 2018 Scott Dendy

Singapore Exchange (SGX) launched its Indonesian 4,200 kc GAR futures contract, designated the M42, on 9 April.

As previously reported, the SGX futures contract will be settled against the IHS McCloskey Indonesian (4,200 kcGAR) FOB marker.

The contract will list monthly futures for up to two calendar years, starting with the current year, with the first contract month listed being the April 2018 contract.

The IHS McCloskey Indonesian (4,200 kcGAR) FOB marker is understood to be the only listed futures product for Indonesian low-rank coal that, to date, is subjected to an external assurance review to ensure compliance with the principles for price reporting agencies (PRAs) set out by the International Organization of Securities Commissions (the IOSCO Principles).

The principles are designed to ensure that a benchmark achieves a level of rigor and independence that is trusted by leading regulatory bodies and market participants.

The physical trade in Indonesian low-rank is currently the most liquid and transparent spot markets in the global seaborne coal business.

"Dominated by demand from China and India and supported by a myriad of large and small suppliers, the 4,200 kc GAR market produces a significant amount of pricing data points to produce a robust trade backed index," says John Howland, managing director of coal at IHS Markit.

As the market shifted towards more prompt pricing, volatility has grown, increasing participants' need to hedge their price risk.

Previously the only option for Indonesian low-rank was to hedge using other markets, such as Newcastle. However, the Newcastle market can be governed by different factors than those influencing Indonesian supply and demand and therefore does not necessarily correlate, creating significant basis risk.

Using a dedicated 4,200 kc GAR index to use as the basis to hedge Indonesian low-rank, and even potentially sub-bituminous, cargoes has been something the market has been requesting and will now be available via SGX.

SGX's 'M42' Indonesian 4,200 kc GAR contract trades on first day

The first Indonesian 4,200 kc GAR futures on Singapore Exchange (SGX) traded on 9 April as the contract launched.

The contract, designated the M42, uses the IHS McCloskey Indonesian (4,200 kc GAR) FOB marker as its basis for settlement.

The first deal was reported on the first day at $40.30/t for May 2018, for 5,000 t. A number of other deals have since been concluded with values ranging between $40.00-39.80/t, also for May.

As of late afternoon on 13 April, Singapore time, the market for May was reported, via GFI, to be bid at $39.60/t and offered at $40.30/t.

SGX communicated that among first participants were Genk Capital, Indika Energy Trading, HNK Alpha, PSU and Brightpoint International Financial, with other established thermal coal market derivative participants also known to have been showing bids and offers with brokers. More participants are understood to be in the process of signing up with SGX and clearing members.

While M42 is not the first 4,200 kc GAR futures contract to be listed, it is the only one using an index that has passed an assurance review that complies with International Organization of Securities Commissions (IOSCO) standards, which is widely considered to be the benchmark for robust and reliable commodity price assessments produced by Price Reporting Agencies (PRA).

Figure 1: M42 Futures - Forward Curve

Figure 2: Indonesian 4,200 kc GAR FOB Prices

Learn more about the M42 in our free seminar.

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