ICE launches Platts-based coal futures contract for ILB

By: Andrew Moore, Managing Editor Platts Coal Trader

Intercontinental Exchange on Monday (April 4) launched a new U.S. coal futures contract, and corresponding futures options contract, for Illinois Basin coal, the first coal futures contract for the U.S. market since October 2014.

The futures contract will be financially-settled against a monthly average of Platts daily physical market price assessments for 11,800 Btu/lb Illinois Basin coal. Platts is the leading independent provider of information and benchmark prices for the energy and commodities markets.

Aannual production for IB, CAPP and NAPP

Annual production for IB, CAPP and NAPP

Futures can be an effective tool for coal producers and coal buyers to hedge their exposure to the coal market, and market participants have been seeking a financially-settled future contract for the Illinois Basin, which is the second largest production region in the US.

In 2015, mines in the Illinois Basin – a mixture of underground and surface mines in Indiana, Illinois and Western Kentucky – produced 128 million short tons of bituminous thermal coal.

The 2015 production total was down 7% from 2014, but that was largely due to the industry-wide pullback in coal production due to cheaper natural gas prices.

Last year’s dip in production masks the fact that the Illinois Basin has largely been a growth story. In 2014, the basin produced a record 137 million short tons, and made up nearly 14% of the total U.S. coal market.

The basin’s market share was slightly higher in 2015, and this reflects the fact that Illinois Basin coal is generally less expensive than bituminous thermal coal from Central Appalachia and Northern Appalachia.

The trade-off is slightly less heat content and greater sulfur content. The heat content of Illinois Basin coal ranges from 10,500 to 12,000 Btu/lb and sulfur content averages roughly 3%, or 5 lbs SO2/MMBtu.

The higher sulfur content historically was a barrier to adoption by U.S. power generators, but that has changed in recent years as emissions mandates have led many utilities to add scrubbing technology to their power plants.

ICE’s new Illinois Basin futures contract also reflects an appetite in the market for another trading vehicle. Futures trading in the U.S. market has largely narrowed toward just two contracts: the Central Appalachia rail (CSX) and PRB 8,800 futures contracts, and volumes have been declining.

The decline in trading activity is partly due to the exit of a number of market participants, including banks, in response to regulation limiting exposure to commodity markets. But the current macroeconomic forces roiling the coal market have also heightened uncertainty and kept other traders at bay.

Both the CAPP rail (CSX) and PRB 8,800 futures contracts trade on ICE as well as the CME Group, and both are financially-settled against a monthly average of Platts’ daily assessments for the underlying physical coal specified in both futures contracts.

The CAPP barge futures contract also trades on ICE and is financially-settled against Platts’ daily physical assessments. The CAPP barge contract is traded on CME but is physically-settled. CME announced last year that it plans to delist the CAPP barge contract at the end of 2016.

Prior to Monday’s launch, the last U.S. coal futures contract to be unveiled was the CME’s physically-settled Illinois Basin futures contract for Illinois Basin 11,500 Btu/lb FOB barge coal. The contract launched in October 2014 but has yet to trade.

Whether the market is quick to adopt the new 11,800 Btu/lb futures contract remains to be seen. On Tuesday, the contract traded for the first time, when the Q4 2016 contract cleared for $31/st. But a new futures contracts can take time to pick up steam, especially considering that traders are often loath to be the first to take a position. But the fact that Illinois Basin production is growing could help push traders into the market.

The complete specifications for Platts’ Illinois Basin 11,800 Btu/lb assessment take into account coal of a typical heat content of 11,800 Btu/lb with typical sulfur content of 5 lbs SO2/MMBtu and a maximum chlorine content of 0.35%.

Platts considers as relevant to the assessment process coals in a range of 11,500 – 12,000 Btu/lb and sulfur up to 6 lbs SO2/MMBtu and normalizes to the standard specifications.

07. April 2016 by Jason Hayes
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