The news in January that CME Group had passed the 100kt of coking coal swaps cleared since the service was launched in August 2011 endorses the rationale behind the development of this new financial product.

For the producers, traders and users of coking coal, the opportunity to manage the price risk inherent in purchasing coke and obtain a fixed price provides a welcome enhancement to secure financing. Many banks and trading houses in turn regard a sound risk-management approach by their customers in the industry as a prerequisite to providing financing and related services.

As a premium product, coking coal’s price dynamics were too far removed from those of thermal coal to allow the use of thermal coal swaps as an effective risk management tool – but dedicated coking coal swaps were recognized as the missing element needed to move toward greater control over price risk.

For the steel industry, a viable mechanism for managing price risk in a volatile global arena has further benefits. As CME Group has argued while developing its ‘Virtual Steel Mill’ suite of risk-management products, a series of contracts which mirrors price risks across the global steel supply chain can transform price risk for all participants – but to be truly effective, the suite needed not only iron ore and steel-related contracts, but met coal as well.

As participants in the broader ferrous industry begin to recognize the benefits of this global, interconnected approach, the gathering liquidity in CME’s coking coal products will continue to deliver benefits, not only to coal producers and distributors, but to the broader ferrous industry. At a time when price volatility remains a significant risk, CME believe these products will earn their place as an essential component of the financing of steel production.

Source: Harriet Hunnable, Managing Director of metals products at CME Group