MET COAL SERIES: Coal trading platforms' role in meeting transparency needs

This five-part story series examines the coking coal market from a few angles. The first part focuses on pricing evolution and spot liquidity. The second analyzes how trade flows have changed, the third traces the rising importance of environment, social and governance criteria, while this fourth part takes a deep dive into the workings of coal trading platforms that may inform spot price assessments. The final part examines the current state of the spot market and explores directions for future evolution.

Global coking coal markets are in a compelling situation in 2023 as the world's largest steel producer China reopens its economy, leading to expectations of higher consumption and a pickup in steel demand, while drier conditions are seen providing relief in Australia after flooding disrupted coal production earlier in the year.

As China returns to buying Australian coal after a two-year hiatus, Australia already has shipped more coal to China in the first four months of 2023 at 1.4 million mt than in full year 2022.

At the same time, the US is gearing up for competition with Russia for a larger piece of India's market, while Europe's ban on Russian pulverized coal injection and other coals and weaker internal steel demand are also keeping prices under pressure.

All these signals point to elevated coal trading activity globally in 2023.

How does all this coal get traded to respective destinations and end-users? One part of the picture is commodity trading platforms.

As the world shifts to a digital ecosystem, online commodity trading platforms have started playing a significant role as marketplaces.

Some coal traders have told S&P Global Commodity Insights they find online coal trading platforms efficient in helping improve market transparency while serving as an effective route for credible price discovery.

If price discovery happens via efficient channels, this helps market players gauge the true demand-supply situation in real time, allowing them to prepare for risk management, capital investment and business planning activities.

Mechanisms operated by coal trading platforms differ, but the most widely used are auction-based and bid-and-offer systems.

"Pricing points generated by trading activity feed into the market's most widely-used indices, improving their integrity and reliability," trading platform globalCOAL said on its website.

This helps pull in dealers and traders to transact on such systems and can also help land them good deals, according to traders.

Marketplaces for metals

There are several commodity trading platforms in the metals space, including globalORE, Mjunction and Trayport.

Mjunction is a B2B e-commerce firm, built as a joint venture between India's leading steel companies Tata Steel and SAIL, that focuses on auctioning commodities such as coal and agricultural production in India. Mjunction recently conducted its first ever e-auction of large cardamom.

Trayport is focused on energy markets, including European gas and global coal, allowing users to access key markets across multiple asset classes.

Another popular trading platform, globalORE, focuses on iron ore trade.

The globalORE platform allows each bid or offer to be displayed with the counterparty depth and breadth of the buyer or seller, according to the company.

Counterparty depth refers to the number of 'matched' counterparties able to execute the order and counterparty breadth denotes the number of different market segments, such as steel mills, producers and traders, represented among the 'matched' counterparties able to execute the order, globalORE said on its website.

Spotlight on globalCOAL

One of the major, globally focused online coal trading platforms is globalCOAL, which is backed by some of the world's leading coal market participants. While some view the platform as the go-to venue for coal markets, others critique what they perceive as limited participant visibility.

The platform's trading community consists of around 160 international consumers, producers and traders of coal, according to the company's website.

That includes a huge list of diversified miners, dedicated coal producers, steelmakers, electricity companies, coal traders and other players across the world that are closely connected with coal markets, its data showed.

A few of those listed to trade include Anglo American, ArcelorMittal, Adani Global, Baosteel, BHP, Idemitsu and ITOCHU.

The trading platform also lists more than 2,600 licensed users that use the platform to trade physical cargoes. Licensed users are not licensed to trade on the screen, but are licensed to trade on SCoTA terms, the company said.

The platform allows trading of thermal coal and two types of metallurgical coal – premium mid-vol and premium low-vol hard coking coal.

Trades, bids and offers are posted anonymously or executed through its platform in a fully transparent and auditable way, with all orders genuine and capable of being traded, globalCOAL told S&P Global Commodity Insights.

"All trades and orders are for a standard specification, so that prices are fully comparable, and no subjective normalization is required," the company said.

globalCOAL offers trade through the Standard Coal Trading Agreement, known as SCoTA, in coal markets. The company said SCoTA is designed to standardize around one specification. It enables users to buy and sell physical coal cargoes quickly, efficiently and with limited basis risk.

For any user to participate on the platform, globalCOAL's parent company Global Commodities Holdings (GCH) requires the user to have a reciprocal credit arrangement with a minimum number of active counterparties, the company said, although it did not define the term 'active' in a written interview with S&P Global.

globalCOAL also did not disclose what the minimum number is in the interview. However, it is heard to be around five, according to some globalCOAL users.

Users of globalCOAL also told S&P Global that they can only see whether a bid or offer is open to them but do not see how many counterparties in total it is open to. As such, bids and offers on the platform are sometimes considered to be restrictive and therefore seen as not representative of market levels, according to market sources.

"Many companies are registered as users on globalCOAL but only a handful are active," a trader said.

"If you choose to only have a credit arrangement with five very inactive counterparties, you can bid higher and higher without having anyone being able to hit your bid on screen," another trader said.

globalCOAL, which also publishes price indices based on platform activity, said its GCH screen-based indices, for example the NEWC index, will require a bid/offer to be on screen for a minimum of 15 minutes in order to be counted as viable to its index methodology.

NEWC index is a reference price for thermal coal for spot delivery on an FOB basis at Newcastle port in New South Wales, Australia.

Some traders told S&P Global that they found the credible price discovery and market price transparency offered by the platform a helpful reference in finalizing actual bilateral transactions in the wider market.

GCH said it will launch an index screen that allows traders to link pricing to the requested index of choice in the met coal markets, replicating a system already in place for thermal coal markets over the last 20 years.

Commodity trading

Trading in met coal facilitates the steady consumption by mills that produce steel to build infrastructure. About 0.77 mt of coal is needed to produce 1 mt of steel, according to BHP.

Global markets are slowly catching up with the shipment pace seen pre-pandemic, when global exports reached 329.4 million mt in 2019, according to S&P Global data.

In 2022, global met coal shipments were still 6.3% behind 2019 at 308.7 million mt. Of this, around 10% was estimated to be spot trade.

The steady rise of met coal trade volumes suggest a continued reliance on online coal trading platforms, with platforms playing a critical role in the global market transparency of on-screen bids, offers and trades expected to remain in the spotlight.