Icap launches Singapore coal derivatives trading

Icap, the world's largest inter-dealer broker, has opened a coal derivatives trading desk in Singapore in a move that highlights the growing importance of the Asian city-state as a commodities trading hub amid robust Chinese demand for coal.

It is another sign of London-based Icap's ambitions to tap increasing demand in Asia for hedging of physical purchases of commodities.

In May the company launched an electronic trading platform for iron ore swaps in Singapore, in part to capture demand from Chinese traders .

That trend has been highlighted by rising volumes in recent months of commodity derivatives cleared at SGX, the Singapore exchange. The notional volume of thermal coal cleared at the bourse's clearing house in the first seven months of this year was equal to the total amount cleared in the whole of 2013.

Inter-dealer brokers like Icap, GFI and Tullett-Prebon act as intermediaries between banks and other counterparties in the trading of over-the-counter (interest rate derivatives, commodity derivatives and foreign exchange.

Icap said its Singapore desk had brokered its first coking coal deal between an unnamed Europe-based bank and an international trading company based in Singapore. The contract was cleared at a CME Group clearing house.

The increased use of clearing for commodity derivatives reflects how markets are responding to requirements for the wider use of clearing by regulators in the wake of the 2008 financial crisis. A clearing house stands between two parties to a trade, ensuring a deal is completed even if one side defaults.

George Dranganoudis, managing director of Icap Energy's Asia unit, said the CME-cleared contract added "much-needed transparency" for participants in the market for steel - production of which relies heavily on coal for energy.

Coal and iron ore derivatives are used to hedge volatility in iron ore and coal prices as traders of the two commodities increasingly rely on spot prices, rather than long-term contracts.

China represents half of the world's coal production and consumption and accounts for about a quarter of all sea-borne coal, much of which comes from Australia, Indonesia and South Africa.

Demand is also coming from other emerging Asian countries, which are increasingly relying on thermal coal-fired power generation as they industrialise and as urbanisation accelerates.

SGX estimates that in 2007 nearly 70 per cent of South African coal was shipped to Europe. Since then the landscape has changed, with about 75 per cent of African coal shipped to Asia, mostly India and China.

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