PREVIEW-Asia to start 1st deliverable coal futures July 7

By Fayen Wong SYDNEY, July 6 (Reuters) - Asia's first deliverable thermal coal futures contract will debut on Tuesday, aiming to converge physical coal prices and derivatives. But the launch of the contract, which will compete against ICE Futures in a region where coal trading has been slow to take off, prompted some market players to question if the platform can gather sufficient liquidity. The thermal coal futures and options contract, launched by Australia's ASX Ltd, Asia-Pacific's second-largest listed stock exchange, will allow end-users to lock in prices that have plummeted 64 percent from a July record high of $200 a tonne. It will also enable producers to hedge against further price falls. "Over time, it will help to improve the general liquidity in the coal market since it provides more hedging products for our clientele," Geoff Clear, ANZ's global co-head of commodities told Reuters in a recent interview. The deliverable feature on ASX's futures contract is the key point separating it from the rival Newcastle coal futures contract -- launched in December by electronic trading platform globalCOAL and the Intercontinental Exchange (ICE) and is a financial product. "The fact that it's a deliverable futures contract could make it popular among some Asian buyers. But it also means that it will need to gain a level of support from producers for it to gather momentum and liquidity," said a coal trader in Japan. ASX said its contract could help bring a convergence between derivatives and physical coal prices, which will be independent of bids, offers and trades in the over-the-counter (OTC) market. The contract will be based on Japanese-quality thermal coal exported from Australia's Newcastle port, the world's biggest export harbour for the fuel. The exchange will act as the clearing house for the futures, allowing participants to avoid any risk of counterparties defaulting on trades. UPHILL BATTLE? Coal gained commodity status in recent years as a result of the standardisation of trading contracts and screen-based trade, which helped the market become more transparent and liquid. A steady growth in spot trades on the back of powerful Asian demand, as well as price volatility has also led investment banks, including Morgan Stanley, Goldman Sachs and Macquarie, to trade physical coal as well as paper instruments. There is also a limited amount of hedge-fund activity. Some market participants say ASX's coal futures will face an uphill battle to gather enough liquidity, particularly for an industry as traditional as coal, most of which is still traded under flat-price long-term contracts, especially in Asia. "If we're already struggling to see liquidity on globalCOAL's NEWC futures, then we'll struggle to see this thing take off," said a Singapore-based trader. "I'm not sure if there's enough room in Asia to accommodate two coal futures platforms." Monthly trading volume on globalCOAL-ICE's Newcastle coal futures has grown about 17 percent since January to reach 4.89 million tonnes in June. However liquidity still pales in comparison to ICE's two existing coal contracts: Rotterdam and Richards Bay futures, which are both based in Europe, where the emergence of vibrant carbon and electricity markets has boosted coal trade. For a graphic on total monthly ICE coal contracts by volume, click on: http://graphics.thomsonreuters.com/079/CMD_GLICE0709.jpg Analysts have said that an efficient market would need to have a liquidity of around 350 million tonnes per year after an initial ramp-up period, a level which ASX has said it hopes to achieve within three to five years. (Reporting by Fayen Wong, Editing by Peter Blackburn) (([e-mail]; [phone]; Reuters Messaging: [e-mail])) Keywords: ASX COAL FUTURES/ (If you have a query or comment on this story, send an email to [e-mail]) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved.

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