DCE plans to launch coking coal futures

Dalian Commodity Exchange (DCE), one of the three futures exchange bourses on the Chinese mainland, plans to launch coking coal futures contracts this year, according to its general manager Liu Xingqiang.

The move aims to provide more hedging options to steel mills - the primary users of coking coal - in China, the world's largest coking coal producer and consumer, said Liu.

However, analysts said the influence of the coking coal futures market will be limited, as its trading volume is expected to be rather low.

Due to declining steel demand and prices in China, coking coal will experience a downturn with little fluctuation in price, which would lower the interest of speculators in the futures market, according to Liu Yiqing, a steel analyst from Jinshi Futures.

Also, Liu Yiqing said the coking coal futures market was likely to see low levels of turnover in light of the fact that trading in coke futures - regarded as a substitute product - has been light.

"Futures contracts for coke and coking coal can basically replace each other. They compete for the same market. However, the interest in the coke futures market is lukewarm. So I expect the trading volume of coking coal to be as low as a few hundred contracts a day," Liu Yiqing said.

According to DCE, the average daily trading volume of coke futures stood at around 10,000 contracts from April 15 of 2011 to February 3. Active futures market such as copper see a daily turnover of around 500,000 trades. "After the coking coal futures market is approved, the trading of coke futures may fall even lower," Liu Yiqing said.

A similar case in point, he said, is the steel wire rods futures contracts, which has been barely traded after the listing of rebar futures, a similar product. "In order to avoid seeing a similar situation repeated, regulators may think twice before launching the new product. So I doubt whether DCE can successfully launch it this year," Liu said.

According to DCE general manager Liu Xingqiang, coking coal futures are awaiting regulatory approval, and the exact listing time is unclear.

Another obstacle to coking coal futures comes from the market, said Zhang Yugui, dean of the College of International Finance and Trade of Shanghai International Studies University. "Current market participants may not want the market to form a benchmark price, which could make it harder for them to make a profit," Zhang said.