THE STEEL INDEX (TSI) TSI Coking Coal – Derivatives and index update Jarek Mlodziejewski

www.thesteelindex.com

Coking coal derivatives update: market awakens in January 2017

Coking Coal Derivatives Update

• Best ever January cleared coking coal derivatives volumes: three times any prior year.

• All-time highest SGX monthly volumes: 870,000 tonnes. January alone was 9% up on full-year 2015 volumes.

• SGX sets exchange record for back-to-back coking coal trading days (15 vs prior 8).

• Share of total cleared market-share increases to 73.8% (SGX), up from 50.2% in December

• Open interest at SGX grows 558,000 tonnes to 701,000 tonnes a 390% rise from December.

• Second highest monthly international coking coal volumes (1.18 million tonnes).

Market-maker enters SGX screen-traded contract on Oct-16, providing liquidity & accelerating volume growth. Voice broking began in January.

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SGX Volumes CME volumes

SGX takes a leading market share of cleared derivatives from December 2016 (SGX clears against TSI’s PHCC FOB Australian index)

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Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17

CME Share of Market SGX % of Market

Exchange trading rises as coking coal prices triple and accelerates as they retreat

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Total SGX/CME cleared volumes TSI FOB Premium Monthly average

Coking coal derivatives in January post best volumes ever, by a large margin

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Total Derivatives Trade

Market participants believe that this is a step-change for the future of coking coal derivatives volumes

Market participants expect between 10-13 million tonnes to be cleared over 2017, a big step up on 2016 volumes

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One fifth of full year 2016 derivatives volumes have been cleared in the first month of 2017 alone.

SGX January trading has been additive to open interest, which has grown rapidly to 701,000 tonnes at end of month

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Cleared Volumes Open Interest

Chinese New Year

The rise in monthly open interest is the fastest seen yet in cleared coking coal markets

SGX January trading has been on the front quarters, with trades on the back of the curve occurring at the end of the month.

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Q1-17 Q2-17 Q3-17 Q4-17

Chinese New Year

Volatility very much present over the course of January. The front month contract fell US$45.37/t, whilst the index dropped by US$54.60/t

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Front Month TSI FOB Premium Australia index

Current market uncertainty expressed through the forward curve

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Q1-16 Q2-16 Q3-16 Q4-16 TSI Premium FOB index

The curve slowly flattens out over the course of Cal17, showing a lack of clarity on future coking coal prices with market participants trying to mark the mid-term price equilibrium

Volatility in the Q1/Q2 time-spread has provided trading opportunities

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Q1/Q2 Spread

Coking coal derivatives growth vs iron ore derivatives path

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IRON ORE COKING COAL

A lot of physical market participants (especially mills and traders) ask: “How quickly will the market grow?”. It’s an urgent question for many who wish to replicate quarterly optionality using derivatives. Using the same growth path of iron ore shows the next annual volume milestone should be 11 million tonnes traded (2017).

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Basis risk is significantly higher than in iron ore

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$8SGX vs CME monthly basis risk

Basis risk inverts from April 2016

Why the growth on the SGX contract? Liquidity is an obvious reason, but basis risk an important consideration, too. The CME uses the Platts index, whilst SGX uses the TSI index. The majority of premium hard coking coal sold on an index-basis is linked to TSI’s PHCC (FOB Australia) number. Non-Australia origin coal is also tied to the same index.

Strong correlations underpin the global met-coal market between Australian PHCC, other origins and other grades

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TSI Premium HCC FOB Australia TSI HCC FOB Australia

Platts Low Vol PCI FOB Australia Platts High Vol A Coking Coal FOB US East Coast

Platts Low Vol Hard Coking Coal FOB US East Coast export Platts Semi Soft FOB Australia

Correlations to TSI PHCC FOB Australia Index

TSI HCC FOB Australia

99.5%

Platts Semi-soft FOB Australia

98.0%

Platts Low vol PCI FOB Australia

96.9%

Platts High vol A FOB US East Coast

98.5%

Platts Low vol HCC FOB US East Coast

98.0%

High correlations allow other grades and origins to link derivatives to the TSI PHCC index. The physical market (i.e. North America) already

tie to Australian indices.

The Australia coking coal benchmark is already used for physical sales from other regions. These other regions and grades can also use the FOB PHCC derivatives market to hedge risk.

Index Composition update: Full year 2016

Index Composition Update for full year 2016

• Number of Premium Hard FOB Australia transactions received by TSI grow year-on-year, for the second year in a row.

• Data provider numbers to TSI’s PHCC FOB index grow 30% year-on-year

• Total spot transaction tonnage received into the index increase by 12.3%.

• Index increasingly dominated by spot transactions.

• Proportion of firm bid/offer data in volume-weighted daily calculations reduces from 32% in 2015, to 22.5% in 2016.

Transaction volumes on a FOB basis weakened at the end of the year

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FOB Australia Bid Offer Transaction

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Number of TSI transaction, bid and offer data points (PHCC FOB only)

Transactions Bids Offers

The metallurgical coal market structurally changed in 2015. Miners increased spot tonnes to intermediaries, improving spot liquidity

# of Spot trades rose 2.4%

The number of spot transactions concluded and submitted to TSI rose 2.4% year-on-year in 2016.

TSI methodology gives precedence to concluded transactions (as opposed to bids and offers) in the volume-weighting of the daily number

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2016 Absolute data points

Transaction Bid Offer

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2016 Data points by volume (tonnes)

Transaction Bid Offer

10,966,000

1,454,000

1,735,500

2016 Data volume weightings used in actual PHCC FOB index calculations

Transaction Bid Offer

Firm bids and offers submitted see volumes automatically reduced by 90% in TSI’s volume-weighted PHCC FOB Australia index calculation

Spot transactions account for an increasing share of TSI PHCC FOB Australia index weighting over 2016

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2016 Data volume weightings used in actual PHCC FOB index calculations

Transaction Bid Offer

Transaction 8,9479,000 Bids 19,280,000 Offers: 22,905,000

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2015 Data volume weightings used in actual PHCC FOB index calculations

Transaction Bid Offer

TSI’s volume-weighted index was already dominated by transaction data in 2015 (67.9%). In 2016, the share of transaction volume driving the index (as opposed to bids and offers) rose to 77.4%.

Just under 2.7 million tonnes of FOB PHCC data received in January 2017. 700,000 tonnes was employed in the index

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Transactions

Offers

Bids

As usual, TSI received a high quantity of valuable firm bid-offer information (brand, price and volume) over the course of January. Transaction data, however, dominated the index weightings in the daily calculations.

TSI continues to encourage direct participation in the index. Data provider numbers grew by 30% in 2016 over 2015

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2016 Data providers

End-user Trader Supplier

Data providers to TSI’s coking coal index provide actual spot transaction data, on an anonymous, confidential basis.

TSI index specifications and valuations

TSI Premium Hard coking coal (PHCC)

Total Moisure (ar) 10.00%

Ash (ad) 10.00%

Volatile Matter (ad) 21.00%

Sulphur (ad) 0.45%

CSR 71%

CSN/FSI 8

RvMax 1.35%

Maximum Fluidity 600 ddpm

Phosphorous 0.05%

Total Dilatation 80%

Maceral Composition (vitrinite) 68%

TSI Theoretical Brand valutions

German Creek 100.40% Oaky Creek 101.90%

German Creek 8 101.20% Oaky North 100.00%

GlobalCOAL HCCA Spec 98.20% Peak Downs 103.70%

Goonyella 100.00% Peak Downs North 97.00%

Goonyella C 99.60% Riverside 99.60%

Hail Creek 96.60% Saraji 102.00%

Illawarra 102.60% TSI Premium Hard

Coking Coal 100.00

Moranbah North 100.60% Wollombi 100.60%

North Goonyella 100.70%

TSI's produces daily coking coal prices and weekly supplementary information including brand valuations, value-in-use data and weekly volumes and ranges. A sample can be viewed here..

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Jarek Mlodziejewski Jing Zhi Ng Tim Hard 12 Marina Boulevard | Level 23 MBFC Tower 3 Singapore 018982 T: +65 6530 6412 M: +65 9108 4257 E: Jarekm@thesteelindex.com Reuters Eikon: jarekm@thesteelindex.com ICE Chat: jarek_mlodziejewski Wechat: jarekm www.thesteelindex.com