Major thermal coal trader Noble Group has outlined its intention to move away from pricing off globalCOAL's Newcastle (Newc) FOB thermal coal index after writing down significant losses totaling $130 million over the first quarter of 2017, the company announced in an earnings call to investors Thursday.
Co-CEO and Executive director of Noble Group William Randall said that a challenging trading environment had been compounded by a dislocation between the Newcastle index and market fundamentals, sparking a rapid change in coal trade flows over Q1, which had taken the trader by surprise.
"Noble has long term and spot contracts [basis Newcastle]... when such rapid changes occur in such a short space of time, the relationships to the hedging program become hard to manage," Randall explained.
"Over the course of the last 6 months -- mainly in the period January to March 2017 -- the ability to rely on this as a relevant reference point for commercial discussions has come into question," Noble said in a separate statement supplementing its results.
"We feel we cannot rely on Newcastle as a relevant point of reference for commercial discussion anymore," Randall echoed. "We see the Newcastle screen as a tool for price discovery only. It is no longer a hedging tool that we can use over the long term."
Randall went on to outline that the company had already begun to reduce its reliance on the index as a hedging tool over Q1 and did not anticipate that it would return to 'normal' levels.
Although the company did not outline specific forward guidance as to how it will manage procurement and sales in the future, Randall stated that Noble would no longer provide liquidity to the Newcastle index, adding that there would be a shift towards fixed price and medium term transactions, drawing the company away from the spot market.
"Our volume in coal is growing but the method by which we transact is changing."
Broker globalCOAL operates a screen-based physical coal trading platform. Its Newc index is the benchmark settlement price for index-linked physical 6,000 kcal/kg NAR trades and underlies an estimated 450 million mt/year derivatives market, according to the company's website. The company did not immediately respond to requests for comment at the time of press.
'DISCONNECT FROM FUNDAMENTALS'
Explaining the rationale for the decision, Randall cited an apparent disconnect between Newcastle index prices and the Chinese and Indonesian domestic markets, outlining that while Chinese domestic market prices have rallied by 16% over the period, Newcastle prices fell back by 13%.
Traditionally, China consumes 5,500 NAR coal, while the higher CV Newcastle 6,000 NAR grade is sold into the Japanese market.
The company also recorded the first occasion whereby Indonesian 4,600 kcal/kg NAR -- a lower specification of sub-bituminous coal which traditionally trades at a discount -- had traded at a premium to Newcastle 6,000 NAR prices.
"Procurement in Asia is done quarterly along a rigid methodology. The price dislocation occurred on month and developed through the quarter," Randall explained. "This extreme movement hurt us as we executed our supply contract."
Exacerbating the issue, Randall said, was also the entrance of new clearing platforms in the European market, where participants can transact small derivatives volumes directly on the Web ICE screen, avoiding broker fees for highly standardized trades, which has increased volatility on the European derivatives market.
This too had effectively created a dislocation from fundamentals, driven by financial players and hedge funds, according to Randall, as the traditional correlation between Newcastle and European prices broke down.
"The introduction of new clearing platforms under which non-traditional market participants can enter -- and transact via small lots -- has increased volatility... the Asian market is being heavily influenced by small volumes... resulting in the physical participants reviewing the method of transaction... it's just not something we're prepared to work with," Randall said.
News of the $130 million loss sent the Singapore-listed company's share price to a 14-year low the same day, as prices shed nearly 33% of their value, while new chairman Paul Brough -- a former partner at accounting firm KPMG -- will lead a strategic review of the commodities trader's operations.
