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Credit Suisse completes first cleared coking coal swap transaction
Credit Suisse and a major coal industry participant completed the first transaction today with a contract for 60,000 tons that references the Platts Australian coking coal index (Bloomberg: PMTCLAUS). The transaction has a six month tenor and enables Credit Suisse’s counterparty to swap exposure to floating coking coal prices for exposure to a fixed price. The new CME Group contract is listed on NYMEX as Australian Coking Coal (Platts) Low Vol Swap Futures (ALW), with clearing services available through CME ClearPort®. A similar contract referencing the Argus index (ACR) is also available.
Credit Suisse has a history of pioneering new commodity derivatives products. The Bank was involved with the first iron ore swaps in 2008 and completed the first iron ore swap contract with a Japanese counterparty in June 2010. With the addition of coking coal swaps, steel mills will now be able to hedge exposure to all their floating input costs, which encompass iron ore, metallurgical coal, power and scrap.
“Coking coal swaps are a breakthrough in risk management for the steel industry,” commented Kristian Thunes, Credit Suisse’s Global Head of Freight and Iron Ore in Singapore. “This is the missing piece of the jigsaw puzzle that enables mills to hedge all of their variable costs. We believe steel mills will find this a very valuable risk management tool, especially since coking coal prices have been quite volatile in recent years, and would expect coking coal swap volumes to increase rapidly.”
Mr. Thunes added that all participants in the steel industry stood to gain from the introduction of coking coal swaps. In addition to the benefits to mills, he noted that producers could use the instrument to sell forward at price peaks or times when margins were strong, hedge market risk in project financings or convert fixed price revenues back to floating rate.
Traders would also be enabled to protect profit margins on cargos traded as principal, or offer fixed pricing to customers when buying at floating prices under contract, noted Mr. Thunes. Steel consumers could hedge contracts linked to raw materials and buy forward to protect long term margins, while financial investors could also use these swaps to express a market view, diversify from commodities indices or hedge equity exposure, he added.
“These contracts have a very broad range of applications for all steel industry participants,” commented Mr. Thunes. “Credit Suisse has once again led the way in bringing intelligent financial risk management solutions to clients in the commodities sector.”