Coal Index Methodology Guide

IHS McCloskey produces physical price assessments for all the major international seaborne traded coal hubs. The markers assess fixed price physical business for delivery or loading over a prompt three month period.

These markers are all compiled through a combination of physical market activity (transactions and bid/offer levels) and a survey of active market participants.

This approach limits the ability of one party to determine the market through just one or two transactions. But also with volatility in the market increasing hugely over the last few years a concentration of trades at any one point over the period of investigation may skew the index if the market evaluation component is not used.

We investigate the market daily, seeking to identify and evaluate prompt values based on firm bids and offers and confirmed trades.

We inform the market of any deals we identify and significant movements of bids and offers through our intra-day McCloskey Newswire service during the week, and through our Friday publications (McCloskey Coal Report and McCloskey Fax) at the end of the week.

Each reported deal is thoroughly investigated and is corroborated in some form usually by more than one party. We will exercise judgment after discussion with market players when assessing how to take into account confirmed deals which appear to be distressed or off-market, especially those trades that have transacted outside of the usual trading hours for the markets being assessed.

The price assessments are published in the McCloskey Coal Report, the McCloskey Fax, McCloskey Newswire.

With all of our markers, we do not use freight netbacks from delivered CIF business to determine FOB values and we do not add freight to FOB values to determine CIF values. This is because the CIF and FOB markets often have different dynamics.

Deals done on a 'Cost Insurance Freight (CIF)' basis and those done on a 'Delivered Ex-Ship (DES)' basis are treated as interchangeable and the same.

API indices

The daily McCloskey NW Europe Steam coal marker and Richards Bay FOB markers are published every day, via McCloskey Newswire, and are components of the daily API2 and API4 indices that are published in the Argus/McCloskey Coal Price Index Report.

The markers that are published in the McCloskey Fax and the McCloskey Coal Report are averages of the weeks daily markers.

The markers are compiled by assessing the market through a combination of reported physical activity (deals completed during the day and bids and offers in the market) and the results of a survey which polls market participants at the end of every day. The price discovery process is a rigorous exercise that is carried out by engaging around 30 market participants throughout the week (buyers, producers and traders).

The NW Europe Steam Coal marker reflects market value for any origin of standard bituminous material that is delivered into North West Europe. Bituminous material from all origins is included in the NW Europe marker as long as the material's specification reaches the general European standard, established by McCloskey in 1991, of under 1% sulphur, with prices c.v. adjusted to a 6,000kc NAR basis.

The NW Europe marker is based on delivery into the ARA hub of the most economic vessel in the current freight market from the sourcing country. For example, in most cases this would mean a cape from Richards Bay instead of a panamax; or a panamax from Riga as opposed to a handysize.

We accept trades of part cargoes in the ARA hub if they are 50,000t or over, as evidential deals in the price assessment. We also include deals that are to North West European countries such as the UK, France, the Netherlands, Germany, Denmark and Northern Spain and netback to a CIF Rotterdam equivalent using freight differentials between discharge ports as reported by the leading freight brokers and verified by the freight desks of market participants.

The Richards Bay FOB marker is an assessment of the price of coal delivered into vessels at the capesize Richards Bay Coal Terminal in South Africa. The marker is based on a 1% max sulphur standard South African export quality steam/thermal coal with c.v. adjusted to 6,000kc NAR basis. FOB deals are not generally size-sensitive.

However, in some cases and in some market conditions small sizes of 30,000t and below have to be examined. This is because the only parties able to buy parcels of this size may well be those with stockpiles at these ports as other buyers may not be able to run the risk of not accumulating enough material to fill the most economic size of vessel.

Physical trades and bid/offer spreads

We investigate the market daily - talking to all the main brokers and players - seeking to identify and evaluate prices in the prompt window based on confirmed trades and firm bids and offers. We inform the market of any deals we identify and significant movements of bids and offers through our intra-day McCloskey Newswire service.

The prices for physical deals for inclusion in the daily IHS McCloskey markers are averaged over the course of the day on a volume/tonnage weighted basis.

To be included in the index, a trade must be completed and confirmed by us before 17:30 UK time each day. All deals completed or notified to us after this time will be excluded from the index, and will not be included in the following day's index.

Trades take precedence but in the absence of any trades we will revert to using bid/offer mid-points as the 'next best fit' to evaluate the months within the window, as long as the best bid and offer are no greater than $1 apart in the same month.

There are instances where premiums or discounts may apply to these bids and offers depending on tonnage, destination(s) and coal origin. So the 'evidential' bid/offer spread is what we judge to be the best standard bids and offers in each month that are $1 or less apart.

Market evaluation

In addition to tracking physical business throughout the day, we survey market participants at the end of each trading day. We email participants with details of any confirmed trades and the best bids and offers seen in the market that day in the three month window, and our 'view' of the market based on the information for the three month window. This 'view' is for guidance purposes only.

The use of bids and offers to inform the 'view' can be subjective: a bid/offer range can be many dollars apart and there are instances where premiums or discounts may apply to these bids and offers depending on tonnage, destination(s) and coal origin. We will use our judgment when using bids and offers to evaluate our 'view' of the market.

Participants are invited to reply with their NW Europe marker (API2) and Richards Bay FOB (API4) daily assessments with a strict 17:30 UK time cut off point each day. Any replies that are not received before 17:30 will not be included in the day's survey. In the event that we receive responses from more than one person within a participating company, we will automatically use the first submission received. The results of the market evaluation survey are then topped and tailed discarding the highest and lowest prices. An arithmetic average is then applied to the results.

Every effort will be made to identify trades before we poll the market, to give participants the most accurate reflection of the market. However, in the event that a new trade comes to light during the polling process, and that trade can be verified before 17:30, we will include it in our index assessment.

Compiling the daily markers

The survey's use in determining that day's marker price will vary depending on the level of liquidity during the day and the spread of trades across the three active index months.

If the market is considered to have been liquid over the day, with a number of trades completed and evenly distributed over the active window months, then the volume weighted average of the trades will dominate.

In a day where trades are not evenly distributed over the active window months or there are no representative trades but a number of 'evidential' bid/offer spreads then the survey will dominate.

In a day when there are no trades or 'evidential' bid/offer spreads, the survey result will inform the marker.

Weekly, Bi-Monthly and Monthly Markers

The other IHS McCloskey coal markers, not used in the API indices, are also compiled by assessing the market through a combination of the physical deals and the results of a company survey. This is done weekly for the McCloskey Newcastle FOB marker, the McCloskey Indonesian Sub-Bituminous FOB marker and the McCloskey ARA FOB Barge marker; every two weeks for the McCloskey China, Colombia, Russia East, Russia West and US Petcoke FOB markers. Our Asian Steam Coal marker and Japan CIF Steam Coal marker are published monthly.

The monthly average of the weekly indices is compiled from indices published on each and every Friday within the calendar month or, in the event of a public holiday on the Friday, the weekly indices published on the preceding working day.

The monthly average of the bi-monthly indices is compiled from indices published on a Friday within the calendar month or, in the event of a public holiday on the Friday, the weekly indices published on the preceding working day.

Physical deals and Market evaluation

The prices for physical deals for the McCloskey markers are averaged over the period between publication on a volume/tonnage weighted basis.

In addition to tracking physical business, we undertake a survey of the market. We enter into a detailed exchange with most of the survey participants using the information McCloskey has built up in terms of deals done and bid and offer values. Market participants are asked where they see the market in terms of deals done and bid/offer levels through the week and what value they would mark the market for. The results of the market evaluation survey are then topped and tailed. An arithmetic average is then applied to the results.

If the market is considered to have been relatively liquid over the period of investigation and there is an even spread of trades over the index window then the volume/tonnage weighted average price of these trades will dominate. If there no, or very few, visible representative trades, the result of the market evaluation survey will dominate.

The CIF Markers

The ARA FOB Barge marker is an assessment of the price of steam coal delivered FOB onto barges at the ARA ports. As with the NW Europe marker, bituminous material from all origins is included as long as the material's specification reaches the general European standard of under 1% sulphur, with prices c.v adjusted to a 6,000kc NAR basis. The minimum traded volume is one barge of 1,000t.

The Japan Steam Coal marker takes into account current delivered prices of Australian, Chinese, and Indonesian material into Japan, all prices are adjusted to a 6,080kc NAR basis. Each price component is assessed in line with the general price assessment methodology, however, individual prices are given a weighting based on the proportion of Japan's steam coal imports that each origin has supplied over a rolling three month average. The average is based on Japanese customs import statistics.

The Asian Steam Coal marker, which was launched in 1998, represents the movement in CIF Asian prices by equally collating prices seen into Korea, Taiwan and Japan (one third each). Unlike the other McCloskey markers this is not done through the general price assessment methodology but uses the most recent tender results at Taiwan's Taipower (on an evaluated basis) and the Korean generating companies. In addition, the Japanese element is derived from the Japan Steam Coal marker. Prices are reported on a 6,080kc NAR basis.

The FOB markers

The Newcastle FOB marker is an assessment of the price of coal delivered into vessels at the capesize Newcastle port in Australia over a week. The price is based on a standard Newcastle export quality steam/thermal coal c.v. adjusted to a 6,000kc NAR basis.

The Indonesian sub-bituminous FOB marker is an assessment of the price of this quality of coal delivered into ocean going vessels from a range of East and South Kalimantan load-outs.

It represents the types of coals currently supplied by Adaro, Kideco, Bumi Resources (Melawan), ABK (Loajanan) and Straits Asia (Jembayan) amongst others.

Indonesian sub-bituminous coal specs

*Note: Max sulphur level raised from 0.8% to 1.0% as of week ending September 03 2010.

The loading points are constrained to those that have a minimum loading rate of 15,000t/day and can load panamax vessels or bigger. However, the minimum cargo size is 50,000t. There are no premiums or discounts for any of the loading points.

The index will be evaluated weekly in the same way as our other weekly indices, through a combination of deals done and a market survey (as explained above). All deals within the c.v. spec range will be prorated to a c.v. of 4,900kc NAR.

The cut off point for trades and survey numbers being accepted for inclusion in the formation of the McCloskey Indonesian Sub-Bituminous marker is 6:30pm, Singapore time, on Friday. This equates to 11:30am GMT in London (10:30am BST). Deals done after this time will not be included in the weekly marker. In addition, no survey prices will be sought or accepted after this 6:30pm cut off point.

The Qinhuangdao FOB export marker is an assessment of the price of steam/thermal coal delivered into vessels at the capesize port of Qinhuangdao in northern China. All trades are c.v. adjusted to a 5,800kc NAR basis.

The Puerto Bolivar FOB marker is an assessment of Colombian FOB steam/thermal coal values using the capesize Bolivar port as the exit point. Other non-Bolivar port Colombian trades are included in the assessment and evaluated to a Bolivar basis and c.v adjusted to 11,300Btu GAR.

The Russian Baltic FOB marker is an assessment of Russian FOB steam/thermal coal values delivered into vessels at a range of Russian and non-Russian ports in the Baltic with vessel capacities ranging from handymax to panamax size. A range of ports is included as physical factors such as winter ice in the Baltic may close some ports. Also other factors such as varying rail freight rates, port charges and cross border tariffs may make some terminals in the Baltic less economic than others from time to time.

The Vostochny FOB marker is an assessment of Russian FOB steam/thermal coal values delivered into vessels at the capesize Vostochniy port in Far East Russia. In determining values, deals done at other Far East Russian ports are included in the assessment.

The US Gulf petcoke marker is an assessment of FOB petcoke values out of the US Gulf loaded onto handysize vessels or larger. It is for a high sulphur 4.5%-8% product and is assessed on a 7,500kc NAR basis.

Monthly rollover

For example if the end of the working week is on January 5th then the period under investigation that week is January, February and March. However, if the end of the working week is on January 19th then the period under investigation is February, March and April.

When the end of the working week falls on the 16th in a 31 day month, the close of business on the 16th is in the second half of the month. For example, October 2009 had 31 days and the end of the working week, a Friday, fell on October 16th. This means we included trades for November, December and January.

In a 30 day month where Friday falls on the 15th, that Friday is deemed to be in the first half of the month. For example, June 2009 had 30 days, and in a week where Friday is on the 15th, trades will be included for the current month plus two (June, July, August.)

If a UK national holiday falls on a Friday then the nearest working day prior to that Friday will be the day that the indices are published.

Sleeve deals

Transactions are investigated if it appears that two trades may in fact be one deal which has been executed using a third party 'credit sleeve', purely because the buyer and seller cannot trade directly between themselves for credit reasons. We contact the parties involved and other market participants to determine if the two transactions were lined up through the third party before being executed, or if the middle man saw an opportunity to buy from one party and sell to another for profit - effectively exploiting an arbitrage opportunity. In the latter case we would view the deals as two separate transactions.

We only take into account physical deals and do not take into account paper trades if used to hedge physical business or index-based physical deals when the buyer or seller has locked in the price through paper and reports this price.

Currently the only exception to this is if a physical price is agreed and the deal is taken through a clearing house in an Exchange of Futures for Physical (EFP). An EFP deal is initially executed at a fixed price and is then broken down into two parts: one part being a physical deal done on an index basis, while a paper position of equivalent size is taken in the same direction as the physical deal. This is done in a way that adds up to the same as the strike price and all elements of the EFP deal are executed at the same time.

Obviously, paper values by themselves, whether bid/offer spreads or traded levels, are not taken into account when formulating the physical API2 and API4 indices. However, we acknowledge that paper values can affect physical market sentiment and so feed into contributor assessments. We diligently question participants to ensure they give justification for the prices they contribute in the market surveys, seeking to ensure they reflect the physical and not the paper markets.