OUR INDEXATION
METHODOLOGY
Fair Coal Indexation Methodology: Preventing Gaming Through Exclusion
SCR has developed a robust and elegant methodology to ensure the integrity and accuracy of coal price indices. By addressing potential manipulation head-on, SCR provides a fair, transparent, and reliable benchmark for the coal industry.
Executive Summary
SCR’s Fair Coal Indexation Methodology delivers transparency, fairness, and balance to coal price reporting. By focusing on the “quiet middle” of the market, using “Top & Tailing” of 10/80/10% to eliminate extremes, and maintaining independence from vested interests, SCR produces indices that reflect the true equilibrium of the coal market. With the widest circulation in the industry and a commitment to stability and trust, SCR empowers market participants with benchmarks they can rely on for confident trading.
The SCR Methodology
SCR surveys the market for coal price mid-values, eliminates outliers (“tops and tails”), and delivers 8 monthly benchmarks back to the industry—free of charge.
Fairness Through Exclusion
Balance
SCR captures a balanced market view by sourcing inputs from a diverse pool of coal producers, traders, consumers, and other stakeholders.
Scale
With the widest circulation of any dedicated coal publication, SCR invites every active participant in the Asia Pacific market to contribute mid-values.
Independence and Security
SCR operates free from the influence of any coal producer, trader, or consumer and does not rely on third-party financing, ensuring complete impartiality.
Fairness Through Exclusion
Exclusion of Trading Platforms
SCR excludes trades conducted on platforms where the beneficial owners have directional interests in coal prices. Without public scrutiny, such trades cannot be verified as genuine arms-length transactions and may be manipulated to influence indices. These trades also risk being reversed off-screen, further undermining transparency.
Exclusion of Hearsay Publications
SCR disregards assessments from coal trade journals that rely on flawed methodologies, including data from trading platforms with inherent conflicts of interest. Such practices have compromised Eastern Atlantic Basin coal indices, exposing them to potential litigation. By contrast, SCR prioritizes clarity and reliability.
FOB Consistency
Unlike other publications that assume a specific vessel class for FOB indices, SCR adheres to the foundational Incoterms principle that FOB simply means coal delivered onboard a ship at the named port of shipment. SCR’s methodology ensures that the indices reflect the true market value of coal without embedding assumptions about vessel types or port-specific requirements.
This flexibility allows buyers and sellers to account for premiums or discounts based on their chosen vessel type or unique port infrastructure, tailoring the final deal to their needs. By maintaining a clear and consistent specification, SCR ensures that its indices remain stable over time, free from arbitrary adjustments or the introduction of sub-indices that could disrupt existing index-linked contracts. Coal traders can rely on SCR’s indices with confidence, knowing that the methodology is rooted in transparency and respects the core definition of FOB.
The “Quiet Middle”: Mid-Values in Coal Indexation
Mid-values, the central point between bids and offers, serve as a neutral reflection of market sentiment. They offer a balanced perspective free from the distortions of speculative bids, manipulated offers, or trades that lack transparency.
By focusing on mid-values, SCR ensures its indices represent a broad market consensus. This methodology filters out exaggerated or fictitious inputs designed to mislead, as well as trades executed between related parties for manipulation. The result is a robust, unbiased benchmark that captures the market’s true equilibrium.
Top and Tailing with Pareto’s Rule
SCR’s 10/80/10% rule, inspired by Pareto’s principle, filters out extremes to maintain the integrity of coal price indices. Pareto’s rule, commonly known as the 80/20 rule, highlights that a small percentage of causes often account for the majority of effects. In coal indexation, this translates to excluding the top 10% (highest) and bottom 10% (lowest) mid-values during data collection.
By focusing on the central 80% of submissions, SCR eliminates distortions from atypical trades, speculative pricing, or distressed sales. This ensures a fair and reliable reflection of the market’s true value, capturing a realistic mid-point while upholding transparency and equity.
Final Thoughts
SCR’s Fair Coal Indexation Methodology reflects a commitment to transparency, independence, and balance. By excluding distortive practices and focusing on the core market, SCR ensures its indices remain a trusted benchmark in the coal industry.
About the Author
Peter Sceats, a renowned coal broker, trader, and risk manager, is the creator of SCR’s coal indexation methodology. As the founder of the original API coal indices, which once set the tone for international coal markets, Peter revolutionized price reporting by capturing true mid-values for ARA and Richards Bay. Concerned by the flaws in modern coal indices and associated failed futures markets, private investors backed Peter to launch the SCR indices to restore the free and fair spirit of the original API benchmarks, delivering transparency and trust back to the industry.