The global energy market is once again experiencing a shift. China recently imposed a 15% tariff on U.S. coal and natural gas imports, effective February 10, 2025. These tariffs were announced as a retaliatory measure against recent U.S. trade actions. Importantly, these tariffs do not apply to other Free Trade Agreement (FTA) countries, and Australia remains exempt due to its FTA with China. This places Australia in a highly advantageous position, particularly in the Newcastle coal market, where much of the coal from the region is loaded for trade.

China’s demand for Australian coal has already been increasing since last year, and the tariffs may serve to accelerate it. We leverage OptionMetrics’ IvyDB Futures European data to gain valuable insights on this matter.

As can be seen in the chart above, Newcastle coal futures prices have been declining from a high of around $160 per tonne in mid 2024. This growth in the first half of 2024 was due to similar tariffs imposed by China back in January of 2024. Since then, Newcastle coal futures prices have fallen, and it is trading around $130 per tonne currently. This price dip and tariff news could present an opportunity for traders and investors, particularly in light of recent options market dynamics.

A closer look at the options market suggests that investor sentiment is turning bullish on Newcastle coal futures. The graph above shows a great divergence between the Out-of-the-Money (OTM) Call and Put 30 Day Implied Volatility (IV), which many refer to as skew. Typically, when put IV is higher than call IV, it suggests a bearish outlook as traders hedge against downside risk. However, in the current market, we see the opposite: put IV has been decreasing as call IV rises, indicating reduced demand for downside protection and increased call buying. The 30 day skew is the lowest it has been over the past 2 years, suggesting that traders anticipate a potential rebound in coal prices. The higher call IV reflects expectations of future price gains, aligning with the fundamental advantage Australia has in the market due to its FTA with China.

The alignment of geopolitical trade advantages and options market sentiment suggests that now could, potentially, be an opportune moment for traders and investors to take bullish positions in Newcastle coal futures before the market reacts to these tailwinds