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Strong Asian demand sees coal gain commodity status
Coal is the most widely-used energy source on the planet and is being burned ever more rapidly, but compared with other raw materials, it has struggled to achieve the status of an internationally-traded commodity.
- Reuters
- Published: 23:30 September 2, 2007
London: Coal is the most widely-used energy source on the planet and is being burned ever more rapidly, but compared with other raw materials, it has struggled to achieve the status of an internationally-traded commodity.
This year booming Asian demand has spurred on the steady growth in spot trade seen over the past decade and record spot prices have had knock-on effects on other markets.
"I would think the coal market is similar to the oil market in the 1970s/early 80s in terms of development," said one industry source. "But over the last 10 years, the industry has certainly turned around. It's a lot more transparent and tradeable and hedgeable than it was. It's beginning to look a lot more like other commodities."
Banks, including Morgan Stanley and Goldman Sachs, trade physical coal as well as paper instruments and there was a limited amount of hedge fund activity, he said.
Spot trade in coal accounts for around 10 per cent of total global trade, with the rest covered by long-term contracts.
This physical trade is dominated by a handful of players, but the over-the-counter derivatives market is far more liquid. The next stage would be to create an international futures contract that could become a pricing benchmark along the lines of Brent or US light crude on the oil markets, which attract huge volumes of investment class money, as well as oil companies hedging their production.
Electronic trading platform globalCOAL aims to launch a physically-settled coal futures contract in the first or second quarter of next year, later than initially planned.
Luring players
Once the contract is established it would take "a couple of years" to boost liquidity and lure in more financial players, globalCOAL's chief executive Eoghan Cunningham has said.
"At the moment, it's like a roach motel - you can get in, but you can't get out. You don't want to get into a position you can't get out of," he said.
He defined a fully commoditised market as one in which the volume of derivatives trade far exceeded the amount physically-traded. The ratio is known as the churn rate.
"Most more mature commodities have a churn rate of around 30 and above," Cunningham said.
For coal the volume of derivatives traded last year was 1.2 billion tonnes, compared with Atlantic physical trade of 220 million tonnes, giving a churn rate of around 5.5.
Already globalCOAL has introduced a Standard Coal Trading Agreement as a step towards standardising coal trade.
Many welcome the progress and predict the proposed futures contract, complete with formal clearing, would be more reliable than the indexes now used as pricing benchmarks.
Rise in Chinese consumption
According to BP's annual statistical review, Chinese coal consumption rose to nearly 1.2 billion tonnes of oil equivalent in 2006, an 8.7 per cent increase on the previous year.
European consumption is far lower at 552.9 million tonnes of oil equivalent for the whole of Europe and Eurasia in 2006.
Environmental concerns are expected to curb European growth, but even there consumption is increasing - rising by 3.1 per cent in 2006 compared with 2005 - and analysts predict coal will continue to make up any shortfall left by energy supplies.
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