Buy Coal Options

On account of its low cost, widespread availability and ease of storage, coal is the most commonly used fuel for generating electricity in the world while coal-fired, generation plays an important role in stabilizing electricity prices in the US as well as elsewhere.

In the United States, coal gas has generally been bought and sold in a two-party relationship between Buyers and Sellers with the intent of accepting physical deliveries from the Producer's reserves to the Buyers facilities. It has also been sold directly by coal producers or by brokers (who received a commission on the price for providing sourcing, marketing and related support services). The Sellers represents directly to industrial and utility Buyers through informal offers or bi formal bidding method.

However, while the vast majority of such 'spot coal' is still sold in this system, a striking change has come in the form of 'Intermediary parties' who are used to man managing positions related to other energy commodities and are now taking similar seats in coal too. They include financial houses and energy traders like ENRON who are now offering both physical coal as well as coal options in the OTC market. These organizations have joined the new trading arms of coal production companies in offering new products in this evolving market.

This new phenomenon, according to some, is responsible for ushering in coal futures trading as well as giving opportunity for more tailored hedging between the counter-parties. Nevertheless, to create a tradable futures contract, the quality specifications have been carefully defined, including limits for heat, moisture, sulfur content, ash as well as physical properties like hardness, etc - factors that are not visible to spot coal dealers. Another factor opposed to the futures trade in coal is the lack of transparency in coal prices. Most traders would prefer to see a liquid and active market featuring substantial movements in prices.

Also, like the gas futures market, where certain players pioneered by ENRON have transformed their approach by offering their customers a wide range of pricing options for gas purchase, underwritten by the company's portfolio of physical and financial positions, coal futures traders have begun to take positions not just in power and coal but also in tradable emission rights applicable to coal combustion, including SO2 NOX, etc.

It is hoped that in the near future, coal trading may be guided by NY MEX look-alike contracts, a forerunner in futures trading.

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