The launch of globalCOAL’s Richards Bay (RB) Indices on January 11 marks a milestone in coal price benchmarking, says the London-based coal e-marketplace.
The company says its shareholders ensure the indices, which are produced in weekly and monthly formats for the South African coal-producing region, represent the objective view of the industry as a whole, allowing traders to “eliminate judgement and interpretation”. The shareholders include mining and natural resources firm Anglo American; Italian electricity firm Enel; E.ON Kraftwerke, a subsidiary of German multi-utility E.ON; Tokyo-based EPDC Overseas Coal Co; and TXU Europe Energy Trading.

Coal traders are now able to transact derivative instruments against the RB Indices. The three instruments are:

• Swap RB Index, a paper-traded instrument settled in cash against RB Monthly Index;
  
• Phys RB1 Index, a physically settled RB1 product where the price is linked to the RB Monthly Index; and
  
• Phys RB2 Index, a physically settled RB2 product where the price is linked to the RB Monthly Index.

Significantly, these indices are planned as the first of a series. Over the coming months further indices covering the other geographic areas relevant to the coal industry – Amsterdam-Rotterdam-Antwerp; Newcastle, Australia; and Puerto Bolivar, Columbia – will be introduced on globalCOAL’s website. Such development, says the company, will reflect the emergence of an increasingly commoditised coal market.

“GlobalCOAL doesn’t act in the market-place; we simply facilitate the trade by creating the e-market trading environment,” says John Loewen, globalCOAL’s marketing director. “Our market members trade with each other on a many-to-many basis and represent the A-list of the world’s international coal trade producers and consumers.

“Because the contracts are standardised, it is so much easier to move into and out of positions,” he adds. “Previously, traders couldn’t do that because each deal was negotiated on a customised basis.”

In November 2001, for example, E.ON appointed globalCOAL to operate an electronic tender. E.ON will tender for 100,000 tonnes of globalCOAL’s Amsterdam-Rotterdam-Antwerp specification coal on a delivery-ex-ship (DES) basis for delivery in the second quarter of 2002. E.ON says the electronic contract saves it time and money.

“The biggest advantage at the end of the day is the cost saving in transactional fees,” says Loewen. “But there is a lot more to it than a single cost benefit. In coal trading, until recently, you have not been able to hedge, to trade in financial product or to incorporate risk management tools.”

John Loewen, globalCOAL: coal is taking its place at the integrated energy trading desk

Not everyone is impressed, however. “The reason we joined globalCOAL as a participant was so we wouldn’t miss out on a new development and a possible sourcing opportunity,” says Borries Raapke, vice-president of RAG Trading, the trading arm of RAG Coal International (Germany). “We haven’t used it yet. As a company that trades 20 million tonnes annually, we need to have our strategic partners. It’s a different story if you trade in a unified product like oil brands but there is more than one parameter in determining whether you can use coal or not.”

GlobalCOAL’s Loewen says RAG’s view reflects its position as a traditional coal company. “The burners [coal-fired power plants] need a precise kind of coal, and they need to know what they’re getting. That’s the old school and is reminiscent of the oil market of 20 years ago.

“Then it was very difficult to price oil: everyone who traded wanted different degrees of specification,” he adds. “Nowadays, there is a fairly standardised type of oil market-place, and you see exactly the same kind of evolution in the coal markets.”

GlobalCOAL’s chief executive officer (CEO), Sean Gilbertson, says of the 3.5 million tonnes plus of coal the company has traded since its launch in May 2001, more than 90% either has gone or will go to physical delivery. “And that’s a very powerful demonstration of how happy our customers are to purchase under our contract,” he says.

Yet some critics point out that 3.5 million tonnes is still a small proportion of the world’s traded coal. Andrew Ertel, CEO of Evolution Markets says his company traded just under 120 million tonnes in 2001. However, as Sean Gilbertson points out, globalCOAL is not involved in the US domestic coal market but, rather, in the sea-borne market. “In addition, we have hardly begun in the financially settled market-place,” he says.

The confidence of globalCOAL’s managers lies in their perception of changes in the world’s energy markets. “The driving force is deregulation in the electricity sector,” Gilbertson says. “Electricity prices used to be very stable, which meant that [coal] contracts were entered into on a long-term basis. Nowadays, people want to be able to make decisions on a shorter and shorter time scale.”

Shorter contracts mean traders are taking more risks and will increasingly need to hedge those risks. “Coal is taking its place at the integrated energy trading desk,” says John Loewen. “The numbers we see in the oil and gas sectors, for instance, are well in excess of five times paper to physical.

Evolution Markets’ Ertel would agree. “Together with United Power and Platts, we are launching a series of indices this month that will allow people to trade in the swap market in the US,” he says. “And in the next three months we will become more active in the European markets – both physical and financial.”

Loewen says that if the market sees just three times the level of paper to physical in coal screen trading in the next three or four years, it would still mean at least 300 million tonnes in paper trade. “Now, that’s getting into a very liquid market-place,” he adds.