Commodity Derivatives: Markets and Applications

9

Coal

At the industry’s peak in the first quarter of the twentieth century, collieries employed 1m miners. Today only six underground mines and a handful of opencast mines are operating with a workforce of fewer than 5, 000’.

Quote from Financial Times on the state of the UK mining industry

SYNOPSIS The purpose of this chapter is to outline the most common derivative structures seen in the coal market.

 

The chapter will be of interest to those who are new to the coal market and are unfamiliar with the market or the hedging structures that are commonly traded. However, the chapter has been structured such that the detail on the market merely provides a context around which the discussion of the derivative structures is placed. As a result, those readers who wish to “cut to the chase” can start in the final section.

The chapter starts by defining the different varieties of coal. Then the discussion develops to consider the demand and supply for coal. The next section describes the main participants in the coal market and the nature of their market risks. From this the different factors that will influence the price of coal are highlighted and analysed. The final section presents the main derivative structures that are used in the coal market. These comprise futures, swaps and swaptions. Although vanilla options are also traded in the market, these are not covered in the chapter to avoid repetition with materials presented in previous chapters.

9.1 THE BASICS OF COAL

Coal, ...