Coal trading markets, as with the rest of the coal industry, are in transition. Producers, power generators, traders and other market participants are increasingly utilizing the over-the-counter (OTC) markets for spot, mid-term and long-term physical transactions – even as they continue to function as a vital hedging tool. The result is increased transparency and transactional efficiencies.
Since 2000, the U.S. steam coal market has been dominated by hedging activity in the financial markets. Traders bought and sold short- and long-term CSX rail, NYMEX barge and Powder River Basin (PRB) financial derivatives cleared on regulated commodity exchanges. While these instruments remain a viable means of managing the price and supply risks inherent in the U.S. coal market, traders, utilities and producers have been finding additional ways to supplement that financial hedging by also trading in the physical OTC markets to address their business needs.
The answer lies in the state of the coal industry itself. Market conditions and M&A activity have been change drivers. Producers and utilities alike have streamlined their operations, seeking cost efficiencies. As a result, they have become more flexible and nimble in their approach to coal trading markets.
The nation’s power sector continues to consolidate, creating opportunities for optimization in fuel procurement. There also continues to be an emphasis on coal inventory management within the larger context of managing coal, natural gas and renewable generation resources. Diverse fuel portfolios and variable needs are resulting in shorter term coal contracts.
Producers have also been right-sizing their business by closing unprofitable mines, tightening up their balance sheets and remaining as flexible as possible to take advantage of market opportunities when they arise.