Broking house London Commodity Brokers (LCB) and the JSE are drawing up plans for the future of thermal coal, which could be a game changer for the South African coal market and help the junior mining sector to compete on a level playing field, states LCB GM Bevan Jones.
The Coal Futures Contract was first announced by LCB and the JSE in Cape Town in January 2013.
Coal futures are standard-ised exchange-traded con-tracts in which the contract buyer agrees to take delivery from the seller of a specific quantity and quality of coal at a predetermined price on a future delivery date.
The JSE contract solves the issue of investment and simplifies the logistics issue, as coal miners need not worry about getting their coal to an export port to achieve proper export parity pricing, Jones explains. “Ultimately, this would mean cleaner, quicker and more efficient logistics chains and several inland coal ter-minals, which will present significant opportunities for buyers and other parties to procure coal reliably at true market prices.”
Unfortunately, coal reserves are becoming smaller and more fragmented, with lower-grade qualities emerging in international markets, Jones notes, highlighting that, should coal exports from South Africa be banned, restricted or taxed in future, many coal miners will likely cease to do business.
This is because export prices are typically required to ensure the financial viability of these operations, he points out. For every new export coal mine that is developed, 30% to 40% of coal production can be sold to Eskom.
Should private coal mines close, the security of coal sup- ply for State-owned power utility Eskom could be threatened. As a result, the development of the coal mining industry will be slow and inefficient and the cost base of coal mining will rise significantly, resulting in much higher prices for Eskom coal.
However, the JSE contract will help to incentivise invest-ment in coal mining, making more coal available for Eskom. “Because Eskom can then procure its own lower-quality coal at a lower, quality-adjusted price to the JSE price, Eskom will always be assured of paying lower prices than those of export coal,” states Jones.
If not, and Eskom continues to buy coal at cost-plus rates with yearly increases of some 10%, the utility could possi-bly end up paying more for its lower-quality coal than equiv-alent export coal prices within five years. “This would of course only be true if export coal prices remained bearish as they cur-rently are,” Jones points out.
The coal market desperately needs investment and a solu-tion to the issue of logistics, both in terms of getting the trucks off the road and finding proper rail and port solutions.
“Commodity brokers and the JSE would also benefit from increased revenue oppor-tunities because of trading in the new product,” Jones states.
The losers would be the agents and tenderpreneurs who add no value to the coal chain while trying to extract margins in the price. So, for instance, a hospital in Gauteng should be paying around R880/t for delivered coal but, thanks to many layers of agents, they sometimes pay more than R1 000/t. The JSE contract would bring much-needed trans-parency to both local and export markets, thus also enabling better oversight of revenues and tax collection.
Open-Trade Futures Market
The open-trade futures market should, ideally, be established before the third quarter of 2013, Jones predicts.
The contract will entail the physical delivery of export-grade material (local B grade coal), with sizing from zero to about 50 mm, which means the coal is typically destined for the export market. However, sized coal could also be bought by local indus-trial buyers through the JSE contract as the sizing and transport would be handled by local traders.
“Buyers and sellers would typically be able to hedge or contract for coal deliveries about two to three years in advance at the prevailing price of the futures contract. “The beauty about a futures contract is that the price on expiry is the settlement price,” Jones notes.
The futures price will be a monthly price, he states, adding that the success of any physically delivered coal futures market depends on the success of reliable delivery. For this, a range of inland coal terminals is required to register as coal delivery and handling points.
LCB and the JSE have secured the cooperation of a few open terminals, but more open and closed terminals are sought to ensure that sellers and buyers make and receive delivery from Delmas, in the west, to Carolina, in the east of Mpumulanga.
LCB was established in 2005 with the aim of becoming the market’s premier over-the-counter physical dry bulk commodity broking house. With its roots in London, LCB has grown to become a global enterprise with global offices, including London, South Africa, Singapore and Dubai.