A FUTURE IN COAL - VIABLE OR NOT

Coal for power generation steam coal-is the major quality of coal trad ed. Coal has a strong inter-relationship with oil (and gas), which aff ects both its volume and price. Internationally traded coal and spot t rading constitute only a small percentage of total world coal producti on, but these sectors provide a particularly interesting basis for est ablishing whether more sophisticated trading mechanisms, such as futur es, could develop. Currently, long-term contracts dominate the coal ma rket; other energy commodities, however, have developed successful fut ures contracts. To establish whether coal markets will develop in the same way coal price and volume data are tested against a set of criter ia developed by Treat, which are considered to represent some of the f actors that contribute to the development of a successful futures cont ract. The criteria are, essentially, an ad-hoc list of commodity-based characteristics, but Treat developed quantifiable limits against whic h he tested data for energy futures contracts (oil and gas) to establi sh why they had succeeded or failed. The criteria that have been used to test coal's suitability for trading as a future are: price volatili ty; uncertainty of supply and demand; product perishability; sufficien cy of deliverable capacity; product homogeneity; market concentration; availability of price information; uniqueness of trading opportunity; market timing; and market liquidity. Although coal meets some of the conditions represented by the criteria, it does not appear to be ready for the launch of a futures contract. Market players are subject to l ittle risk in what is quite a stable market, have strong preferences f or the specific nature of long-term contracts and profit from product uniqueness (each trade is individually negotiated). Potential structur al changes in the western Europe market are not felt to be sufficient to create demand for a coal futures contract. However, an empirical mo del developed by Black could form the basis of a further study to pred ict the potential for success of a proposed contract, although establi shing the specifications of such a contract would require extensive da ta gathering and discussions with players in the market.