JSE to roll out coal futures market

[miningmx.com] – TRADING coal futures is probably beyond the scope of the average private investor, but the launch of South Africa’s first derivatives market for the fuel is still worthy of attention owing to the broader economic benefits to the country it offers.

In a nutshell, investors who play in the world of futures are taking bets, presumably informed ones, on whether the price of something, usually not produced yet, will go up or down. It can be mucky work for the untrained and most financial advisers corral amateur investors away from it.

So why do we care? Well, for one, the creation of a coal futures market in South Africa is extremely good news for the country’s emergent coal export mining companies.

“It offers them price discovery in rands,’ says Chris Sturgiss, director of commodities trading at the JSE which is behind the creation of the market along with London Commmodity Brokers (LCB), a privately-owned commodities trading house.

Small players can also improve their cash flow because they will be able to sell their coal inland at coal “pantries’ – or terminals – which have been created by the JSE and LCB instead of waiting for the material to be sold into the offshore market.

The inland terminals are really just sidings near railways with loading and weighing facilities, but they are crucially important in launching South Africa’s coal junior sector.

“These are essentially sidings near eMalahleni (formerly Witbank),’ says Sturgiss. “The sidings have capacity for weighing and facilities for loading.’ About 50 wagons holding a maximum of 4,200 tonnes will be accommodated at the inland terminals, deemed an appropriate size for the current market.

Selling to the inland terminals also removes the problems associated with getting access to export terminals such as Richards Bay Coal Terminal (RBCT) which is infamously difficult for smaller coal miners since they are dominated by the major shareholders such as Anglo American and BHP Billiton.

Launch of the market is planned for mid-November, says Sturgiss who concedes that the proposals were a worry to Eskom which was concerned the terminals would only make it easier for much-needed fuel to be sold into offshore markets.

The south African government is increasingly protective of coal that would ordinarily be consumed by Eskom finding its way to higher bidders in offshore markets and is considering legislation aimed at restricting the ability to access export markets.

“It would certainly have an effect on liquidity of the market,’ says Sturgiss. “If you look at other examples where the government has intervened in the market, it does make it difficult to get liquidity and that’s important because this market is all about long-term planning for which you need liquidity,’ he says.