- Demand for coal is growing in India, China, and Japan.
- Power generators, miners, and traders there are increasingly needing to hedge the commodity.
Before the emergence of oil and gas, there was coal. Cheap and plentiful coal powered the Industrial Revolution in Europe and the United States. In recent years, coal consumption in those regions has declined, largely because of competition from natural gas, which also has fewer harmful emissions.
But demand for coal remains very strong in other parts of the world, particularly from the growing economies of Asia, which are adding more and more electricity production every year to power their industrialization strategies. Coal producers and exporters around the world now look to meet demand in India, China, and Japan. And while Indonesia and Australia are the dominant suppliers in the region, coal reaches Asia from as far afield as South Africa, Colombia, and Russia.
The diversity of buyers and sellers in the Asian coal market is making the region a significant location for price discovery. And as the markets for physical coal in Asia continue to grow, there is also an upturn in demand for risk management.
Power generators, coal miners, and traders use coal derivatives to protect themselves from price movements that may impact their profitability. The most sophisticated region is Europe, where the electricity markets are liberalized. European power companies typically trade coal as a spread to electricity (the “dark spread”) as well as a spread to natural gas and to European emissions certificates. Asia has traditionally lagged Europe in terms of managing coal price risk. Few Asian electricity companies operated in a competitive environment. They were typically able to pass any increase in higher fuel costs to the consumer, reducing their need for risk management.