Coal comes of age with futures: globalCOAL

By Jackie Cowhig

BALI, Indonesia (Reuters) - Coal trade will come of age with the launch of its first exchange-based futures this year, a partner in the project said on Tuesday.

Futures will satisfy a pent-up demand from hedge funds and banks for more trade in coal, Eoghan Cunningham, chief executive officer of electronic trading platform globalCOAL told Reuters.

globalCOAL, privately owned by a group of coal producers, utilities and traders, will launch the futures on the IntercontinentalExchange's (ICE.N: Quote, Profile, Research, Stock Buzz) ICE Europe.

"I've been touring around Asia and Australia talking to funds. They are keen to get involved," Cunningham said. "Some of the smaller energy focused funds will be the first to get involved, but others, the much larger macro funds will need a certain level of liquidity first."

"Over time the funds will be the players providing liquidity to the coal market," he added. "It used to be the banks but the credit crunch has hit them fairly hard so the funds will take on more of the speculative risk."

globalCOAL is a platform for physical Australian coal free-on-board (FOB) Newcastle, for South African coal FOB Richards Bay and multi-origin coal delivered into Europe (DES ARA).

It will launch a cleared Newcastle swap on ICE at the end of July, he said. A DES ARA physical coal futures contract will launch on ICE later in 2008.

"The whole energy complex is going up, coal represents 28 pct of primary energy demand. It's been the fastest growing energy source worldwide for the past three years," he said.

"The grain futures markets on exchanges are a good example of how coal could trade going forward," he added. "In terms of how people trade and manage their basis risk there is not much difference between grain and coal," he added.

"GIVE ME ACCESS"

Over-the-counter coal swaps developed several years ago in Europe as a result of the deregulation of the power market, which led to the separation of physical and financial exposure, Cunningham said. Since then the market has continued to rapidly evolve and now needs exchange-based futures.

There are potentially large players still on the sidelines of the coal market who have been waiting for a cleared contract on an established exchange, he said.

"Liquidity begets liquidity. There are players among the funds and financial institutions who've been saying 'give me access, give me access, give me access,'" he said.

Coal producers and consumers are already active users of OTC swaps and index-linked physical pricing.

Speculators, hedge funds, bankers active across the commodity markets not currently trading coal cannot wait to negotiate a suite of counterparty agreements to trade OTC swaps and some are only able to trade on exchanges, he said.  Continued...