Coal Markets

Vincent Kaminski

The coal markets can be considered a good laboratory for anybody interested in studying the emergence and development of a new market. Coal has historically been supplied under long-term bilateral contracts (in the US, often as long as 20–30 years), with a significant component of the delivered price determined by the cost of transportation. In the US (and elsewhere), the primary reason for reliance on long-term contracts was the high capital cost of new mining projects and related transportation infrastructure, which required many years of reliable revenues to justify the risks involved. On the buy-side, regulated utilities were in a position to enter into such contracts as they could transfer the cost to ratepayers with a high degree of certainty. The operators of coal-fired power plants with high capital costs and a long expected life had similar objectives to the coal miners: they required long-term arrangements with regular deliveries of coal to their sites to avoid costly shutdowns. Since around 2000 we have seen the emergence of a more active spot market, combined with the development of financial derivatives. This has happened at the time when the coal industry has come