South Africa’s New Thermal Coal Futures Exchange to Manage Risk

The launch of a futures exchange for the South African thermal coal export market may give power utility company, Eskom, food for thought given its interest in protecting domestic supply. South African Coal Report looks at the implications.
South African Thermal Coal Exports | Eskom | Supply | Futures Exchange
South African Thermal Coal Exports | Eskom | Supply | Futures Exchange
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Feb. 16, 2013 - PRLog -- London Commodity Markets (LCB), a minerals trading company, and the Johannesburg Stock Exchange (JSE), announced at the McCloskey South African Coal Export Conference in Cape Town last week that the parties hoped to enlist inland coal terminals for a futures market that would allow trading companies to limit downside price risk.

“The aim is to cover price risk rather than speculation which has given futures trading its bad name in the past,” said Chris Sturgiss, director of commodities at the JSE. “The exchange will also offer price discovery,” Sturgiss added.

For its part, LCB will provide the physical delivery component, offering smaller mining companies, in particular, improved market access. “The inland coal terminal will be JSE-registered and it will allow junior mining companies to deliver their coal by truck,” said Bevan Jones, GM of LCB’s Johannesburg office.

“From there the juniors will get a true export parity price and remove the scramble to Richards Bay Coal Terminal (RBCT),” Jones added.

So far, there has been interest in registering coal sidings with the JSE/LCB scheme, Jones added on the sidelines of the conference. LCB was seeking a product that was below RB1 specifications, but somewhat higher than the quality of coal Eskom would burn in its power stations, Jones said.

Herein lies the potential conflict, however. Eskom has been motivating with the South African government, which is its only shareholder, to regulate the export industry as it fears it will be priced out of market by Asian importers who are now prepared to buy 5,500kcal coal, the type Eskom would traditionally burn.

In addition, it’s unclear how the coal futures market will combine, if at all, with plans by Eskom and the government’s public enterprises department to establish coal pantries for new, black-owned companies. Last year, Malusi Gigaba, public enterprises minister, launched a scheme to stimulate South Africa’s junior coal mining business.

As part of the proposal, he wanted the establishment of a coal pantry that would provide a platform for the beneficiation of coals, thereby encouraging new mining companies to engage in coal trading activities. Amendments to South Africa’s centrepiece mining legislation, the Minerals and Petroleum Resources Development Act (MPRDA) places huge importance on beneficiation of coal so, in that respect, the terminals planned by the JSE may dovetail with government intentions.

Certainly, the initiative will ease pressure on Transnet Freight Rail (TFR), a divison of another state-owned company, Transnet, which is trying to open up more rail entitlement to RBCT to black-owned businesses, as well as expand its own capacity.

An industry source recently told the South African Coal Report that Transnet had given RBCT’s shareholders an ultimatum that it either assist with lending more entitlement to small, black-owned businesses or face the prospect of Transnet building its own coal-dedicated terminal in Richards Bay. Currently, the Quattro scheme, established for black-owned players without RBCT entitlement, provides just over 4Mtpa in capacity.

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