Unlike some other energy commodities, coal is not exchange-traded. Eighty to 85% is sold on the long-term market, usually on bilateral contracts for delivery over a year or more, and the balance is split between the spot and the over-the-counter (OTC) market, according to the American Coal Council.

Spot markets are based on a consumer's sending out a request-for-proposal (RFP) listing tonnage, specifications and times of delivery needed. Delivery may be spread over as much as a year. The OTC market handles deals for shorter-term deliveries, often through brokers. Some OTC participants have been hoping for development of a paper swaps market, so coal buying risks can be hedged, but that market is still in its infancy.

When the New York Mercantile Exchange (NYMEX) initially offered coal futures in July 2001, it found few takers. The big producers, the so-called naturals, avoided the NYMEX as they had avoided the OTC. The major effect of the NYMEX futures contract's creation was the adaptation of its coal specifications into the "NYMEX lookalike" specification, which has become the eastern coal benchmark in OTC trading, and the use of NYMEX's Clearport system to limit credit risk in that OTC trading. But with this year's volatility and the entry of more purely financially players into the energy markets, NYMEX is preparing to introduce two new financially settled swaps contracts, on eastern and western (PRB) rail coals, that will be settled on Platts' broker-based indexes.

NYMEX to introduce CSX, PRB rail futures contracts 'soon'

NYMEX, using Platts OTC broker indexes, will introduce two new rail-served futures contracts, one of CSX-origin and the other based on 8,800-Btu Powder River Basin coal, NYMEX Research Director Jay Gottlieb said Sep 27 at Platts Coal Marketing Days conference in Pittsburgh, Pennsylvania.

These two are the first coal futures contracts that NYMEX will introduce in more than three years. On July 12, 2001, NYMEX introduced its long-awaited Central Appalachian-sourced contract based on 12,000 Btu/lb, 1% sulfur and 10% moisture. That instrument is based on single barge load contracts (1,550 tons) at Big Sandy River origin points. NYMEX finally introduced that contract after obtaining approval for trading the contract from the federal Commodity Futures Trading Commission in May 1998. NYMEX had been waiting for several years for more volatility to develop in certain coal markets. Now, as then, NYMEX is banking that the new launch could spark renewed interest in hedge market vehicles for coal.

Still, Gottlieb told the CMD audience that no launch date has been set, but he noted, "Soon, I hope." He said that the IT department, through which NYMEX funnels new products, has about 70 products in line ahead of the coal swaps.

Here are the particulars:

In each case, the contract quantity will be 1,000 tons, and the Floating Price for each contract month will be equal to the final monthly average for the corresponding month of the Platts OTC Broker Index. The minimum price fluctuation will be $0.01/ton and there will be no maximum price fluctuation.

The CSX contract will be based on the Floating Price for each contract month equal to the Final Monthly Average for the corresponding month of the Platts OTC Broker Index for the CSX Big Sandy/Kanawha, 12,500 Btu/lb, 1% sulfur index published in Platts Coal Trader in the table titled "OTC Broker Index" in the first regular issue of the contract month.

Likewise, the PRB contract will be based on the floating price for each contract month equal to the Final Monthly Average for the corresponding month of the Platts OTC Broker Index for PRB coal quality of 8,800 Btu/lb, 0.8 lbs sulfur/mite Index published in PCT on the date and publication position noted above for the CSX instrument.

The termination date of a contract will be the last business day of the month preceding the contract month (for example, a March contract terminates at the end of February). The cash settlement date will be after the close of the first business day in the contract month.

Four brokers are providing price data for these instruments, Gottlieb said: "People have assured us that these are reliable prices; that the indexes are sound."