Energy commodities have always been key players in the global market. This guide focuses on coal trading and the different ways you can trade coal with instruments like CFDs, options, ETFs, and coal company stocks.
Coal prices can be volatile, and traders should take this into consideration. Placing a small portion of a trading portfolio into a diversified basket of commodities, including coal, could actually mitigate trade risk. There are two compelling reasons why traders should include coal in this basket:
Global Growth – Coal is one way to bet on global growth. Emerging market countries will undoubtedly need a cheap source of electricity to power factories and homes in the years ahead. They will very likely turn to coal to meet much of this demand.
Global Infrastructure – Traders should consider the crucial role that coal plays in the steel industry.
Traders purchase coal for a variety of reasons, but the following are most common:
1. Bet on Emerging Market Demand
The fast-growing Chinese economy has an insatiable demand for cheap fossil fuels to produce energy. Chinese electricity usage is likely to surge over the coming decades as the country builds new factories and housing. India will also see massive increases in its electricity consumption as it modernizes its economy. Trading coal is a way to bet on the modernization of these emerging market economies.
2. Bet On Infrastructure Growth & Coal Demand
The United States has not funded major infrastructure projects in decades. Infrastructure requires massive quantities of steel. Demand for coal (and the coke from coal used to produce steel) could surge if plans to replace the crippling infrastructure in the United States come to fruition. Other large developed countries in Europe and Asia will have massive infrastructure needs in the coming years. The price of coal used to make coke is significantly higher than the price of coal used in the electric power sector.
3. Portfolio Diversification With Coal
Trading coal along with other commodities is a way to diversify a trading portfolio. Traders seeking true asset class diversification should consider putting a portion of their tradable assets into a basket of commodities including coal, other energy commodities, metals, and agriculture.
Ways To Trade Coal
Traders have a very limited number of ways to speculate on coal prices. Some previously available means for trading coal have recently ceased to trade.
Where To Trade Coal Futures and Options
The Intercontinental Exchange (ICE) recently suspended trading in Central Appalachian Coal Futures and Central Appalachian Coal Options due to a lack of any open interest in the contracts. Prior to this, the Chicago Mercantile Exchange (CME) delisted trading in Central Appalachian Coal Futures. Then again, the CME still has four categories of coal instruments:
1. Thermal Coal (International);
2. Thermal Coal (US Domestic);
3. Coking Coal;
4. Coal Options.
These four categories have a variety of futures and options markets.
Can I Buy Coal Company Shares?
There are very few publicly traded companies engaged in mining and processing coal. The industry has shrunk in recent years due to mergers and bankruptcies. The remaining companies are not pure-play trades in coal, but the performance of their shares is generally correlated with the price of coal.
Risks of Trading Coal
However, traders should also consider three serious risks associated with a coal trade:
Environmental Concerns – Coal is receiving intense scrutiny in many countries because of the pollution it creates. These concerns are creating competition from greener energy sources. As the cost of greener energies declines, consumers might switch to these for their energy needs.
Regulatory Changes – Coal produces harmful and toxic carbon emissions, and many countries might intensely regulate these in the years ahead. If countries phase out coal as a source of power, then demand could plummet.
Global Recession – Weak economic conditions could cause coal and many other commodity prices to suffer.