COAL futures to begin trading but analysts aren't sure it'll heat up energy markets

Thursday, July 12th 2001, 12:00 am
By: News On 6

NEW YORK (AP) _ While the New York Mercantile Exchange believes it can stoke interest in coal futures trading, analysts say this fossil fuel won't necessarily take off like wildfire on commodities markets.

``It's gonna be real wait and see,'' said David Khani, a coal analyst for Friedman, Billings, Ramsey Group Inc. of Arlington, Va.

Futures exchanges exist to transfer the risk of price volatility from people who don't want it _ in this case, power producers or steel manufacturers _ to speculators who are willing to take a gamble on making profits from this uncertainty.

One of the main reasons for doubts about coal as a commodity is that it has little history of wide price fluctuations, a key ingredient in bringing together buyers and sellers. And of the roughly 1 billion tons of coal burned in the United States annually, 80 percent is bought through long-term contracts, not on the daily spot market.

Skeptics also contend that the exchange is overestimating the industry's need for coal futures, arguing that power producers are protected from price swings by passing along higher costs to consumers.

But those assumptions were under assault as Nymex's Central Appalachian futures contracts were to begin trading on Thursday.

The price of coal per ton doubled in a matter of weeks last winter in some parts of the country, boosting the stock prices of coal companies just as quickly.

Also, as more and more states deregulate electricity markets, power providers like Mirant Corp., American Electric Power Company Inc. and Dynegy Inc., won't be able to hide behind laws allowing them to pass on higher costs to consumers. Instead, they will be forced to become more competitive with one another, said Andy Ozley, manager of fossil fuels for Atlanta-based Mirant.

``Welcome to the free market,'' he said. ``The pace of deregulation will encourage more and more activity on the exchange. At least that's the hope.''

The swapping of coal contracts is not entirely new.

Energy traders, including Mirant, Enron Corp. and Aquila Inc., helped build an international over-the-counter exchange on which some 1 million tons of coal can switch hands on any given day. Some days, not a single transaction takes place.

Just how much daily volume Nymex coal futures will add to the mix is anybody's guess.

Nymex Executive Vice President Neal Wolkoff said, ``If it starts in the low hundreds and builds to maybe 5,000 contracts a day I think that would be viewed as a successful marketplace.

``We don't expect this to approach anywhere near the size of natural gas and crude oil,'' for which hundreds of thousands of contracts are swapped each day, Wolkoff said.

At the very least, Wolkoff said, the Nymex coal futures will benefit the industry by making a ``transparent price reference'' available to buyers and sellers of both long- and short-term contracts.

But critics believe Nymex's coal futures will suffer the same low trading volume that the exchange's electricity futures have since 1996.

``There will be a flurry of trading when it starts, though I'm not so sure it's going to be a long-term success,'' said Howard Simons, a finance professor at the Illinois Institute of Technology and a former commodities trader.

The run-up in coal prices last winter occurred as demand outstripped supply. Coal companies curtailed production and even closed some mines after a mild winter in 2000 at a time when power producers sought a less expensive alternative to natural gas, which had quadrupled in price.