LONDON Feb 1 London Commodity Brokers and the Johannesburg Stock Exchange are drawing up plans for physically delivered thermal coal futures, a move that could enable junior miners to get higher prices and to attract investment.
The British broker, a major player in physical and futures markets for coal, said it aims to launch a contract with the JSE by the middle of 2013 that will enable small miners to get a guaranteed price and move their coal longer distances by rail.
South Africa's coal industry is dominated by major miners such as Anglo American, BHP Billiton and Xstrata .
Smaller miners fail to secure good prices because they lack the infrastructure to ship their coal and because they cannot match the buying power of the country's state-owned power producer Eskom, Bevan Jones, general manager with London Commodity Brokers, said on Friday.
"This futures contract would enable mining companies to deliver their output to approved terminals and get a fair price for their coal at a parity with export prices. It will also enable them to use a guaranteed return and attract investment," he added.
Jones said the forward contract is likely to be part-guaranteed by the JSE and would be settled between energy-intensive buyers, such as sugar mills, and smaller producers.
"We'd be delighted if we could see volume in the contract reach 1 million tonnes," Jones said.
South Africa exported almost around 68 million tonnes a year from its main export terminal, Richards Bay, the port authority's data shows.
The broker said the development of a 'free-on-rail' contract would be along similar lines to the New York Mercantile Exchange's (NYMEX) Central Appalachian Coal spot contract, which prices coal sent by barge in the eastern United States.
The broker's move comes as South Africa's government said this week it was considering whether to declare coal a strategic asset and guarantee that more of the country's coal is available to domestic consumers, particularly Eskom.
The utility, which uses the fossil fuel to generate around 80 percent of its electricity output, claims major coal producers export too much abroad where they can get higher prices which puts the country at risk of power cuts.
"Offering a physically-delivered futures contract would be much preferable to declaring coal a strategic asset," Jones said, explaining that coal companies could guarantee higher domestic prices through swaps and other market mechanisms.
"Limiting exports in such a way would kill the coal industry in South Africa as you'd see mines stop production," he added.
Richards Bay coal, which is mostly exported to Asia and Europe, commands a price of around $85 a tonne in the spot market, while Eskom is able to buy coal at around $25 a tonne for lower quality coal located close to power stations, before transport costs are taken into account.
South African industry has balked at the prospect of paying the higher power prices that Eskom wants due to higher prices for coal the utility says it will have to pay.