Thanks for sharing your analysis! Quick question for you. Can coal producers take advantage of high spot prices by hedging the price of coal. I'm thinking of Thungela Resources in SA. They are printing FCF at the current spot price and could lock in a very high profit this year by entering into a contract to sell its coal at the futures prices. Is there any reason it wouldn't do this?
1) You can lock in long term supply contracts at a fixed price
2) You can use the futures market to lock in some portion of your exposure
The problem is the futures are severely backwardated... meaning that a futures contract 6 months or a year from is priced materially less than current spot prices. Therefore you can't really use futures to hedge at current price levels (but you could use them to hedge at those backwardated levels). Moreover, a coal buyer is not going to agree to a supply contract at a fixed price at today's level IF the futures markets are implying that prices will back off in the next 6 -12 months.
That's a long way of saying.. Not really. You can't hedge today's spot for any great length of time. Coal producers are inherently long those futures prices and coal buyers are inherently short. Hope that helps!
Great analysis, thanks for sharing your thoughts. Keep them coming!
Thanks for sharing your analysis! Quick question for you. Can coal producers take advantage of high spot prices by hedging the price of coal. I'm thinking of Thungela Resources in SA. They are printing FCF at the current spot price and could lock in a very high profit this year by entering into a contract to sell its coal at the futures prices. Is there any reason it wouldn't do this?
There are two ways to hedge:
1) You can lock in long term supply contracts at a fixed price
2) You can use the futures market to lock in some portion of your exposure
The problem is the futures are severely backwardated... meaning that a futures contract 6 months or a year from is priced materially less than current spot prices. Therefore you can't really use futures to hedge at current price levels (but you could use them to hedge at those backwardated levels). Moreover, a coal buyer is not going to agree to a supply contract at a fixed price at today's level IF the futures markets are implying that prices will back off in the next 6 -12 months.
That's a long way of saying.. Not really. You can't hedge today's spot for any great length of time. Coal producers are inherently long those futures prices and coal buyers are inherently short. Hope that helps!
very helpful. Thank you so much!