Coal is found in many different forms. Whereas each type has a different use. Coal is being used in power generation, the manufacturing of cement, iron and steel. Coking coal is used to produce coke, which in turn is used to produce pig iron. The commodity coal used for energy generating is declining due to an increase in the use of natural gas and nuclear power. The overall coal production however is increasing, for other purposes. There are a number of reasons for the increased production and consumption of coal. Firstly, the demand for energy continues to increase. Secondly, coal is a cheaper energy source than oil or natural gas and also easier to transport. Thirdly, the remaining available reserves are much greater than the oil and gas reserves. There are three parties active on the coal market. The mining companies who extract the coal, utilities who use the coals for generating energy and industrial companies who use to create their products.
Pricing of the commodity Coal
Because there are different types of coal on the market, different benchmarks has evolved for the price of the different types of coal. These prices form a basis for the futures contracts traded on the exchanges across the world. The environmental awareness affects both the supply and demand side of the coal market. When mining coal, methane is released which has a negative effect on the environment. When coal is burnt it releases a large amount of pollutants into the atmosphere. This may cause producers to switch to a less polluting fuel. The price of coal will also be influenced by the price of other fuels. When other fuels have a more attractive price the demand for coal will drop and when other fuel prices rise, coal becomes more attractive.
The supply of coal can be affected by a number of factors. The supply will be affected by the freighting costs. Because a large portion of coal is traded internationally, the transport costs will play a more prominent role in the price of coal. Mining issues can affect the supply of coal in multiple ways. First of all the actual mining of coal can be disrupted by both technical as weather conditions. furthermore the production costs will affect the supply. When the coals must be mined from deep within a mine the cost of extracting coal will increase and thus it may become unattractive to extract this coal.
There are multiple factors that influence the demand for coal and thereby the price of this commodity. The electricity industry is an important factor in the demand for coal. As electricity producers are one of the largest users of coal, an increasing demand for electricity will have a major impact on the demand for coal. Increasing economic activity will also likely result in an increasing demand for steel. Because the production of steel requires coals, the demand for coal will increase accordingly.