Coal is a combustible black sedimentary rock that is made mostly of carbonized plant matter that is trapped between rock deposits. Over a period of time (say millions of years), biological and geological processes cause this plant matter lignite, sub-bituminous coal and finally anthracite coal which is used as fuel to generate heat or electricity. Due to its availability and global warming, coal is currently used to produce about one-third of the world’s energy needs, including about two-fifths of global electricity. Coal is essentially a solid fuel to produces heat and electricity via combustion. It generates about 41% of the world’s supply of electricity besides its key roles in other societies. The activities of buying and selling coal is called code trading.
Since the inception of the coal trade during the industrial revolution, coal has been traded all over the world. With large amounts being shipped huge distances by sea and rail to reach markets. Since a large number of suppliers are active in the international coal market, the coal trade is competitive and dynamic with a variety of qualities are traded and new price indexes created. The largest importing countries are India, China, South Korea and Japan. The world biggest coal exporters are Indonesia, Australia, Russia, the United States and Colombia. Global coal production has grown since 1970. However, with the shift towards clean, renewable energy, its production numbers have reduced over time.
In coal trading, coal prices can be volatile, and traders should take this into consideration. That is why placing a small portion of an investment portfolio into a potpourri of commodities helps prevent investment risk. One of the reasons why traders should include coal in this basket is global growth. This is because countries will definitely need a cheap source of electricity to power factories and homes, and since coal fits the bill, its prices will definitely increase. Then the role of coal in global infrastructure should also be considered. Coal is crucial to the steel industry, which is needed to build bridges, railways and airports. Its importance in the development of infrastructure will lead to the demand for coal and the increase in its prices.
However, the prices of coal trading also fluctuate. Some of the reasons why coal prices fluctuate are:
Emerging market demand: With the transformation of economies and the attendant urban development, the demand and supply of coal fluctuates.
Government regulations: Owing to concerns about environmental pollution, several developed countries have enacted clean air regulations that are aimed at limiting carbon emissions. This has adverse effects on coal production, code trading and its pricing by extension.
Transportation costs: The transportation costs of coal can constitute up to 25% of the overall cost of coal prices. When this increases, of course, the cost of coal prices will increase and vice versa.
Environmental concerns: Coal is reputed to be an environmentally unfriendly form of energy because it raises carbon dioxide levels and contributes to global warming. The alternative is clean coal technology which is expensive and has the potential to upend coal prices.
Substitution: There are other sources of power which are cleaner and more cost-effective than coal. The use of these sources will affect the demand for coal and its pricing by extension.