Liquidity infusion: Proposed coal exchange to allow traders to buy and sell contracts

The proposed coal exchange will allow independent traders and firms to play on the platform since they can infuse liquidity in the market for producers and sellers through buying contracts from producers when there are no takers of coal and selling contracts to end users when contracts are not available to producers and importers.

Deepak Bhattacharyya, senior general manager at mjunction services, said coal sellers and buyers would witness a sea change in the market structure with commercial miners coming into play. The change would happen since there would be multiple sellers in place of a single dominant seller fixing price at its own prerogative. Market forces would determine pricing and this would be generally for the short term, replacing pricing for a long term, gradually bringing down long-term contracts. Prices in the exchange may vary in a span of three-four days.

There will be faster sales cycle with delivery commencing immediately on closing a deal for spot transactions. At present, even after a spot auction, 45 days time is given to lift coal. The exchange will provide its own logistics for immediate delivery and will have its own inventory management, warehousing, sampling, quality assessment and analytics as support systems for both buyers and sellers. The exchange will have to have the ability to handle larger volumes, while also developing the capability to manage risks in terms of deposits for buys and sales.

The exchange would conduct spot transactions, including listed sales, on the basis of fixed price and delivery, continuous trading and auction sale, enabling price discovery.

It would also conduct forward contract auction and pure hedging future contracts.

The coal exchange, Bhattacharyya said, would bring about enhanced transparency and reliability in coal trading practices, with the platform helping in increasing marketing of domestic coal. It will be a regulated market place with standardised features in terms of quantity, quality, price agreement and delivery.

In case of future transactions, the exchange could adopt the present model of forward auction contracts, but keeping additional margins to prevent buyers from backing out if there is a fall in the spot prices. This would also be applicable for price hedging future contracts, though spot prices can serve for index price in future contracts.

The present future-auction model takes payment in a stipulated time before a delivery and delivery is made within a certain time frame. But in the exchange, delivery will be made immediately after a transaction closes.

With the exchange trading coming to force, the government would get the benefit of single-platform prices. The platform would help easily calculate government revenue share due to availability of price and sales data.

While sellers will be benefitted with wider market reach, faster inventory liquidation through price negotiation and a ready platform with a buyers base, buyers will be benefitted from integrated services like financial support, quality testing and delivery tracking system, Bhattacharyya said.