What is Coal?
Coal is a sedimentary rock that is combustible and black in appearance. Coal is found in low-lying areas having been buried due to natural occurrences to the land including flood, resulting in the newly fossilised product, coal. Coal is extracted from the ground through a mining process, either underground by shaft mining or above ground in the form of open pit mining extraction.
China is the largest coal producer in the world and coal, as a commodity, is the largest source of energy produced for the generation of electricity in the world.
Uses of Coal
Coal is a very prominent energy source in generating electricity. The steel production industry is dependent coal with around 70% of steel production coming from coal as the energy production source.
Other significant uses of coal are cement manufacturing and as a liquid fuel. Coal is essential in specialist products including Carbon Fibre, Activated Carbon and Silicon metal.
Risks of Coal
Like any futures contract, there is always the possibility that the underlying asset i.e coal will move in the opposite direction to which you anticipate. For example, you take a long position expecting the price of coal to rise and it falls.
With any commodity, supply and demand will affect the price. This risk should be monitored on a regular basis and adjusted to suit your risk parameters.
Mining has an inherent risk with the level of costs associated with extracting the product from the earth. This can include but not limited to the cost of oil to fuel machinery, cost of labour or new tax regulations being implemented.