Members of the Coal Trading Association have approved a new methodology developed to resolve the issue of discrepancies between unit train and tonnage commitments in physical OTC contracts, according to Matt Schicke, president of the Coal Trading Association (CTA).
Schicke said the voluntary guidelines, developed after an intensive 18-month study by the CTA Standards Subcommittee, will go into effect on October 1, 2003.
The Coal Trading Association was established in 1999 to promote efficient and effective coal trading capabilities and market liquidity in the U.S traded coal markets. It is comprised of coal producers, utilities and merchant generators, coal brokers and traders. One of its chief purposes is to develop, adopt and maintain industry-trading standards for the purchase and sale of coal to facilitate efficient trading of coal products and to increase market liquidity.
The measure discrepancy for volumes had been viewed as a significant challenge in the coal OTC market. Schicke said the breakthrough means progress toward the goal of establishing the maturity of the OTC coal market. “The new methodology represents a major advancement in establishing mutual confidence in the market for national buyers and sellers of coal, as well as the coal trading community,” he said.
“This industry rule will provide equity to all participants,” Schicke continued.
CTA members approved two items:
- First, a standard base tonnage for Powder River Basin (PRB) products was established at 14,500 tons per trainload (it previously was 12,500 tons)
- Second, the “CTA Over/Under Rule” was formally adopted by the association for use in the Central Appalachian (CAPP) barge or NYMEX look-a-like contracts, CAPP rail contracts, and PRB 8,800 and 8,400 contracts.
Currently, the physical train average in the PRB is approximately 14,275 tons, according to railroad averages. In developing its recommendation to the full CTA, the study subcommittee projected that train size will continue to increase because of factors such as increased power and other technological factors. Modifying the unit train size to 14,500 will allow the market to more closely align with physical (tonnage) transactions while providing a marginal cushion on future transactions.
The standard base tonnage for CAPP rail contracts is 10,000 tons per train. The standard base tonnage for NYMEX Look-a-like contracts is 1,550 tons per barge.
In the past, the measures of tonnage and unit trainload have competed against each other, and as a result impeded the development of the coal trading market. The new “CTA Over/Under Rule” provides the equity mechanism, through a volume variance adjustment, that meets the needs of all parties.
The agreement reached by the CTA in establishing the new rule is “another significant step toward achieving a more robust marketplace which will help to support and solidify the coal markets,” Schicke said. For more information on the “CTA Over/Under Rule” go to the CTA’s website at www.coaltrade.org.