Extract of paper presented at Coaltrans India  By Chandrakant Bhima

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Price volatility - A new world?

Why hedge?

- Forward coal prices are extremely difficult to predict and subject to rapid and significant change.

- Stakeholders prefer companies that perform as planned

- Hedging stabilizes cash flows

- Reduces cost of capital

- Secures company objectives

- Enables management to measure performance

WARNING : "Doing nothing to manage risk is in itself a risky move"

Fixed Priced deals

- The vast majority of coal transactions are still fixed price.

- Fixed price deals inevitably eliminates price risk exposure.

Are Fixed Priced Products right for me?

"I don't want to take risks with the energy market."

"I'm looking to achieve price certainty."

If the answer to any of these questions is yes then fixed price deals are right for you

- We are in a high price environment

- Prices can fall as well as rise

- Buyer flexibility has proven extremely successful with the growth of financial coal trading

Index linked deals

- With coal qualities changing, many buyers increasingly want to lock in physical purchases but wait on prices.

- Index linked prices give you the ability to take advantage of movement in the market while giving you the flexibility to lock in rates when conditions are right for you - allowing your business to have supply security and budget protection.

Are Index Priced Products right for me?

"I don't think that the high pricing for a term deal will remain at current levels."

"I'm willing to ride the market for the short term price movements but lock in physical

coal quality and wait for a more competitive price."

"I feel that I am better off floating in the index market rather than fix the pricing at a high

level."

"I have budget flexibility to float in the short - term market until more competitive term

pricing develops."

If these appear complex then at its simplest they are no different to annually negotiated

contracts, with the ability to fix the price via third party at any time.

If the answer to any of above questions is yes then index deals are right for you.

Traded index products

Current Tradable indexes

- API2: based on generic 6000cv CIF ARA

- API4: FOB Richards Bay

- globalCOAL Newcastle index: FOB Newcastle, Australia

Future index products

- FOB Indonesia

- CIF Japan

- CIF India ???

2. Coping with price volatility

KEEP YOUR OPTIONS AND MIND OPEN!

Negotiate contracts for the entire company, not for individual sites. Buying power does count!

- Hire dedicated staff to focus on energy management.

- Understand the energy market. The market is changing and the most successful are those who are adapting to the new world.

- Think in portfolio terms, getting a mix of long and short-term contracts, with various levels of flexibility.

- Take advantage of new coals. Many boilers have been adapted to accept cheaper grades of coal.

- If you lose money on hedges this is good (contrary to logic).