The aptly named protagonist in director Tim Burton's Edward Scissorhands could trim a hedge like nobody's business. Given the incredible volatility the commodities sector witnessed in 2008, the trillion-dollar question for 2009 could be whether companies should be trimming hedges, or keeping Edward Scissorhands at bay.
Conveniently, two coal-mining companies with operations in Appalachia delivered earnings this week that open a window onto this important consideration.
Foundation Coal Holdings
International Coal Group
Quite unlike Peabody Energy
International Coal Group, on the other hand, faces slightly more spot market risk, with 92% of planned shipments priced at an average of $61 per ton. Similarly, CONSOL Energy
Given dire economic projections for 2009, the miners with less spot market risk might indeed celebrate these forward contracts over the coming quarters. If, however, the combined impact of rapidly contracting industrial production and global stimulus efforts produce a resumption of coal demand that's more swift than many expect, then a lightly hedged miner like Arch Coal could in fact have the last laugh. Despite this possibility, both Foundation Coal Holdings and International Coal Group offer a safer road forward.