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Compared to cash contracts, which require payment against the physical delivery of goods immediately or after a specified period, a futures contract is a special type of agreement made strictly under the rules of a commodity exchange, which may or may not call for the actual delivery of goods and payment in cash on a future date.

According to Emery, a futures contract can be defined as a contract for the future delivery of some commodity without reference to specific lots, made under the rules of some commercial body, in a set form, by which the conditions as to unit of amount, the quality and time of delivery are stereotyped, and only the determination of the total amounts and the price is left open to the contracting parties.
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If you don’t mind losing $5,000 in 10 minutes, you may enjoy trading commodity futures contracts. There’s an old saying among commodity traders: “It’s easy to make a small fortune in commodities. Just start with a large fortune!” This is not a business for people who are emotionally attached to their money, yet thousands of average “investors” get lured into the commodity markets year after year. Why? Because of the possibility of making high percentage gains using the built-in leverage that is available to commodity futures traders.

The commodity markets include wheat, corn, soybeans, pork-bellies, gold, silver, heating oil, lumber, and numerous other common trade items. The huge companies that operate in these markets use commodity “futures” contracts to lock in their selling prices for the product in advance of delivery. This practice is called “hedging.” On the other side of that transaction is the trader, who speculates on whether the priced of the commodity will go up or down before the contract is due for delivery. Because futures contracts may be purchased using leverage, these financial instruments lend themselves to speculation.

For example, control of a corn contract worth $5,000 may only requrie $500 of actual cash, or 10% of the face value of the contract. If the corn goes up in value, and the contract becomes worth, say, $5,500, the speculator has made $500 on his or her original $500, for a 100% return. Compare this with the regular stock market, which limits leverage to 50%, so that $5,000 worth of stock requires a minimum of $2,500 of capital. If the stock goes up to $5,500 in value, the $500 gain is against $2,500 invested, for a return of “only” 20%. The 100% return sure looks a lot better, right?

You can easily see why investors in search of quick gains are hypnotized by the lure of big profits using maximum leverage in commodity futures trading. The real problem, however, is that the leverage works in BOTH DIRECTIONS. You can lose your entire investment in a matter of minutes due to the wild price gyrations that sometimes occur in these volatile markets. Let’s say the $5,000 contract drops to $4,000 in value instead of increasing. You’ve not only lost the original $500 you put into the contract, but an additional $500. You can go broke quickly this way.

So why do people play this game? Average investors do not wake up in the morning and say to themselves, “Right, I think I’ll start trading commodities.” What happens is, they receive a sales pitch from a commodity trading “guru” claiming to have a “system” for generating sure-fire profits in these wild markets. These “systems” range in price from $25 all the way up to $5,000 or more, and are sold based on the promise of “huge profits” from a small starting investment. Read the rest of this entry »

A recent report published by the Cohen Independent Research Group, called Wall Street’s #1 Independent Research Firm, rated Pacific Asia China Energy (TSX: PCE: Other OTC: PCEEF) a Buy. The 68-page research report set three wide-ranging valuation levels as price targets for PCE shares for the company’s coalbed methane concessions in China. Considerations such as the wide range of the Guizhou’s abundant gas reserves, expected prices of natural gas during the research firm’s forecast period, and discounting factors, such as the stock price’s high volatility, were included in their price targets.

PCE shares, which closed at C$1.16/share on nearly 131,000 shares trading hands on June 19th, were given long-term fair market pricing of C$1.96/share by Cohen Research. This pricing was under the most pessimistic scenario. The low-case scenario included a natural gas price as low as $275 per 1000 cubic meters, and included a discount rate of 25 percent on the stock price. Cohen also reported, in the report, that at the current market price, PCE is “grossly undervalued.”

Cohen Research wrote, “As per our Base Case scenario estimates, the NAV of PACE’s resources falls in the range of C$5.31 – 7.83 per share (with a discounting factor of 20 percent).” Under the most optimistic pricing, assuming natural gas at $375 per 1000 cubic meters, Cohen targeted PCE shares at C$11.56/share. Cohen Research used the Net Asset Value (NAV) based method, which is one of the most accepted methods to value mining companies.

PACE, the acronym for Pacific Asia China Energy and not the stock’s ticker symbol (which is PCE, trading on the Toronto Venture Exchange, or TSX), is fortunate that one of its concessions is in the Guizhou province of China. Estimates describe this Chinese province as hosting more than 20 percent of China’s coalbed methane (CBM) reserves. The country’s total CBM reserves have been independently estimated to exceed 31 trillion cubic feet.

PACE was the first Canadian publicly traded company to participate in China’s granting of CBM concessions. PACE is participating in the Baotian-Qingshan CBM project through its wholly owned subsidiary Asia Canada Energy (ACE). China’s state-owned CBM company, China United Coalbed Methane (CUCBM), granted the 970-square kilometer CBM concession in September 2005 to ACE. The Baotian-Qingshan concession is located in the CBM-rich Guizhou province.

The Cohen Research NAV levels confirm what we anticipated. Earlier this year, we had reported on the assessment by Sproule International on the Baotian-Qingshan property. On March 1st, PACE had released three scenarios presented in the technical report filed by Sproule. The worst-case scenario on the property showed 504 billion cubic feet for three coal seams. The high case volume scenario for seven coal seams reached as high as 11.2 trillion cubic feet. Sproule’s assessment, called the “Most Likely Case volume” estimated 5.2 trillion cubic feet. Some analysts have valued each trillion cubic feet of gas at C$1 billion market capitalization.
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According to a U.S. Congressional – Executive Commission on China, which held a series of Issues Roundtables in late 2004, it was estimated that 12 Chinese mine workers die for every million tons of coal produced. Most are killed by methane gas explosions while inside the coal mines. China Business Weekly reported in July 2000, “To prevent gas explosions, China emits 6 billion cubic meters of methane from mines annually, seriously polluting the environment…” Last year, instruments on the world’s largest environment-monitoring satellite, the European Space Agency’s Envisat, revealed the world’s largest amount of nitrogen dioxide was hanging over Beijing and northeastern China. Because the country emits more methane from its coal mining than any other coal producing country, China pollutes the earth’s atmosphere with about one-third of the total annual emissions of methane. According to the US Environmental Protection Agency, methane traps heat twenty times more than carbon dioxide, which impacts global warming.

On March 6th, People’s Daily reported, “Shanxi, China’s largest coal-producing province, plans to put the brakes on the further expansion of coal mining in the next five years.” Shanxi Governor Yu Youjun at a recent press conference announced, “We can not continue the rough way of development any more and must limit coal production strictly with the guidance of scientific concept of development.” While only slightly reducing the country’s aggressive GDP growth, China has instituted reforms to maximize its energy efficiency and minimize the environmental damage and loss of human life. Not only is the country stamping down on the causes of these problems, it wants western technology to help become more efficient.

Since September 2005, Shanxi shut down nearly 5,000 illegal mines and fined or imprisoned more than 1,200 operators, including 60 local officials. Coal produced about 70 percent of China’s energy supply in 2005. The Chinese government worries China’s dependence upon coal could rise above 80 percent over the next five years. The country is second only to the U.S. as a net importer of petroleum. Nontraditional sources are being encouraged to clean up the environment and reduce China’s dependence upon foreign oil. StockInterview.com has widely discussed China’s scramble for uranium as the country has embarked upon the most aggressive nuclear power program since the United States in the 1970s. Along with nuclear energy, China hopes to exponentially expand its natural gas program as a means of lowering its astronomical levels of air pollution.

Chinese Premier Wen Jiabao told the National People’s Congress earlier this month that the country’s growth rate would be reduced to 7.5 percent over the country’s next five year plan. Economic growth reached nearly 10 percent in 2005. The strain imposed on China’s natural resources and labor has been taking its toll. According to the next five-year plan, China’s government policy will concentrate on building a resource-efficient and environment-friendly society. Their idea is to sustain the high output while reducing waste.

That may not be so simple. On February 20th, China Daily reported, “The bulk of China’s gas-fired power plants are on the verge of closure due to a shortage of natural gas.” Wang Yonggan, secretary general of China Electricity Council, said nearly 40 percent of China’s power plant capacity remained unused because of the lack of gas supplies. Wang warned a plan drafted the National Development and Reform Commission to increase China’s gas power capacity to 30 gigawatts by 2010 (up from 10.7 now) would make “such targets impossible to reach,” because of the gas shortfalls.

China’s Ambitious Coal Bed Methane Gas Development

One of the more serious reforms being addressed is the energy crisis within the context of the environmental stigma now attached to China. Coal is a problem because, as toxic as it is known to be, it helps fuel China’s growth, literally. But the dark rock has its bright side. Following the examples of the U.S. coal industry, predominantly in New Mexico’s San Juan Basin, Wyoming’s Powder River Basin, and Alabama’s Black Warrior Basin, and the more recent rise of Alberta’s Horseshoe Canyon, China has aggressively moved into the development of its coal bed methane gas industry. The degasification of coal can not only increase mining safety, but it can be an economic method of natural gas production.

In a 2005 report issued by the Federal Reserve Bank of Dallas, coal bed methane is being taken very seriously as an alternative energy source with strong growth potential in the U.S. energy mix,
“Geologists call it continuous gas, but it is also called unconventional gas or even weird gas. Whatever you choose to call it, you must give it due respect for its growing importance. The Department of Energy reports the share of unconventional gas doubled from 17 percent of Lower 48 natural gas supplies in 1990 to 35 percent in 2003. By 2025 it is projected to be 44 percent— matching the role of conventional gas—with the remaining 12 percent of domestic supplies imported.”
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