Coal Trading

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Coal Trading

  1. 1. Trading - Coal
  2. 2. 2 12/4/2013 Agenda Session 1 - All About Coal – A basic introduction Session 2 - Coal Trade – A inner prospect Session 3 - Contract & Quality Session 4 - Trading Coal & Price risk management
  3. 3. 3 12/4/2013 Session 1 All About Coal – A basic introduction
  4. 4. Coal – The Evergreen Black Diamond • Coal is a fossil fuel and is the altered remains of prehistoric vegetation that originally accumulated in swamps and peat bogs. • This caused physical and chemical changes in the vegetation, transforming it into peat and then into coal. • Coal formation began during the Carboniferous Period known as the first coal age which spanned 360 million to 290 million years ago. 4
  5. 5. 5 12/4/2013 Classification of Coal Carbon/Energy Content High Moisture Content Hard Coals Low rank Coals 47% Lignite 17% 53% Sub-Bituminous 30% Bituminous 52% Thermal Steam Coal Power Generation High Power, Cement Power, Cement Anthracite 1% Metallurgical Coking Coal Steel Domestic/Industrial
  6. 6. Properties - Coal • Any coal contents %of ▫ Moisture ▫ Ash (A) ▫ Volatile Matter (VM) ▫ Fixed Carbon (FC) ▫ Sulphur (S) ▫ Calorific Value (CV) • Definitions ▫ As Received (ar): includes Total Moisture ™ ▫ Air Dried (ad): includes Inherent Moisture (IM) only ▫ Dry Basis (db): excludes all Moisture ▫ Dry Ash Free (daf): excludes all Moisture & Ash 6
  7. 7. 7 12/4/2013 Conversions Example
  8. 8. 8 12/4/2013 Coal Mining & Production • Coal is mined by two methods: ▫ surface or 'opencast' mining ▫ underground or 'deep' mining • Underground mining currently accounts for about 60% of world coal production. • In several important coal producing countries surface mining is more common. • For example, surface mining accounts for around 80% of production in Australia; while in the USA it is used for about 67% of production. • The choice of mining method is largely determined by the geology of the coal deposit.
  9. 9. 9 12/4/2013 How is Coal Converted to Electricity?
  10. 10. 10 12/4/2013 Coal – Electricity Coal in Electricity Generation South Africa 94% Australia 76% India 68% Greece 55% Poland 93% Israel 71% Czech Rep 62% USA 49% China 81% Germany 49%
  11. 11. 11 12/4/2013 Coal and Steel
  12. 12. 12 12/4/2013 Coal and Cement
  13. 13. 13 12/4/2013 Session 2 Coal Trade – A inner prospect
  14. 14. 14 12/4/2013
  15. 15. For India COAL is KING • Reserves ▫ Proven 106 Billion Tonnes ▫ Indicated 123 Billion Tonnes ▫ Inferred 38 Billion Tonnes • TOTAL 267 billionTonnes • Coal reserves: > 250 years at present levels of consumption • Concentrated in Eastern India - As on 1 April, 2009, Ministry of Coal 15
  16. 16. 16 12/4/2013 The Supply Side • Dominated by Public Sector players Ministry of Coal Coal India Limited (CIL) Neyveli Lignite Corporation (NLC) Singareni Collieries Company Ltd. (SCCL) • CIL (85%), SCCL, (9%) are the major ones CIL Subsidiaries Central Coalfields Ltd. (Ranchi) Mahanadi Coalfields Ltd. (Sambalpur) Southeastern Coalfields Ltd. (Bilaspur) Northeastern Coalfields Ltd. (Guwahati) Western Coalfields Ltd. (Nagpur) Northern Coalfields Ltd. (Singrauli) Eastern Coalfields Ltd. (Asansol) Bharat Coking Coal Ltd. (Dhanbad) Pricing of domestic coal declared by CIL – Notified Prices Central Mine Planning & Design Institute (CMPDI)
  17. 17. 17 12/4/2013 Features of Coal in India • Coal Prices are notified by CIL • Coal Supplied to Actual Users Only • Merchant sale of coal is not permitted, all sales are through CIL • E-Auctions is open for all participants • Supply unable to meet Demand • Imported Coal Prices are market determined
  18. 18. 18 12/4/2013 Power – Driving Coal • The latest estimates of MOP indicates that overall power generation capacity addition feasible during Xlth plan is 65,000 MW instead of earlier plan of 78,000 MW. • The present estimates of coal based generation capacity during the Xlth plan is 44,000 MW requiring about 220 Mt of coal. About 37,000 MW capacity to be added during the balance period of the xlth plan. • Calls for extremely speedy implementation of coal mining projects, enhancement of infrastructural facilities and coal evacuation capacities and various other inter-related suporting systems.
  19. 19. 19 12/4/2013 Coal Resources
  20. 20. 20 12/4/2013 Domestic Output
  21. 21. 21 12/4/2013 Stagnant domestic production led to spike in imports in FY12
  22. 22. 22 12/4/2013 India’s dependence on coal imports to increase
  23. 23. 23 12/4/2013 Thermal Coal Imported In India – Country Wise
  24. 24. 24 12/4/2013 Port Infrastructure
  25. 25. 25 12/4/2013 Indonesia Coal Production 2012 Indonesian coal production in 2012 was 386 Million Tonnes (9.3% increase on that of 2011) Export: 73%; Domestic: 27% Kalimantan contributes 92% of the total production Sumatera contributed 8% of the total production
  26. 26. 26 12/4/2013 Indonesia Coal Producing Regions
  27. 27. 27 12/4/2013 Indonesia Coal Export Destinations
  28. 28. In the Port of Richards Bay RBCT 28 12/4/2013
  29. 29. 29 Distance from the Coal Mines 12/4/2013 Coal Mines 600Km850Km RBCT
  30. 30. 30 Current Capacity at 91mtpa 12/4/2013 Phase 1 Phase 2 Phase 3 Phase 3 Phase 4 Phase V 12Mt 24Mt 44Mt 63Mt 72Mt 91Mt
  31. 31. 31 12/4/2013 South African Coal Trade
  32. 32. 32 12/4/2013 Session 3 Contract & Quality
  33. 33. 33 12/4/2013 Sale Purchase Agreement • • • • • • • • • • • • Commodity Origin Specification Laycan Price Price Adjustment ▫ GCV ▫ Ash ▫ Sulphur Shipping Terms Payment Quantity and Quality Force Majeure Risk and Title Arbitration
  34. 34. 34 12/4/2013 Indian Coal – Typical Grades
  35. 35. 35 12/4/2013 Imported Coal – Typical Grades
  36. 36. 36 12/4/2013 The Supply Chain
  37. 37. 37 12/4/2013 Significance of CQ Parameters
  38. 38. 38 12/4/2013 Coal Quality Parameters ► Parameters of techno-commercial importance •Total moisture •Ash •Calorific value ► Parameters of technical importance •Volatile matter •Sulphur •Phosphorus •Chlorine •Ash composition •Ash fusion temperature •Grindability (HGI) •Size consist
  39. 39. 39 12/4/2013 Contracting issues ► Typical coal contracts for imports stipulate the following: ▫ TM ▫ Ash ▫ Calorific value (Gross or Net) ▫ Sulphur ▫ HGI ►Penalty/bonus/rejection criteria are specified for many of the parameters ►Increasingly, Indian purchase contracts are based on calorific value on “asreceived” basis e.g. GAR or NAR ►This is a better base compared to “air-dried” basis as the latter reflects an artificial basis and can have significant implications on the cargo value without any change in the inherent quality of the coal
  40. 40. 40 12/4/2013 Coal Sampling ► Sampling of imported coal is tricky especially as majority of the consignments are blended coals from Indonesia ►Methods prescribed in standards (ASTM/ISO) cannot often be followed strictly due to infrastructural constraints ►Manual sampling requires significant skill and experience of the sampling personnel. ►Mechanical sampling is preferred but infrastructural bottlenecks prevent installation of mechanical samplers in most ports ►Lot-wise sampling a must though hardly any contracts have any safeguards against indiscriminate blending/mixing
  41. 41. 41 12/4/2013 Trading Coal
  42. 42. 42 12/4/2013 Trading “The process of buying or selling a commodity, or a derivative on the underlying commodity, for delivery at a certain time and location” Physical Commodity Trading A physical trading is based on the actual commodity; delivery of the specified commodity is expected Derivative Trading A derivative is a financial instrument derived from a physical/ cash market commodity. Delivery of the underlying commodity can be enforced
  43. 43. 43 12/4/2013 Trading Platforms Spot/Cash Market : • A physical place where people buy and sell the actual commodities • Spot usually refers to a cash market price for a physical commodity that is available for immediate delivery. • This is cash and carry transaction OTC Market: • A market where commodities are bought and sold in bilateral, customized contracts negotiated over the telephone, via email and other means of communications • Usually, trades or contracts negotiated in the OTC market are for delivery in the future period
  44. 44. 44 12/4/2013 Trading Platform contd… Exchanges: • A physical or electronic central location where “defined” commodities are traded for future. Delivery takes place among buyers and sellers, and which publicly quotes bid and offer prices • The exchange acts as a clearing house and becomes the counterparty for all exchange trades. Online Trading: • A web site owned by a market participant (buyer and/or seller) where potential counterparties can view the companies bids and offers and transact a trade if interested.
  45. 45. Pricing of Coal • Coal is mainly priced on ▫ GCV ▫ Moisture • Congestion at Load Port & Discharge Port • Freight • Weather • Inventory • Currency • Finished product price • Government policies • Prices of alternatives • New technology development 45
  46. 46. 46 12/4/2013 Derivatives & Risk Management
  47. 47. Components of a Hedging Programme • In order to stabilise cash flow and earnings volatility, entities can manage risk via “hedging” • Hedging is an action of transferring risk to energy prices to a counterparty • A well-designed hedging strategy can: ▫ Facilitate earnings predictability and stability and enable management planning and negotiation ▫ Reduce cost of capital or release capital held against commodity price shocks • Hedging does not necessarily make energy costs “cheaper” at any point in time • Hedging a particular exposure should be considered as part of an overall hedging strategy because currency risk may remain 47 A well-designed hedging programme reduces the variability of costs
  48. 48. Optimum Hedging Strategy • The first step in any hedging decision is to identify the risk(s) that you are looking to mitigate. In the case of IndiaCorp the risk is Coal costs will rise in the future • The second step in a hedging policy is to evaluate acceptable risk levels that the program can take • A number of diverse hedging instruments are available to mitigate the risks of high prices • efficiently • Hedging is an ongoing programme – regular adjustments to reflect forecasted coal expenditures and anticipated market conditions must be made 48
  49. 49. 49 12/4/2013 Actively Quoted Coal Indices •The index chosen as the underlying pricing reference for your hedge depends on the particular exposure you have to physical coal prices •The following are the coal indices that are actively quoting and trading swaps on
  50. 50. 50 12/4/2013 Swaps •A swap is a financial instrument (no physical delivery) whereby one party (the buyer) agrees to pay the other a fixed price for an underlying product (Fuel Oil, Crude Oil, or any other commodity) in exchange for a floating price for the same underling. •An example of which is a swap between Broker and IndiaCorp whereby IndiaCorp agrees to pay Broker a fixed price for its fuel consumption and Broker agrees to pay IndiaCorp a floating price for the same product – IndiaCorp thus fixes the price at which it buys its fuel (see below illustration) • The swap protects against adverse movements in energy prices by fixing the price you would pay for your fuel with a cash flow that compensates you should prices rise.
  51. 51. 51 12/4/2013 Swap Term Sheet • • • • • • • • Swap Buyer: IndiaCorp Swap Seller: Mitsui (International Broker) Reference: globalCoal Newcastle Index Swap Price: 50 $/mt* Start Date: 1st July 2012 End Date: 31st December 2012 Volume: 25,000 mt / month (450,000 mt total) Settlement: Monthly, 5 business days after the end of the month (Note that this settlement period can be adjusted to match the payment patterns of the counterpart)
  52. 52. 52 12/4/2013 Swap Mechanics •To give you an idea of where the market is currently trading, the globalCoal Newcastle swap for July 2012 – December 2013 is currently at $90/mt (5th March 2012) • The swap fixes the maximum price you would have to pay for your fuel, offering you immediate certainty of expenses • As the upside is uncapped, you have unlimited up-side protection • The swap has no entry costs
  53. 53. 53 12/4/2013 Resources • • • • • http://www.powermin.nic.in/ http://www.globalcoal.com/ http://www.coalspot.com/ http://www.mccloskeycoal.com/ http://www.coalindia.in/
  54. 54. 54 12/4/2013 Thank you!!!

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