Coal Trading

1. Trading - Coal

2. 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
2
12/4/2013

3. Session 1
All About Coal – A basic introduction
3
12/4/2013

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. Classification of Coal
Low rank Coals
47%
Hard Coals
53%
Lignite
17%
Sub-Bituminous
30%
Bituminous
52%
Anthracite
1%
Thermal
Steam Coal
Metallurgical
Coking Coal
Power
Generation
Power, Cement Power, Cement Steel Domestic/Industrial
High
High Carbon/Energy Content
Moisture Content
5
12/4/2013

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. Conversions
Example
7
12/4/2013

8. 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.

8
12/4/2013

9. How is Coal Converted to Electricity?
9
12/4/2013

10. 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%
10
12/4/2013

11. Coal and Steel
11
12/4/2013

12. Coal and Cement
12
12/4/2013

13. Session 2
Coal Trade – A inner prospect
13
12/4/2013

14. 14
12/4/2013

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. The Supply Side
•Dominated by
Public Sector
players
•CIL (85%),
SCCL, (9%) are
the major ones
Ministry of Coal
Neyveli Lignite
Corporation (NLC)
Singareni Collieries
Company Ltd. (SCCL)
Central Coalfields Ltd.
(Ranchi)
Mahanadi Coalfields Ltd.
(Sambalpur)
Western Coalfields Ltd.
(Nagpur)
Southeastern Coalfields Ltd.
(Bilaspur)
Northern Coalfields Ltd.
(Singrauli)
Eastern Coalfields Ltd.
(Asansol)
Northeastern Coalfields Ltd.
(Guwahati)
Bharat Coking Coal Ltd.
(Dhanbad)
CIL Subsidiaries
Coal India Limited
(CIL)
Central Mine
Planning &
Design
Institute
(CMPDI)
Pricing of domestic coal declared by CIL – Notified Prices
16
12/4/2013

17. 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
17
12/4/2013

18. 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.

18
12/4/2013

19. Coal Resources
19
12/4/2013

20. Domestic Output
20
12/4/2013

21. Stagnant domestic production led to
spike in imports in FY12
21
12/4/2013

22. India’s dependence on coal imports to
increase
22
12/4/2013

23. Thermal Coal Imported In India –
Country Wise
23
12/4/2013

24. Port Infrastructure
24
12/4/2013

25. 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

25
12/4/2013

26. Indonesia Coal Producing Regions
26
12/4/2013

27. Indonesia Coal Export
Destinations
27
12/4/2013

28. In the Port of Richards Bay
RBCT
28
12/4/2013

29. Coal
Mines
RBCT
600Km-
850Km
Distance from the Coal Mines
29
12/4/2013

30. Phase 1 12Mt
Phase 2 24Mt
Phase 3 44Mt
Phase 3 63Mt
Phase 4 72Mt
Phase V 91Mt
Current Capacity at 91mtpa
30
12/4/2013

31. South African Coal Trade
31
12/4/2013

32. Session 3
Contract & Quality
32
12/4/2013

33. 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
33
12/4/2013

34. Indian Coal – Typical Grades
34
12/4/2013

35. Imported Coal – Typical Grades
35
12/4/2013

36. The Supply Chain
36
12/4/2013

37. Significance of CQ Parameters
37
12/4/2013

38. 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
38
12/4/2013

39. 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 “as-
received” 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

39
12/4/2013

40. 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

40
12/4/2013

41. Trading Coal
41
12/4/2013

42. 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

42
12/4/2013

43. 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


43
12/4/2013

44. 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.


44
12/4/2013

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. Derivatives & Risk
Management
46
12/4/2013

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
A well-designed hedging programme reduces the variability of costs
47

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. 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
49
12/4/2013

50. 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.
50
12/4/2013

51. 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)
51
12/4/2013

52. 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 (5
th
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
52
12/4/2013

53. Resources
•http://www.powermin.nic.in/
•http://www.globalcoal.com/
•http://www.coalspot.com/
•http://www.mccloskeycoal.com/
•http://www.coalindia.in/

53
12/4/2013

54. Thank you!!!
54
12/4/2013