Coal Trading

Trading - Coal

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

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Session 1

All About Coal – A basic introduction

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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.

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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

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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

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Conversions

Example

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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.

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How is Coal Converted to Electricity?

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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%

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Coal and Steel

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Coal and Cement

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Session 2

Coal Trade – A inner prospect

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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

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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

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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

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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.

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Coal Resources

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Domestic Output

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Stagnant domestic production led to spike in imports in FY12

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India’s dependence on coal imports to increase

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Thermal Coal Imported In India – Country Wise

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Port Infrastructure

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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

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Indonesia Coal Producing Regions

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Indonesia Coal Export Destinations

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In the Port of Richards Bay

RBCT

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Coal Mines

RBCT

600Km-

850Km

Distance from the Coal Mines

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Phase 1 12Mt

Phase 2 24Mt

Phase 3 44Mt

Phase 3 63Mt

Phase 4 72Mt

Phase V 91Mt

Current Capacity at 91mtpa

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South African Coal Trade

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Session 3

Contract & Quality

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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

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Indian Coal – Typical Grades

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Imported Coal – Typical Grades

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The Supply Chain

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Significance of CQ Parameters

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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

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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

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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

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Trading Coal

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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

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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

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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.

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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

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Derivatives & Risk Management

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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

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

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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

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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.

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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)

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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

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Resources

• http://www.powermin.nic.in/

• http://www.globalcoal.com/

• http://www.coalspot.com/

• http://www.mccloskeycoal.com/

• http://www.coalindia.in/

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Thank you!!!

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