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The many prices of coal decoded

A special early excerpt from the forthcoming Medium-Term Coal Market Report 2013

The IEA will publish Medium-Term Coal Market Report 2013 on Monday, December 16. Below please find a special early excerpt from the publication that also appears in the latest issue of IEA Energy: The Journal of the International Energy Agency.

What is the price of coal? That is the first question that usually arises when talking about this fuel. But the only answer is another question: which price?

Unlike oil, coal is a domestic fuel: 85% of coal worldwide is consumed in the same country where it was mined. Domestic markets are more or less exposed to international prices, and prices can vary significantly because of quality, geographic, contractual and regulatory aspects. Plus different types of coal and purchase conditions, including time and point of delivery, make for as many different prices as you can imagine.

To begin with, coal is not a single product, but a family of many types of different rocks. There are many classifications, but the main split for prices is non-coking (steam or thermal coal and also lignite) and coking coal. Coking coal, which produces coke that is used for iron making, is of a higher quality, mainly in terms of caking properties and strength, than non-coking coal. Hence it commands a price premium, making it too expensive to be burned to produce electricity or heat. But things are not as simple as that.

Coking coal is not a homogenous product, as there are a variety of qualities, with hard coking coal representing the highest quality. Such other types as semi-soft or high-volatile coking coal are usually sold at a discount to hard-coking coal. In addition, some high-quality non-coking coals are used in metallurgy, as coal for pulverised coal injection (PCI) to reduce coke consumption in the blast furnace. Their prices are also related to coking coal, though still at a discount. Finally, there are some market niches. Whereas high-grade anthracite can also be used for PCI and follows those prices, ultra-high-grade anthracite can partially replace coke in the blast furnace, and hence, is related to coke price at a discount.

In non-coking coal used for heat and power generation (steam or thermal coal), calorific value is the main parameter for defining performance, but it is not actually that simple. A lower calorific value generally means a lower price, with the price falling faster than the energy value.

But supply and demand also affect the discount. The price-reporting agency Argus, for example, lists five different price indexes just for Indonesian coal, one each for kilocalorie counts of 6500, 5800, 5000, 4200 and 3400 per kilogram. In addition, calorific values can be referred to as gross or net calorific values and as different conditions of coal (as received, air-dried basis, etc.). Still more factors, such as sulphur content, can discount the price of steam coal.

Different prices in different places

In general, different geographic markets are well integrated, as seaborne transport costs are much lower than, for example, those of LNG. Nevertheless, there are different prices in different importing and exporting regions.

For seaborne coal, freight still is a significant part of the price, and so, too, is insurance. Therefore, terms such as free-on-board (FOB), cost insurance freight (CIF) or cost freight (CFR) matter to the price. FOB is usually used for the port of origin and means that the buyer will pay for transportation to the destination port and assume the risks in transit. In delivery points, CIF prices are used. That means the buyer takes title in the destination port and the seller pays freight and insurance and assumes the risks in transit. CFR is similar to CIF, but the buyer pays the insurance.

A further aspect when dealing with coal prices is whether the price refers to contracted coal or to spot purchase. For example, Japanese utilities often buy most of their thermal coal through one-year term contracts (and by one-quarter or one-month contracts for coking coal). But generally, coal is traded internationally on a spot basis, so most price markers and indexes refer to spot purchases.

And of course, as for any commodity, there are futures, forwards and swaps for different dates, different types of coal and different locations.

In short, you have to be pretty specific if you ask for the price of coal.

Medium-Term Coal Market Report will be for sale at the IEA bookshop as of 9h30 GMT Monday, December 16.

The International Energy Agency (IEA) produces IEA Energy, but analysis and views contained in the journal are those of individual IEA analysts and not necessarily those of the IEA Secretariat or IEA member countries, and are not to be construed as advice on any specific issue or situation.

source: www.4-traders.com