international coal market and contracts

Trade patterns in the coal market

Ajay Baral, globalCOAL

Copyright © by globalCOAL 2001 - 2015

For today’s discussion…

• Changes in trade flows

• Price trends in the thermal coal market

• The derivatives market

• SCoTA Overview

• The NEWC index – Asia’s price benchmark

• Conclusions


globalCOAL ownership

Global HubCo BV

Individual Shareholders


Coal brokerage

Screen Trading (Standard contracts)

Voice brokering (Any coal,

any location)

SCoTA

Contract updates and revisions

Development of new hubs

Indices and market data

Index calculation

Coal Market Report

Historical Index data

Delayed Price Feed

What does globalCOAL do?

Changes in Trade Flows: The Exporters


The Seaborne Coal Market

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Thermal Coal Coking Coal

Seaborne Coal Volumes 1990-2013 (Mt)

Source: IEA Coal Information (2014)


Major Exporters

7

Australia New destinations

Indonesia From zero to hero

South Africa Looking East

USA Looking to the

Far East

Colombia Europe’s supplier


South Africa turns to the East

Sources: globalCOAL, IHS McCloskey

Forecasted RBCT Thermal Coal Exports by Destination, 2005-2040

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2005 2010 2015 2020 2030 2040

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Atlantic Pacific


South Africa turns to the East


RBCT Thermal Coal Exports to Key Asian Destinations, 2006-2014

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45

2006 2007 2008 2009 2010 2011 2012 2013 2014*

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Taiwan China India

*2014 annualised from Aug’14


Australia Diversifies

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Australian Thermal Coal Exports by Major Asian Destination, 2000-2014

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*

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China Taiwan South Korea Japan


*2014 annualised from Aug’14


Where to for Indonesia?


Forecasted Growth of Total Indonesian Coal Exports, 2000-2040

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700

2000 2005 2010 2015 2020 2025 2030 2035 2040

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12 Sources: globalCOAL, IHS McCloskey

Indonesian Coal Exports by Product, 2000-2014

*2014 annualised from Jun’14

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2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*

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Sub-bituminous, Lignite & Other

Bituminous




Indonesian Coal Exports by destination, 2000-2014

*2014 annualised from Jun’14

Sub-bituminous, Lignite & Other

Bituminous

0%

10%

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30%

40%

50%

60%

70%

80%

90%

100%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*

?

South Korea

Taiwan

Japan India & Pakistan

China

Other

Changes in Trade Flows: The Importers


Major Importers

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Europe Stalling?

China The big unknown

India Critical…

Japan Levelling off


Europe Stalls

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2005 2010 2015 2020 2025 2030 2035 2040

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Pacific Atlantic

Sources: globalCOAL, Euracoal, IHS McCloskey

Atlantic vs Pacific Steam Coal Imports, 2005-2040


China

• The largest producer of coal

• The largest consumer of coal

• Imports are marginal compared to consumption (7.6% in 2013) but have huge impact on international market

• Unlike India, China doesn’t have a coal deficit

• Imports to arbitrage prices between domestic and international coal

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China’s Coal Imports

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All Coals, 1990-2013 (Mt)


The Future for Chinese Coal Imports

• Ever changing landscape

• Uncertainty over new regulations affecting imported coal

• Likely that China will impose strict limits on trace elements in imported coal

• Major exemptions (eg. Indonesia)

• Uncertain impact

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India

• Large resources, large production but limited growth in extractive capacity

• Indigenous resource also tends to be far from demand centres

• Coal imports are critical to make up shortfall

• Assuming GDP growth rate of 8%, imports will top 350Mt/annum within 20 years

20


India

21 Source: IEA Coal Information (2014)

All Coal Imports, 1990-2013 (Mt)

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Japan’s Coal Imports

• Historically the largest thermal coal importer

• Surpassed by China in 2010

• Moving away from nuclear power after Fukushima disaster of 2011

• Coal demand expected to level out

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Japan

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All Coal Imports, 1990-2013 (Mt)

Price Trends in Seaborne Markets


Price Trend – Last Decade

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USD

/mt

RB DES ARA NEWC

globalCOAL Indices, 2004-2014 (USD/mt)

Source: globalCOAL


Price Trend – Last 3 years

globalCOAL Indices, 2011-2014 (USD/mt)

Source: globalCOAL

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/mt

RB DES ARA NEWC

The Derivatives Market


Building Blocks of a Derivative Market

28

Standard Contract

Screen Trading Market Data

Market Liquidity & Transparency


2014 Derivatives Market Snapshot

API#2 2.5Bt

API#4 500Mt

NEWC 278Mt

API#8 34Mt

S/B Indo 18Mt


Significant growth in recent years

*2014 annualised from Sept’14 Sources: globalCOAL, ICE, CME, SGX, EEX, FSA, LEBA

Growth in Coal Derivatives Volume, 2001-2014

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500

1,000

1,500

2,000

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3,000

3,500

4,000

2001

2002

2003

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2005

2006

2007

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2010

2011

2012

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2014

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∆+7.8%


Growth in clearing vs OTC

Sources: globalCOAL, ICE, CME, SGX, EEX, FSA, LEBA

Cleared and OTC Derivatives Volumes Growth, 2001-2014

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Cleared OTC % Cleared (right axis)


Pacific lag

Sources: globalCOAL, ICE, CME, SGX, LCH, Euracoal

Atlantic Market Pacific Market

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SCoTA Overview


A brief history of SCoTA…

• Following the collapse of ENRON in 2001, the thermal coal market demanded reliable, transparent thermal coal pricing

• globalCOAL was established in 2001 by coal market producers, consumers and traders to establish a standardised coal market:

– Introduced a standardised coal trading agreement: SCoTA

– Online trading platform to facilitate the trade of standardised seaborne thermal coal, with all trades underlied by SCoTA

– Pricing data derived from the platform provided objective, transparent price points to the market for the first time


Benefits of Standardised Screen Trading

Screen Trading

Accessible to all

Quick and easy route to standardised

market Ability to reverse positions quickly

Real-time, transparent & objective spot and forward

prices

Efficiency & speed of execution

(click & trade)

Anonymity until point of execution


What defines a commodity market?

• The product is traded without qualitative differentiation

• Negotiations are focussed on price rather than quality

• The price is international and fluctuates on global supply / demand

• The product is traded in a transparent market

• There is an active spot and risk management market


Is coal a commodity?

• Is it traded without qualitative differentiation?

Yes; SCoTA defines standard quality parameters => pools of liquidity form around most commonly traded hubs

• Are negotiations focussed on price rather than quality?

Yes; Indices for the main hubs NEWC, RB & ARA give clear price markers

• Is the price international and fluctuating on supply/demand?

Yes; market participants trade coal globally

• Is the product traded in a transparent market?

Yes; bids, offers and trades on gC are communicated to the market

• Is there an active spot and risk management market?

Yes; 2.7 Billion tonnes of cleared derivatives traded in 2014 YTD


Who uses SCoTA?

There are 2,300+ companies licensed to use SCoTA worldwide and 161 globalCOAL Market Members

Principals

• Utilities

• Miners

• Physical coal traders

• Financial institutions

OTC Brokers

•globalCOAL •Other brokers: •LCB •GFI •Ginga •ICAP


Geographic spread of SCoTA users

226

273

218

222

186

171

145

108

70

55

26

Top 5 Countries

1. Indonesia 2. Australia 3. USA 4. India 5. UK


Total brokered physical SCoTA volumes

Source: globalCOAL & other brokers

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2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 *

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* 2014 – estimate


The SCoTA market in perspective

Production Intl Trade Seaborne Trade Thermal Coal Market

Source: VdKI, Euracoal, globalCOAL & other brokers (2010 data)

7.2Bt Domestically produced & consumed

1.1Bt Int’l Trade

971Mt Seaborne

Trade

99Mt Overland

726Mt Thermal Coal

245Mt Coking Coal

155 Mt Brokered

SCoTA

571 Mt Bilatera

l standard and non-standard

coal


SCoTA today… • SCoTA v8

• Master Agreement (v8 MA)

• SCoTA v8 General Terms and Conditions (v8 GTC)

• 15 RSSs on a range of INCO delivery terms

• Build your own RSS

• SCoTA-based transactions underpin 99% of API#2 and 100% of API#4 and gC NEWC Index

• Indonesian and Indian governments use NEWC as a component of their price assessment for coal and power


DES ARA Multi-origin ACPRSU

Richards Bay FOB

3 qualities

Newcastle (NEWC) FOB

COL FOB

4 load ports

INDO A B C FOB or FAS 3 qualities NCIG

FOB

DAP RTM Multi-origin ACPRSU

Lower min CV

Standard hubs covered by SCoTA

CFR China Multi-origin 2 qualities

CFR Krishnapatnam Multi-origin 2 qualities

High Ash Aus FOB

Lower CV

The gC NEWC Index


• The benchmark price for coal in Asia Pacific

• Used by governmental agencies around Asia:

– 25% component of HBA in Indonesia (25% NEX, 25% FOB Kalimantan, 25% ICI)

– 25% component of CERC in India (25% API4, 50% Indonesian Coal)

– Chinese government is considering the use of international indices (including gC NEWC) in its forward planning for pricing electricity

• Coaltrans Bali survey in 2011:

– 64% of respondents stated the NEWC Index is the most trusted Index by Indonesian producers, end users & traders

– 64% stated that the NEWC Index is the most suitable to establish end-user prices for Indonesian coal (versus 18% for the Argus-ICI)

The globalCOAL NEWC index


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Spot trades Forward trades % Asia-Pac based trader

More spot trading in NEWC

Source: globalCOAL

Spot vs forward NEWC volume on the globalCOAL screen and % of NEWC tonnage traded from APAC

50%

Some conclusions

& your questions?

CONTACT US

London +44 207 776 5900 Singapore +65 6311 4571

New Delhi +91 1204 26 48 90

[email protected]

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