pet coke

ENERGY ARGUS COAL DAILY COAL INDEX

DEL SPANISH MED $/mt 40 HGI 70HGI4.5% Sulphur 37.05 / 38.05 37.55 / 38.556.5% Sulphur 34.55/ 35.55 35.55 / 36.55DELIVERED JAPAN $/mt 45 HGI3.0% Sulphur 42.00 / 43.004.5% Sulphur 37.00 / 38.00

ENERGY ARGUS AIR DAILY SO2 INDEX

ENERGY ARGUS PETROLEUM COKE DECEMBER COKE INDEX

Copyright 2003 Argus Media Limited All rights reserved. Page 1

Petroleum Cokewww.energyargus.com/coke.html Wednesday January 8, 2003 Report No. 03S-001

FOB US GULF COAST $/mt 40 HGI 70HGI4.5% Sulphur 25.50 / 26.50 26.00 /27.006.5% Sulphur 23.00 / 24.00 24.00 /25.00FOB US WEST COAST $/mt 45 HGI3.0% Sulphur 31.00 / 32.004.5% Sulphur 26.00 / 27.00

ArgusM O N T H L Y

E n e r g y

PETROLEUM ARGUS CRUDE & PRODUCTS INDICES

$/bl 12/30/02 December AverageMaya US Gulf Coast 25.73 19.83ANS US West Coast 30.00 24.95WTI/Maya spread -5.57 -6.57Brent/Dubai spread 2.60 1.661pc Fuel Oil New York 28.38 26.59Asphalt, Western Gulf Coast, $/st 91.50 89.17

$/st 12/30/02 December Average135.00 132.15

A market report from thepublishers of

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SO2 Allowance Index

IN THIS ISSUE...

Venezuela strikes at heartof the coke market ..........2

Trading stalls or goesunderground ....................3

ExxonMobil replaces Kochwith ConocoPhillips..........5

Venezuelan crisis slashescoke production ..............8

Oil market faces fight ontwo fronts ........................8

Saudis want Opec outputincrease ..........................9

US coal prices leaphigher ............................11

Note:Delivered prices are cal-culated using fob prices plusPanamax freight

Next Month Delivery Next Quarter Delivery$/mt 12/30/02 December Avg 12/30/02 December Avg

CAPP Nymex spec 12,000 Btu $/st 29.50 28.58 30.50 29.42Cif ARA 6,000 kcal --- --- 35.35 34.79Fob Richards Bay 6,000 kcal --- --- 27.50 27.00Fob Newcastle 6,700 kcal --- --- 25.25 24.28Cif Japan 6,700 Kcal 30.75 29.89COKE PERCENT OF COAL fob US Gulf Coast cif ARA cif Japan4.5% 40 HGI 88.38% 105.78%6.5% 40 HGI 79.88% 98.59%3.0% 45 HGI 142.19%

EUROPEAN BTU COMPARISON Spot $/mmBtu Btu % CoalCoal Delivered Spanish Med 39.00 1.58Coal Delivered Northwest Europe 35.35 1.43Hard 4.5% Coke Delivered Spanish Med 37.55 1.20 76%Hard 6.5% Coke Delivered Spanish Med 35.05 1.12 71%Hard 4.5% Coke Delivered NW Europe 36.80 1.18 82%Hard 6.5% Coke Delivered NW Europe 34.30 0.97 77%

Venezuela strikes at the heart of thefuel grade coke market

US petroleum coke prices have jumped by almost 20% since thestart of the December 2 national strike in Venezuela. Atlantic basincoke supply has been cut by 20,000 t/day, and 500,000 tons are nowirreplaceable.

The supply-side crisis has seized the market and European prices appearto have already crossed the point where coal is a better burn value thancoke.

Our subscribers should not be surprised. Argus warned in its March 5,2002, issue that "one wild card remains hanging over the market, onethat many have chosen to ignore at their peril, is Hugo Chavez." Ouroverview went on to say that "the coke industry in its short life has hadexperience with political risk in the form of regulation, but not in theform of unpredictable and unstable governments. Up until a few yearsago, the overwhelming majority of cokers were located in the relativelystable economy of the United States. Now that balance is shifting withVenezuela taking a greater share."

At March of last year, coke prices were at their weakest values in overtwo years. Few could take seriously the threat of a supply crisis whenlow sulphur hard coke was at $9.50 and coal in Europe was at $34. Buttoday that same coke is at $26 and coal in Europe is at $35. Europeanbuyers of coke usually balk when the price of coke exceeds 65% of theprice of coal on a Btu basis. In December, coke was valued at between77% and 82% of coal on a Btu basis delivered into Northwest Europe.And it was between 71% and 76% of coal in the Mediterranean. Thiswill be disconcerting to those with flexible demand, at least as discon-certing as a commodity price rise of 275% in ten months. What lookedlike an opportunity to the cement and industrial buyer last spring nowlooks much more like a liability.

Defaults spreadOne US utility, that utilizes coke sourced from Venezuela, said inDecember that force majeure letters were falling out of the sky. PdVdeclared force majeure on all crude and products exports shortly after thestrike began, which includes the three new crude upgrading projects.

The loss of coke may force the utility to solicit for additional coal, afteralready securing what it thought was ample coal for this year. Some mar-ket sources say that the high price of coke will prompt US end users toswitch to coal, or at least to a higher percentage of coal usage.

Even prior to this month's surge in prices, some end users like the CityPublic Service Board of San Antonio (Texas) had grown disenchantedwith coke prices and opted not to use coke this year. Other utilities thatburn only a small portion of coke in their fuel mix, such as OwensboroMunicipal Utilities (OMU) in Kentucky, could easily switch away fromcoke altogether.

Energy Argus Petroleum Coke Report No. 03S-00-01 - Wednesday January 8, 2003


5

10

15

20

25

30

Sep Dec Mar Jun Sep Dec

4.50% 6.50%

Hard Petroleum Coke Spot Price$/t

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Jun Jul Aug Sep Oct Nov Dec

4.5% HGI Spread 6.5% HGI Spread

40 HGI Sulphur spread 70HGI Sulphur spread

Coke Quality Spreads$/t

14

18

22

26

30

34

38

Aug Sep Oct Nov Dec

Nymex Spec Coal ARA Coal USGC Coke

Coke vs Coal4.5% 40 HGI fob USGC

$/t

7

8

9

10

11

12

Apr-02 Jun-02 Aug-02 Oct-02 Dec-02

Panamax Freight Rate, Petroleum CokeUSGC to Spanish Med

$/mt

Source: Clarksons



Another US utility says the strike could end up costing it one or two car-goes, but that the primary impact of the strike has been the delay in ves-sels loading at PdV/Amerada Hess Hovensa refinery at St Croix, VirginIslands.

Trading stalls or goes undergroundAll eyes are fixed on the strike to the point where very little else is beingdone or discussed. The holiday season combined with the Venezuelanstrike proved to be the death knell for business, including the conclusionof several contracts which are still hanging in the negotiation balance.Many of the contracts waiting to be inked are for Venezuelan coke, sounderstandably the contracts are on hold pending the outcome of thestrike.

The shortfall of supply has given way to a lot of scrambling in the mar-ketplace. But scramble as they may, potential buyers are finding preciouslittle supply anywhere. One cargo sourced off the US Gulf coast inDecember fetched $25.50/t fob, for 4.5% sulphur, above 50 HGI. The55,000 t cargo was lifting prompt. Another cargo was reportedly done at$27.00/t fob US Gulf coast, but confirmation was not obtained.

Bullish stories in the coke market in 2002, such as the surprise entranceof China as a buyer into the market, take on even more impact given thecurrent supply situation. China, in the first 11 months of 2002, purchasedalmost 1.3mn tons of coke, or 112,000 tons per month. In November,Premcor closed its Hartford, Illinois, refinery, with its 325,000 t/yr highsulphur, hard coke output.

Last spring, JEA brought the first of two, coke-fired circulating fluidizedbed (CFB) boilers online, with the second just behind it. The utility facedchallenges finding the right coke and coal mix, but still utilized up to500,000 tons of coke in 2002. When the units begin to use 100% coke,they will combine for up to 1.6mn t/yr of consumption.

Watch this spaceNine months before the latest strike began, Chavez was facing internalmutiny within PdV, had found dissent among his own military cohortsand was running out of cash. Argus suggested that there was a chancethat Chavez, in an effort to boost his public appeal among Venezuelans,could move to nationalize the Orinoco belt joint ventures withExxonMobil, TotalFinaElf, Statoil, ConocoPhillips and ChevronTexaco.Chavez did not do that, but the net effect has been nearly as bad. And wewould be foolish to think that the crisis in Venezuela could not evolveeven further and become perhaps intractable.

Coke is borrowing this volatility from the oil markets. In the best oftimes, the coke price is driven by many vectors including oil, coal, ship-ping, new supply, and the steady growth in demand. But no factor, notcoal nor demand nor shipping, can cause a sudden supply shock. Supplyshocks are the expertise of the petroleum markets and coke traders whoare not well versed in oil and refining markets and in international oilpolitics become standing targets in no man's land.

25.00

25.50

26.00

26.50

27.00

27.50

28.00

28.50

29.00

29.50

30.00

1 0 / 1 1 0 / 2 2 1 1 / 1 2 1 2 / 3 1 2 / 2 4

Daily Coal PricesNymex Spec Central App Prompt Month

$tl

80

100

120

140

160

180

200

220

A M J J A S O N D

Eastern USGC BargeMidwest US BargeSouthwest Spain

Asphalt prices: US and Europe$/t

8

9

10

11

12

13

14

15

16

2-Dec 9-Dec 16-Dec 23-Dec

USGC

USWC

Light/Heavy DifferentialUS Gulf Coast

$/bl

26.5027.0027.5028.0028.5029.0029.5030.0030.5031.0031.5032.00

1st Month 2nd Month 1st Q 2nd Q 3rd Q

1-Dec 1-Jan

Coal Forward CurveNymex Spec Central App Coal$/st

3.2

3.4

3.6

3.8

4.0

4.2

4.4

Feb Mar Apr May Jun Jul Aug Sep Oct Nov

2002

2001

Spanish Domestic Cement Consumption



0

50,000

100,000

150,000

200,000

250,000

Mar Apr May Jun Jul Aug Sep Oct Nov

Calcined

Uncalcined

Chinese Coke Importsmt

0

100,000

200,000

300,000

400,000

500,000

600,000

Mar Apr May Jun Jul Aug Sep Oct

Spain Italy

US Exports to Spain and Italy,000 t

500

700

900

1,100

1,300

1,500

1,700

May Jun Jul Aug Sep Oct

Europe Asia Latin America

US Exports of Non-Calcined Cokeby region

000 t

CLARKSONS COKE FREIGHT RATES

60,000 mt (Panamax) $/mt 1/3/02 US Gulf Coastto European Continent 10.80to Spanish Mediterranean 11.55to Black Sea 12.50US West Coastto European Continent 16.00to Spanish Mediterranean 16.50to Japan 16.00

ENERGY ARGUS

Heat Value in Spark Spread$/mmBtu in $/MWH

New York Diesel 6.27 -21.58New York 0.3% Fuel Oil* 6.12 -20.03New York 1% Fuel Oil 4.44 -3.32Transco Zone 6 Gas 5.35 -12.36Nymex spec Coal 1.38 27.29Gulf Coast 4.5% 40 HGI Coke 1.28 28.36Gulf Coast 6.5% 40 HGI Coke 1.39 27.24PJM Power 41.13

As of December 30, 2002

BTU COMPARISONS

0%

30%

60%

90%

Jul Aug Sep Oct Nov Dec

4.5% 40 6.5% 40

Coke Price as % of CoalNymex Spec Coal

Spanish Cement ConsumptionYear-on-Year Change

mt

1 / 9 7 6 / 9 7 1 / 9 8 6 / 9 8 1 / 9 9 6 / 9 9 1 / 0 0 6 / 0 0 1 / 0 1 6 / 0 1 1 / 0 2 6 / 0 2

20

16

6

-4

0

4

8

14

18

12

10

-2

2

%



Coke Market NewsUS trader Koch Carbon will not have a share ofExxonMobils Torrance, California, petroleum coke marketingfor 2003. Rather, ExxonMobil has added ConocoPhillips tothe mix, which makes this the first known deal wherein oneUS refiner has a lifting contract with another refiner. Like lastyear, US trader Aimcor will market 50% of ExxonMobils1.2mn t/yr of 1.4%, 45-50 HGI coke, and will have this per-centage for the next three years (EAPC, February 5, p6). Thebalance of this years marketing will be split betweenConocoPhillips, Mitsui Energy, Oxbow Carbon & Minerals,Energy Coal Spa and Mitsubishi. ConocoPhillips and Mitsuiwere each awarded less than 100,000 tons, market sources say.ExxonMobil was able to increase its 2003 contract price by $1per ton from 2002 levels, sources say.

Sincor shipped approximately 1.1mn tons of petroleum cokein 2002, well placed sources report. Production in 2002 wasslightly less than 1.1mn tons, but the prolonged Venezuelangeneral strike has made it difficult to obtain exact figures.Sincors massive 2mn t/yr coker at the port of Jose, in easternVenezuela, began startup sequence in March 2002, and pro-duces 4.5% sulphur, 45 HGI coke (EAPC, April 5, p5). Sincor,the PdV/TotalFinaElf/Statoil joint venture, shipped its firstcoke in early September when its new shipping installationwas completed (EAPC, October 4, 2002, p5). Sincors upgrad-er was taken off line on December 13 due to the strike, andthe loading facility was also shut down by the same day.

The Italcementi Group reports that it is still in the process ofnegotiating some of its supply contracts for this year, but thegeneral strike in Venezuela has prevented it from completingall of its contracts. The cement producer reports that some ofits suppliers are counting on Venezuelan coke, and that it isapproaching the deadline by which it needs to have its con-tracts in place. As a result, a prolonged strike in Venezuelacould force it to look elsewhere for a portion of its 2mn mtannual coke take (EAPC, October 4, 2002, p6). Apart fromVenezuela, the cement producer also receives petroleum cokefrom the US, Italy and Spain. Italcementi, sometimes referredto as the fifth global player, has five suppliers, with con-tracts ranging from spot, quarterly, six-month, annual andindex-related.

While Florida utility St Johns River Power Park, the JEAand Florida Power & Light joint venture, has three coke sup-ply contracts that expire the middle of this year, it does notbelieve now is the best time to enter the market for new con-tracts. The utility has a contract with US trader Aimcor for150,000 tons of coke to be delivered from last month throughthe end of June. Additionally, St Johns is in the last six monthsof three-year contracts with US trader TCP andConocoPhillips. A third, three-year contract that began in 2000with Enron, was cancelled, but only consisted of 100,000 tons

(EAPC, February 5, p6). In the spring of 2002, Power Parkalso awarded 250,000 tons of coke to trader Capex, and50,000 tons to TCP for 2002 delivery. St Johns is in a com-fortable position with regard to inventories, as it has up to fourmonths worth of coke supplies on the ground. Last year, theutility consumed 650,000 tons of petroleum coke, up 50,000tons from a year earlier. And the same amount is projected tobe burned this year. St Johns, which is permitted to utilizecoke in up to 20% of its fuel mix at any given time, increasedits annual coke usage from 15.5% to 17% in 2002 (EAPC,September 3, 2001, p6). But the utility will pursue using morecoke in the future, which will require re-permitting and mak-ing boiler modifications, a company official says. With regardto the strike in Venezuela, St Johns has not been significantlyimpacted. The strike could result in up to two cargoes beingdelayed or cancelled, but that has not happed yet. The biggestimpact so far is that vessels are taking longer to load atHovensas St Croix refinery in the Caribbean, which typicallyprocesses Venezuelan crude.

JEA, which witnessed the ups and downs of bringing two newboilers utilizing circulating fluidized bed (CFB) technology online back-to-back in 2002 at its Northside 1 and 2 units, isbeing adversely affected by the Venezuelan strike. The utilityhas reportedly received several force majeure letters, and saysit may have to put out a solicitation for coal if the situation isnot resolved soon. But JEA said nothing was known at thetime with regard to what it will decide to do. The utility lastmonth said it will solicit for 2003 coke supplies this month ornext (EAPC, December 5, 2002, p5). JEA has some coke sup-ply contracts that extend into this year, but exact details areunavailable. In March 2002, JEA awarded up to 1.3mn tons ofcoke to Koch Carbon, TCP and SSM, and prior to that timeawarded a supply contract to Aimcor for an unspecified vol-ume of coke (EAPC, November 5, 2001, p6). JEAs 2002 cokeburn was estimated between 400,000 and 500,000 tons, butonce the two 300MW Northside units are utilizing 100% coke,they will combine for an annual burn of up to 1.6mn tons(EAPC, September 3, 2001, p6). JEA has yet to discover whyit is having problems burning 100% coke at the units, and con-tinues to run them on a 70:30 blend of coke and coal. But it isstill the utilitys intention to run Units 1 and 2 on 100% cokeas soon as they are able to do so.

JEA, which conducted planned, two-week outages on its cokeand coal burning Northside Units 1 and 2 in Jacksonville,Florida, last October and November, has announced additionalmaintenance for this spring (EAPC, December 6, 2002, p5).While last autumns outages prepared the units for the winter,JEA is planning to take both units down in March and April,for two to three weeks each, to make improvements for thesummer run. The utility will do the work during the low loadperiod, and will make engineering improvements and othervarious fixes, including limestone feed problems. NorthsideUnits 1 and 2 will continue to burn a mixture of coke and coal



this year, but JEAs goal is to have both units consuming100% coke in 2004.

Taiwan's Formosa Petrochemical has pushed ahead with itsMailiao refinery's new power plant despite persisting problemswith the petroleum coke unit, using coal as a blend to make upfor the shortfall on coke supply (EAPC, December 6, 2002,p5). The coker is designed to produce around 1mn t/yr, all ofwhich is intended for consumption by the power plant at the450,000 b/d refinery. But technical problems have preventedthe coker getting up to full speed, although the situation doesappear to be improving. Testing on the unit began way back inJune. "We still have some time to go to get it running smooth-ly," a source at the privately owned refinery said. "But thepower units are running." The source would not say exactlyhow much petroleum coke is currently being produced, butindicated that the situation has recently improved. A test run at50% capacity in November could only be sustained for a fewdays. Electricity from the two new 150MW circulating flu-idized bed (CFB) boilers at the plant is to be sold to Taiwan'snational grid as well as supplying the Mailiao refinery itself.Formosa has enough coke of its own to blend with coal to runthe power plants, the source said. No purchases of petroleumcoke are being contemplated.

The 540,000 b/d Reliance refinery at Jamnagar, on Indiasnorthwest coast, is reportedly back to normal, and is produc-ing close to 8,000mt/day of petroleum coke, a company offi-cial says. Industry sources in late 2002 suspected that Reliancehad raised coke output from early year levels of 6,800mt/day,but the figures were never confirmed until now (EAPC,December 6, 2002, p7). Technical problems that surfaced atthe refinery late last summer interrupted some output, and theproblems have only now been corrected. With the additionalcoke production, Reliance has increased domestic sales, pri-marily into the cement industry. The Indian producer willexport any surplus coke that is not utilized in the domesticmarket, but cannot commit any material in the near term, anofficial says.

Venezuelan crisis slashes over 500,000 tons of productionVenezuelas political crisis is showing no sign of resolution,over five weeks into a national strike aimed at removingPresident Hugo Chavez from power. The operations of state-owned PdV remain paralyzed, and prospects for a quickrecovery from the crisis appear more remote with every pass-ing day. Global crude and products have been impacted, andprices have shot higherincluding petroleum coke. Shortlyafter the strike began, PdV was forced to declare forcemajeure on all exports.

Industry sources agree that close to 15,000 t/d of Venezuelancoke production is being lost due to the strike, and an addi-tional 5,000 t/d at affected US Gulf coast and Caribbean

refineries. The strike started December 2, but not all refineriesor upgraders were closed down that day. Closings came at dif-ferent times, and some, such as Sincor, thePdV/TotalFinaElf/Statoil joint venture upgrader in Jose,Venezuela, came down as late as December 13. As a result, theindustry estimates that over 500,000 tons of coke has been lostsince the inception of the strike, at a time when the globalcoke market was already tight on supply. Some have put thatfigure closer to 1mn tons, and are quick to point out that evenif the strike ended today, it would take another two to fourweeks for refineries to ramp up after being shut down cold.Reports have emerged claiming serious damage to oil fields,refineries and other infrastructure that could delay a return toproduction when the current stalemate is resolved. One cokemarket participant called the Venezuelan situation a tickingtime bomb, and said most people have yet to fully understandall the implications of the prolonged strike.

In Venezuela alone, the three upgrading projects plus PdVstwo coke-making refineries produce a combined 6.2mn tons ofcoke per year. PdVs coke output at the Cardon/Judibana refin-ery is 1.2mn t/yr, and another 800,000 tons is produced at theAmuay refinery. And the Cerro Negro, Sincor and Petrozuataupgraders account for the remainder of the coke production.Additionally, subsidiaries of PdV and Amerada Hess own theHovensa refinery in St Croix, which has a capacity of 1.3mnt/yr. The exact status of US refiner Citgo, a wholly-ownedsubsidiary of PdV, is unknown, but most agree that it hasavoided force majeure, but is scrambling to replace 650,000b/d of Venezuelan crude. It has so far avoided deep run cuts atits Lake Charles, Louisiana and Corpus Christi, Texas, refiner-ies. But the 260,000 b/d Citgo Lyondell Chemical refinery inHouston, which is 42pc owned by Citgo, has cut runs byroughly 50pc. Citgo produces 2.91mn t/yr of coke at its threerefineries. Several US Gulf coast refineries have been directlyaffected by the strike. Murphys Meraux, Louisiana, plant, wasrunning 15,000 b/d below capacity, while Lyondell-Citgo inHouston, Texas, slashed runs by half as of late December.ConocoPhillips in Sweeney, Texas, was about 40,000 b/dbelow capacity. Hovensa was reportedly well below capacityin December.

With regard to coke production, Hovensa is operating any-where from 60% to 100% of normal levels on a daily basis,industry sources say. The refiner is buying spot crudes, someof which are actually better quality than Venezuelan crude.Overall, Hovensa coke production has fallen one quarter sincethe beginning of the strike, sources say. But the producer hasnot had to cancel any coke deliveries due to the lower produc-tion.

Many end users are reluctant to say how the Venezuelan strikeis affecting them. One of the major cement producers says thestrike has impacted them, but due to the complicated force



majeure situation it cannot comment on anything. The produc-er said the strike impacts all buyers of coke, and hopes thematter is solved as soon as possible. Another cement producerin the Asia Pacific region does not know how the strike isaffecting them at this time. Some lifters of Venezuelan cokesay that the true implications of the strike could depend onhow contracts with PdV are set up. The force majeure compli-cates the issue, and some contracts may end up being can-celled due to the strike. At least one US utility, JEA inJacksonville, Florida, has hinted that it might be forced to putout a tender for coal, as its coke suppliers rely heavily onVenezuelan material. The utility previously fulfilled its 2003coal requirements, but may need extra supplies now.

Coke prices at the US Gulf coast have jumped about 20pcsince the beginning of December due to the strike. The globalcoke market is very tight on supply, and most producers donot have any excess material to sell. The lingering question ishow long will the strike last. But even if the strike ends today,the effects of the strike will persist throughout the year.

Western Kentucky Energy (WKE ) has announced that itwill receive spot bids on January 24 and term bids onFebruary 7 for either coal or petroleum coke. The utility hasnot set any certain volumes for the solicitations, primarilygiven current market conditions. But the minimum monthlybid is for 5,000 t from any bidder or supplier. WKE has notbeen active in the coke market recently due to the current pric-ing of coke versus coal. The utility says it would be surprisedto see many bids for petroleum coke given current marketconditions.



Coke Industry NewsVenezuelan disruptions slash Atlanticbasin oil supplyThe political strife in Venezuela has slashed oil supplies to theAtlantic basin, and US crude stocks are brushing 20-year lowsafter a massive drawdown late last month. Virtually no oil hascome out of Venezuela since the countrys strike began fiveweeks ago normally it exports 2.5mn b/d, of which 60%goes to the US. The loss of supplies from a major source justfive days sailing from the Gulf coast has slashed US imports,cut inventory levels, and sent crude prices soaring to theirhighest level in two years.Last months Opec decision to adjust targets and cut produc-tion is now irrelevant in a market which has switched frompotential oversupply to acute shortage in just four weeks.Middle East producers are already gaining from the troublesin Venezuela, as Atlantic basin and Asian refiners compete forscarce prompt supplies. Opec output this month is unlikely tobear much resemblance to the new ceilings.

The loss of a major short-haul exporter is a bigger blow forwestern buyers than cuts in Middle East supplies, which are asix-week voyage away. US refiners have no immediate substi-tute for 1.5mn b/d of Venezuelan crude, and their onlyrecourse is to bid up prices to attract other grades across theAtlantic. But they are facing severe competition, particularlyfrom Asia-Pacific refiners. Seasonal demand and fears aboutsecurity of Middle East supply have prompted a surge inAsian buying in the last two months.

Westbound spot chartering from the Mideast Gulf has fallensharply since October as crude flooded east. Chinese crudeimports hit a record 1.8mn b/d in November, after a restrainedthird quarter. West African producers are also benefiting fromUS demand for their crudes, which pushed prices to a 12-month high against Brent at the end of last year. But the widerdifferential between Brent and Dubai has not deterred Asianbuyers that need crude with high distillate yields, and are pre-pared to pay whatever they must to secure them. The strike inVenezuela could hardly have come at a worse time for the US.It would have been problematic enough in an ordinary year,halfway through a cold winter and with the economy still dan-gerously susceptible to higher oil prices. But this year, with amilitary strike against Iraq imminent, it is more than just atemporary nuisance.

Even before the strike began, US crude stocks were at the lowend of the fourth-quarter average. The halt in Venezuelanexports reduced US imports to 7.6mn b/d at the end of lastmonth, the lowest weekly volume in almost three years. Theimmediate impact was on Gulf coast inventories, which fell by9mn bl in just one week, leaving total US stocks close to the20-year low of 270mn bl reached at the end of September

after hurricanes shut in offshore production. The shortfall inthe Gulf coast will soon spread inland to the high-consumingmidcontinent region, where crude stocks have been close tohistoric lows for several months. There is now a strong argu-ment for Washington to release some of the 600mn blStrategic Petroleum Reserve (SPR).

But it is unlikely to do so, even if consumers are hit by highprices, because SPR oil is seen an insurance policy againstsupply disruptions during an attack on Iraq. With no end to thepolitical stand-off in sight, crude prices look set to rise further.And higher product prices will follow swiftly if US demandremains close to the current 20mn b/d. Colder than averagetemperatures on the US Atlantic coast have boosted distillatedeliveries to their highest level in two years. And robust gaso-line demand is keeping pressure on refiners to rebuild invento-ries before the start of the next driving season. A shortage ofcrude now could mean tight gasoline supplies and high pumpprices in the spring.

Opinion: Oil market faces a fight ontwo frontsThe US "is capable of fighting two regional conflicts," againstboth Iraq and North Korea, says defence secretary DonaldRumsfeld. But can the US handle two simultaneous oil supplydisruptions? The month-long strike in Venezuela, one of theUS closest and largest suppliers, has removed 2.5mn b/d fromthe world market, boosting WTI prices towards the highs oftwo years ago. Even if the strike ends soon, it is already toolate to avoid large stockdraws in the US this month. IfWashington presses ahead with war against Iraq, at least 2mnb/d more is likely to be lost. This will keep prices high andthreaten serious damage to the economy. The Bush adminis-tration now faces a political conundrum. If the US goes towar, the dire economic consequences could cost PresidentBush the election next year. But if it is seen to back downover Iraq, Washington will lose credibility, which will havemajor long-term consequences for US interests.

As with the developing tension in North Korea, it seems thatWashingtons eye has been fixed so firmly on Iraq that troubleon its own doorstep has caught it unawares. The Venezuelanstrike has had an immediate impact on US supply. Venezuelaprovides 1.5mn b/d of crude, or almost a sixth of US imports.It accounts for over 40% of the heavy crude run by refiners onthe US Gulf coast. The full impact of the disruption is onlynow appearing in trade statistics, but it is clear that the lossover a prolonged period will slash industry stocks fromalready critically low levels. US crude stocks are brushing 20-year lows and global stocks are at their lowest level sinceearly 2000. Opec also seems to have been taken by surprise. Amonth ago, ministers resolved to cut output to a new lowerceiling of 23mn b/d. This week, they belatedly acknowledged



the Venezuelan crisis, indicating that output may be raised ifthe upper $28/bl limit is breached for 20 days. The Opecpromise temporarily stemmed the rise in prices. But extra sup-plies from the Middle East will be of little immediate help toGulf coast refiners.

There is no ready substitute for short-haul Venezuelan supply.And strong demand from Asia has already cut the volume oflong-haul oil moving west this month. Political debate in theUS has focused on the countrys dependence on Middle Eastoil. But the loss of a major source of supply just a few daysaway by sea is potentially much more serious. Any disruptionto Iraqi output could be more easily managed, as westernrefiners would be cushioned by the six-week voyage. Lossesof short-haul supply give little time to find alternative supplies and this is precisely why stocks need to be maintained atreasonable levels. Yet in the past four years Opec has drainedthe industry of stocks in order to push up prices. Crude stocksheld by US refiners are close to historical lows, and there isnow a compelling case for Washington to release oil from theStrategic Petroleum Reserve (SPR). But Washington has itsown agenda. It has been building up stocks in the SPR aheadof the expected assault on Iraq, and now refuses to release oilto cover the crisis in Venezuela.

How quickly the oil market has flipped from feast to famine faster, perhaps, than policy makers can think or respond.Two months ago, after a $5/bl slide in prices, Opec ministerswere worried about oversupply. Now prices are at a two-yearhigh, Venezuela has stopped exporting and war looms in theMiddle East. But there has been minimal political reaction tothe changed circumstances, either from the US or Opec.Politicians did not foresee the change. The industry will haveto cope alone. No country plans to fight two wars simultane-ously, and the industry does not plan for two oil crises. Thisyear it may have to find a way to do just that.

Chalco, Alcoa announce revised jointventure timetableAluminum Corporation of China Limited (Chalco) and AlcoaInc have announced that their joint venture at Pingguo, China,will now be formalized this year. This revised schedule willallow the parties to complete the necessary commercial termsand to obtain the necessary government approvals for the JV.Both Chalco and Alcoa are satisfied with the substantialprogress of preparations made during 2002 toward the final-ization of the Pingguo JV. Under the previously announcedstrategic alliance, Chalco and Alcoa are forming a 50/50 JV atChalcos facility at Pingguo, which is one of the most efficientalumina and production facilities in China. Alcoa believes thatthe proposed JV will allow it to benefit from the growth ofChinas aluminum market, the fastest growing in the world.Chalco believes that the cooperation with Alcoa on thePingguo JV will improve business performance within Chalco.

The parties have committed to significantly increase both therefining and smelting capacities at Pingguo over the next fewyears. The current alumina expansion should be completed inthe middle of this year, at with time the capacity of the alumi-na plant will be 850,000 t/yr. There are also plans to expandthe 130,000mt/yr aluminum smelter at Pingguo by250,000mt/yr, bring total capacity to 380,000mt/yr by 2006.Both parties expect to finalize the necessary arrangements andobtain government approvals by the second half of this year.No US regulatory approvals are required. Chalco is the solealumina producer and the largest producer of primary alu-minum in China, and was ranked 2nd in terms of alumina pro-duction volume in 2001 in the world. Its mining, refining andsmelting operations are the largest in the Chinese aluminumindustry. Alcoa is the worlds leading producer of primary alu-minum, fabricated aluminum and alumina, and is active in allmajor aspects of the industry.

Asia-Pacific coal: Australia flexesproducer muscleAsia-Pacific steam coal prices have been nudged back on to agentle upward path with the help of a concerted effort by themajor Australian producers to capitalize on the strength ofdomestic demand in China. As the robust Chinese demandcontinues to eat into coal available for export, and even sucksimports into the heavily industrialized south of the country, thetop four Australian producers are using their market muscle toconvince north Asian consumers that the rebound from thespot market's mid-year lows still has some room to go. Thosefour producers control more than 80% of the shipments fromAustralia, the world's top coal exporter. They have staunchlykept their offers into recent water-testing tenders by Japaneseand South Korean power companies to a minimum of $26/t ona Newcastle fob basis well above the levels closer to $24/t atwhich spot Newcastle trades have been done. That hasallowed some Indonesian producers to snap up a bit of extrabusiness, but it has also grabbed the attention of the majorconsumers, which in the end would prefer the higher-qualityAustralian coal if the price is competitive. Still, Australianproducers are also coming to a mindset in which their ownprice ambitions are limited by how high the Chinese domesticprice can go. If the Asia-Pacific spot price were to get back toa point somewhat higher than $26-27/t Newcastle fob, thenextra Chinese coal would be drawn back out into the interna-tional market a phenomenon seen a year ago that set off asteep dive in steam coal prices.

Saudis want 1.5mn-2mn b/d Opecoutput increaseSaudi Arabia wants Opec to increase its output ceiling by1.5mn-2mn b/d to offset a supply shortfall caused by theVenezuelan strike. "Saudi Arabia and other countries thinkthere is a need for 1.5mn-2mn b/d of extra oil on the market,"



an Opec delegate told Argus. Opec ministers are holding con-sultations over the telephone to decide the exact amount of theincrease, which would use the new 23mn b/d January outputtarget for Opec s 10 participating members as a baseline, saidthe Opec delegate. An extraordinary Opec meeting is beingconvened in Vienna on 12 January to discuss an increase inproduction, indicating that some of the group's members dis-agree with the proposal to officially hike output by up to 2mnb/d. Kuwait's acting oil minister Sheikh Ahmad al-Fahd al-Sabah said his country favors a 1mn b/d increase, while othersappear to favor sticking to the 500,000 b/d increase called forby the mechanism. One of the issues under discussion is howto allocate the increase on a pro-rata basis, given that the levelof Venezuela s output will remain unknown. Asked if Opec snine members excluding Iraq and Venezuela have enoughspare capacity to offset a possible simultaneous export halt bythese two countries, the first Opec delegate said: "We are notgoing to deal with ifs." If a US-led war on Iraq coincides witha continued curtailment in Venezuelan exports, some 4mn-5mn b/d would be lost, straining Opec's spare capacity to thelimit. Momentum for an output rise has been building withinOpec since last weekend.

Steam coal loadings at Australia'sNewcastle upThe amount of Australian steam coal loaded at Newcastle'smajor coal export terminals rose 8.7pc to 5.089mn t inDecember from 4.644mn t in November. The average queuefor loading lengthened to 20 vessels last month from 12 inNovember, raising the average turnaround time to 10 daysfrom six days. The number of ships loaded jumped to 81 from66 in November, according to latest data from Port of WaratahCoal Services (PWCS). PWCS is owned by a consortium ofAustralian coal producers and major consumers, and operatesthe main Carrington and Kooragang facilities. Using theJapanese fiscal year ending 31 March as the basis for its data,PWCS said its steam coal shipments so far in 2002-03 are41.013mn t. Steam coal represented 78pc of all the coalshipped, down from 82pc in November. The PWCS data didnot specify the breakdown between the destinations of steamcoal and coking coal, but the figures suggest a rebound inJapanese demand. Japan took 57pc of the coal shipped fromthe terminals in December, up from 55pc in November. SouthKorea's share slumped to 6pc in December from 15pc inNovember, while China's share fell to 4pc from 6pc. Taiwan'sshare jumped to 12pc from 8pc. So far in 2002-03, Japan has taken 56pc of steam and cokingcoal exports through the PWCS terminals, followed by Taiwanwith 15pc and South Korea with 11pc. China's share is 3pc.

Rotterdam coal stocks edge upCoal stocks at the giant EMO terminal in Rotterdam haveedged up slightly to 2.7mn t, sources say. Stocks at the port

stand around 4.5mn t, of which 1.8mnt is iron ore. Marketsources say that while there were fewer vessels than expectedduring December, activity is forecast to increase at the portover the next few days. The EMO terminal handled 20mn t ofcoal last year, while the smaller port of EBS processed 3mn t.EMO's maximum coal-unloading capacity is roughly 175,000t/d. The EBS terminal, in Rotterdam's Botlek area, offers facil-ities for efficiently discharging ships up to 70,000 tons. ButEBS offers board-board facilities for longer vessels in theBeneluxhaven (Europoort).

European coal sector agrees pricingspecificationsEuropean coal market participants agreed to keep standardpricing specifications unchanged at a key London industrygathering today, while continuing the drive to boost trans-parency across the sector. TFS a large, international coalbroker arranged the gathering after concerns over the con-struction of the TFS API indices and confusion as to howreporting agencies like Argus obtain their prices were voicedby a handful of market participants.

Standard specified coal is currently material which is sched-uled for delivery within the next 90 days. A number of partici-pants had previously voiced concern over such a wide timingwindow, claiming that in a liquid market a shorter pricing win-dow of 60 days would provide more accurate price assess-ments. But, the majority of participants agreed to maintain thepricing window period at 90 days. One delegate also stressedthat the TFS API index needed to take the next step forwardand that the index was not transparent enough. Other playerssuggested that one way to boost transparency may be to pub-lish a list of people contacted by the price reporting housesduring the week. A published pool of contacted market mem-bers would provide a guiding principle to other players acrossthe sector, one dealer said.

Global Coal trades were also discussed, and it was noted thatwhile deals concluded on the e-trading platform were an easyway to signal prices, there was still insufficient traded volumeon the platform to be fully reflective of the market. The lackof liquidity on the TFS API 3 (fob Newcastle) index con-cerned a few individuals. But again the general consensus wasthat the contract needed a boost of confidence.

The potential of a cif Japan physical index was also mentionedand participants at the gathering remarked that this contractwas likely to receive a large amount of interest. The majorityof the 26 participants at the London meeting agreed that theywere generally satisfied with the way in which both pricereporting houses assessed the TFS API cif Rotterdam and fobRichards Bay indices, and it was reiterated that greater trans-parency across the market was needed for price assessments toimprove.



Coal MarketsEuropean physical coal prices have leapt up around $1/t dur-ing the past four weeks, following a spate of buying by a num-ber of Scandinavian utilities and concerns over the furthertightening of South African supply.

Scandinavian buyers have been seen in the market purchasingcoal for prompt delivery at higher levels after lower hydrooutput helped to boost coal burn. Physical coal prices inEurope (cif Rotterdam) currently stand at $35.65/t, whileSouth African fob prices are reported at $27.71/t.

Driven by the onset of winter temperatures in the US andincreased buying activity from utilities, eastern US spot coalprices strengthened noticeably during the past month. Pricesfor most coal specifications have increased by at least $1/tonsince the beginning of December, and may strengthen further,especially if utilities continue to increase their coal burns.

A substantial amount of coal remains available among easterncoal producers, but many utilities may be forced to enter themarket at the same time in the coming months, resulting in amuch-anticipated price spike. Many utilities are working withsmaller stockpiles than normal during the winter season.

Although there were alternative sources of coal being offeredinto the ARA region, strengthening freight rates were helpingto keep these products off the market. Towards the end of themonth the route 4 freight rate reached $10.70/t.

SO2 MarketsThe SO2 emissions market stayed within its post-Enron rangebetween $125 and $135. The market finished up at $131. Thebulk of SO2 volume for last week took place on just two dayswhere 29,000t and 15,000t traded respectively. Trading of SO2forwards and future vintages in December was extremelylight, due to the major decline of speculative trading, anotherresult of the Enron collapse.

Asphalt MarketsHigher feedstock costs forced US asphalt producing refiners toraise their asphalt winter-fill prices. The higher quotes havecome at a time when US buyers typically expect to see thelowest wholesale prices of the season. Surging prices for high-density fuel oil in northwest Europe and the Mediterraneanfailed to have an impact on bitumen prices. Many marketersexpect pressure on bitumen prices of up to Euros 25/t inJanuary, the result of rising feedstock costs.

Southeast Asian asphalt prices found support on strengtheningfuel oil and crude, but demand for prompt supplies petered outahead of the year-end holidays. North Asian asphalt demandslowed in the winter season as refiners switched to fuel oilproduction.

Crude MarketsCrude prices were driven sharply higher in December as astrike by employees at Venezuela's PdV erased over 2mn b/dof supply from the market. Since much of the country's outputis higher-sulphur crude, the loss was felt most sharply amongprices for alternatives like US domestic Mars and Ecuador'sOriente.

The cash price for US benchmark WTI hit its highest levelsince November of 2000 at more than $32/bl, even as liquidityin the Americas crude markets dried up alongside falling sup-ply. Worsening jitters over a possible war in Iraq also support-ed crude prices as the month wore on, and the premium forprompt oil over forward oil soared.

Yet US purchases of Iraqi crude accelerated as refiners scram-bled to replace lost Venezuelan supply.

Availabilities of even light sweet crude from the North Seaand west Africa were quickly snapped up in the US at ever-increasing premiums to WTI. And in a testament to the badtiming inherent in trying to manage a commodity as complexas oil, Opec met mid-month to ratify a cut to real output of upto 1.7mn b/d. Only weeks later it was reconsidering that deci-sion as prices stayed above the organisation's price band.

Traders watched closely to see if the US Strategic PetroleumReserve (SPR) could be tempted to release some of its stocks,which finished the month nearing the 600mn bl mark.

But reserve officials instead agreed only to allow deferrals ofdeliveries scheduled for December and January.

Fuel Oil MarketsUS high sulphur fuel oil prices were highly volatile through-out December and early January, but remained exceptionallystrong relative to crude oil after Venezuelan exports ground toa halt in early December. US Gulf coast 3pc sulphur fuel oilprice hit a 15-year of 29.00/bl on 6 January, at approximately90pc the values of WTI.

Despite the high prices, Gulf coast refiners chose not toincrease fuel oil output, as tight sour crude oil supplies madethe move unprofitable.

Soaring prices in the US Gulf and Atlantic coasts also openedan arbitrage for high sulphur fuel oil from Europe, with sever-al Russian M-100 cargoes scheduled for delivery in January.

The spread between low and high sulphur fuel oil price wasexceptionally wide, as slack low sulphur imports and changesin the contractual arrangements of northeast US refinersseverely curtailed low sulphur blendstocks supplies on thespot market.



Argus Petroleum Coke Index:The Argus Petroleum Coke index is an assessment of spot market activity forthe grades assessed. Spot activity is defined as transactions or negotiationsduring the month assessed for delivery within the next 90 days. We base ourassessments on a market consensus of the commodity value.

We consider spot transactions and negotiations at the market in question (as infob US Gulf Coast and US West Coast), delivered prices netted back for freight,contract renegotiations, and estimates of market participants. Forward loadingor delivery dates will be considered up to 90 days from the end of the monthassessed. Prices for volumes loading or delivering in those 90 days that werenegotiated prior to the month assessed will not be considered in the assess-ment, as they reflect historical not current market fundamentals. Prices for con-tracts negotiated in the month assessed but for delivery over a term that spansbeyond the next 90 days will not be considered in the assessment.

We are reflecting intelligent index values for the grades assessed: where speci-fications of actual trades differ from the index, we will seek a market consensusas to how to adjust the traded value to properly inform the index specification.Where actual trades are not available, we will assess the value of the grade byseeking a consensus of participants and considering other connected markets.Where a range is assessed for a particular grade, it reflects the range of tradefor that grade in the month assessed. If there is no trade, it reflects the rangewithin which a willing buyer and seller could close a deal. Our survey includesproducers, electricity generators, marketers/traders, heavy industry endusers,and other market participants.

Coke percent of coal: As of February 5, 2002 issue, this table calculates the coke price as a percentof the coal price using estimated delivered coke prices for Europe and Japan.The US values compare Nymex specification CAPP coal to fob Gulf coast coke.The ARA values compare cif ARA 6,000 kcal coal to cif ARA coke by adding theUSGC to ARA freight to the fob USGC coke price. The Japan value comparesthe price of cif Japan 6,700 kcal coal to cif Japan coke by adding the USWC toJapan freight to the fob USWC coke price. CFR quotes for Japanese coal arebased on current freight added to fob China and fob Newcastle markets.

Coal forward curve:Represents the level of contango or backwardation in the coal markets by chart-ing the price for forward delivery on the day quoted.

BTU Comparison:Compares the relative values of different fuels on a BTU basis. Conversions formmBtu per unit are: Diesel 5.79/bl, 0.3pc fuel oil 6.258/bl, 1pc fuel oil 6.384/bl,Coal 24/short ton (12,000 btu), Coke 30.86/metric ton (14,000 btu). New York0.3% fuel oil is high pour and includes New York taxes. Coal and coke valuesinclude cost of sulphur allowances.

Spark Spread:Indicates the relative profitability of burning various fuels in a northeastern USpower plant. The spark spread is the difference between the spot power priceand the cost of generating output from a given fuel based on a heat rate of10,000.

Coal and coke adjusted for SO2 allowances:A comparison of the true cost of coal and coke at a US electric generating plantafter sulphur allowances are included. The spot price of coal and coke is adjust-ed for the cost of sulphur dioxide emissions, assuming the plant applies sulfurdioxide allowances at the current market price for those allowances. The SO2index price is listed on page 1 of the report.

Light/Heavy Product SpreadA measure of the profitability of coking. For the Gulf coast, the spread is theaverage of prompt 87 octane conventional gasoline and prompt diesel inHouston, less the price of 3pc sulphur fuel oil fob US Gulf coast. For the Westcoast, the spread is the average of prompt 87 octane CARB gasoline andprompt CARB diesel in Los Angeles, less the price of 380 CST fuel oil in LosAngeles.

US Exports of Non-Calcined CokeSource: United States International Trade Commission,http://dataweb.usitc.gov/.

Clarkson's Freight RatesRates are assessments for day quoted and assume a 65,000 metric ton drybulk vessel, with a 45 foot draft at load port and no other restrictions.

ARGUS INDEX METHODOLOGY:

FOR FURTHER INFORMATION:

Energy Argus Inc.4801 Woodway, 270WHouston, TX 77056Phone: 713.622.3996Fax: 713.622.2991Email: [email protected]: www.energyargus.com/coke.html

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PublisherAdrian Binks

CEOAbudi Zein

EditorialAmericas: David LovePhone: 406.494.0061Fax: 406.494.0062Email: [email protected]

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Energy Argus Petroleum Coke ispublished by Energy Argus.Copyright 2003 by Argus MediaLimited. Reproduction, scanninginto an electronic retrieval system,or copying to a database is prohibit-ed without the written permission ofthe publisher. ISSN 1538-9316

WHAT IS ENERGY ARGUS?

Energy Argus is the publisher of Coal Daily, the acceptedbenchmark for trade in the US and international markets forcoal, and Air Daily, the index for sulphur allowance trading.Energy Argus is part of the larger Argus Media Ltd, whichhas existed for over 30 years as Petroleum Argus. PetroleumArgus publishes numerous price reports and analyticalnewsletters, and is widely used as an index for trade in crudeoil, refined products, and LPG.

Argus Petroleum Coke brings our experience in marketanalysis and indexing to an important but often neglected cor-ner of the industry. Our goal is to produce index-qualityassessments of the coke market, and to analyze coke pricesand their direction. Argus is uniquely able to provide marketnews and analysis from its global team of reporters coveringrelated industries such as coal, crude, gas, power and refin-ing.

Our coke indices assess spot market values for coke whichis a great challenge in an elusive and illiquid market. We areassessing the value that coke has traded at or would trade atduring the most recent month, for delivery in the next 90 days.We are not assessing long term contracts, nor are we includ-ing prices that were transacted months ago and are nowbeing delivered. The prompt value of a commodity is alwaysthe best index.

We welcome your comments and suggestions. Contact us at [email protected].

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