1. Trading - Coal

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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

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

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

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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

28. In the Port of Richards Bay
RBCT
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Distance from the Coal Mines
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Coal
Mines
600Km850Km
RBCT

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

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South African Coal Trade

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Session 3
Contract & Quality

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Sale Purchase Agreement
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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 “asreceived” 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.

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
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Derivatives & Risk
Management

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
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A well-designed hedging programme reduces the variability of costs

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
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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
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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
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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!!!