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Trading Coal
E.ON Sales & Trading, THW Lars Wlecke
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Content
Demand and Supply in CoalPhysical Trading
Financial Trading
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World
EU-25
Germany
Comparison of Primary Energy Sources in 2005
0 %
5 %
10 %
15 %
20 %
25 %
30 %
35 %
40 %
Coal Gas Mineral Oil Nuclear Other (renewables etc)
Source: Verein der Kohleimporteuere, BP Statistical Review of World Energy, AGEB AG Energiebilanzen e.V, EST-TA
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Power Plants 65 %
Heating Production 15 %
Percentage Hardcoal usage over different Industries
in the EU-25 in 2005
Source: Annual Report VDKI 2005
Coking Plants 20 %
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Development of Global Coal Consumption (1965 - 2005)
0
500
1000
1500
2000
2500
3000
3500
1 9 6 5
1 9 6 8
1 9 7 1
1 9 7 4
1 9 7 7
1 9 8 0
1 9 8 3
1 9 8 6
1 9 8 9
1 9 9 2
1 9 9 5
1 9 9 8
2 0 0 1
2 0 0 4
m
n o f t o n n e s O i l
E q u i v a l e n t
North America
South and Central America
Europe and Eurasia
Middle East
Africa
Asia Pacific
Source: BP Statistical Review 2006, EST-TA
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Development of Global Coal Consumption (1990 - 2030)
North America OECD-Europe Non-OECD Europe and Eurasia
Asia (no China/India) China IndiaMiddle East Africa Central/South America
Source: EIA Base Case, EST-TA
0
2000
4000
6000
8000
10000
12000
1990 2002 2003 2010 2015 2020 2025 2030
m n o f m e t r i c
t o n n e s
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Development in Europa: loss of 100.000 MW
Minimal Capacity Reduction:~ 100.000 MW
Nuclear 45 years
Hard Coal / Lignite 45 years Oil / Gas 50 years,
CCGT 40 years
Maximum Capacity Reduction:
~ 200.000 MW Nuclear 40 years / Phasing Out Hard Coal / Lignite 40 years
Oil / Gas 40 years, CCGT 35 years
Decommissioning of Capacity in Europe* (2005 - 2020)
*EU-25 without GB, GR, IRL, SLO, CY, M + BG, RO, N, CH
R e d u c t i o n o f p o w e r p r o d u c t i o n c a p a c i t y i n M W
-250.000
-200.000
-150.000
-100.000
-50.000
02005 2010 2015 2020
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Seite 9
Technology
CHP 8.780 MW (13)
Hardcoal (HC) 9.945 MW (11)
Lignite (Lig.) 2.760 MW (2)
Standort offen
Total: ~ 21.500 MW
New Powerplants in Germany
(as per 04/2006)
Concord Power – Lubmin I
CHP – 1.200 MW
Electrabel – (Stade)HC – 800 MW
VE - HamburgHC – 1.640 MW
VE – Boxberg V Lig. – 660 MW
N-ergie - Dettelbach
CHP – 400 MW
E.ON Energie – Irsching 4/5CHP – 1.330 MW
SW Hannover (HC – Beteiligung)
E.ON Energie - DattelnHC – 1.000 MW
RWE - Hamm
HC – 1.400 MW
TRIANEL/EWMR - LünenHC – 800 MW
STEAG – Herne 5HC – 750 MW RWE - Lingen
CHP – 850 MW
STEAG – Walsum 10
HC – 700 MW
RWE – Neurath BoA 2/3Lig. – 2.100 MW
Statkraft - HürthCHP – 800 MW
MarkE/Statkraft - HerdeckeCHP – 400 MW
Electrabel – SaarlandCHP – 400 MW
STEAG SaarEnergie –Querschied
CHP – 400 MW
TRIANEL - HammCHP – 800 MW
KMW – MainzHC – 750 MW
EnBW – KarlsruheHC – 750 MW
EnBWCHP – 400 MW
SüdWestStrom - WertheimCHP – 400 MW
Referenz-KW NRWHC – 555 MW
Essent/swb - BremenHC – 800 MW
Iberdrola – NordhessenCHP – 1.000 MW
Braunschweiger Vers. AGCHP – 400 MW
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Situation of hard coal in Germany (- 2010)
0
10
20
30
40
50
60
70
80
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
i n m n
m t
Domestic coal International coal
Quelle: EKW-MB, VdKi Jahresbericht 2005
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Regional Dispersion of Hard Coal in the World
(stand 2004, 785 bln. T. Reserves)
Source: Kurzstudie Reserven, Ressourcen und Verfügbarkeit von Energierohstoffen 2004, BGR
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Content
Demand and Supply in Coal
Physical Trading
Financial Trading
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Qualities of Coal: There is not one commodity
Coal from different mines are different in:
Heating Value
CO2 content
SO2 Content
Moist
Ashes
Etc.
Buyers of coal often have specific preferences, depending on:
Burning facilities Government / EU Regulations
Availability of Storage facilities
Etc.
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Freight
Worldwide freight market …
ca. 685 Capesize ships (130.000 – 180.000 t)
ca. 1.348 Panamaxsize ships (60.000 – 80.000 t)
ca. 4.195 Handymax & Handysize ships (10.000 – 59.000 t)
… Carrying approximately
2/5 Coal and 3/5 Iron Ore with Capes
40 % Coal, 30 % Crop, 15 % Iron Ore with Panamaxes
Physical freight market more short-term oriented
(Financial) Forwards on exposures further out
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Total: 534 Mio. t
(+27 Mio. t)
Seaborn Coaltrade in 2005
China
Kanada /
USA
Russland
Australien
110
Südafrika
Indonesien
Polen
70
Kanada /
USA6
62
Kolumbien /
Venezuela
11
128
66
57
Vietnam 18
Quelle: EKW-MB; VdKi Jahresbericht 2005
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Important Players in the Physical Market
Big Four
Xstrata / Glencore BHP Biliton Anglo American Rio Tinto
China
China Coal Company Vinacoal Shenhua Group
Shanxi Group
South America
Drummond Cerrejon Coal Company
Eastern Europe & former USSR
Weglokoks Suek Krutrade
South East Asia Banpu Adaro KPC
Arutmin
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Estimates of Trade Volumes for Physical Coal Market
World Coal Trade Volumes (Foreign Trade) - Coking and Steam Coal
0
100
200
300
400
500
600
700
800
1997 1998 1999 2000 2001 2002 2003 2004 2005
m n t
Source: Verein der Kohlenimporteure
Steam coal only
Total Seabourne Trade(Coking and Steam Coal)
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Content
Demand and Supply in Coal
Physical Trading
Financial Trading
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API#2 Index Market
One „average“ Coal Contract, proxy for all seaborne Coal into
Western / North Europe 6000 kcal/kg
CIF delivered to ARA (Amsterdam, Rotterdam or Antwerpen)
1 % sulphur NAR
Average of oral / telephone surveys done by Argus and McCloskey
on prices paid for coal with delivery in the next 90 days over 40
market participants
Also in Index: deliveries into France, Denmark, Germany, UK netback for freight
Like API #2 there is also a API #4 market for South-African Coal
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Swaps on the API Index
Advantages:
No handling / logistics Decoupling pricing question from quality issues
„Hedge“ for more grades of Coal (with a basis risk)
Standard size per trade much smaller compared to the physical market
Standard contract
Disadvantages:
Index settlement is not always transparent
Premiums / Discounts for a specific grades of Coal are not hedged
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Trading options (1):
Power-producer hedging his power sales
Power producer profits depend on margin between producing costs
(eg. coal) and power proceeds
Coal: dark spread, gas: spark spread
Power sales-volume also depend on spread levels
Every day a make-or-buy decision, some sales will be bought back when
spark- and dark spread falls
To hedge those profits our producer needs to be able to act quickly, in
flexible volume and without any logistics / issues
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Trading options (2):
Coal producer that wants to be exposed to Spot prices
Producer holds the view that he cannot beat the market, thus wants to
leave its price-exposure open
Physical customers however, are interested in fixed forward prices
Every time the producer sells “fixed” (physical) to customers he buys the
corresponding API#2 contract to reach the preferred exposure
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Trading options (3):
Coal producer wants to open an new mine
Coal producer wants to open an new mine and needs financing
Bank wants security of income stream throughout the investment
lifecycle
Physical Market does not trade this far out (usually)
In the financial market there are more parties with a risk appetite to
take on those risks (“at a fee”)
Producer sells forward (say 5 years) part of his production to the
Financial participant to satisfy the bank
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Players in Financial Market
Banks (Deutsche, BNP Paribas, Morgan Stanley, etc.)
Utilities (EDF, RWE, NUON, E.ON, etc.)
Producers (BHP-Billition, Cargill, Glencore, etc.)
Trading Houses (Constellation, Sempra, Foundation etc)
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Marketplaces
Brokers
Voice / screen broking, Most trades on bilateral credit / contracts
Clearing possible (eg. via European Energy eXchange)
Exchange
Standard contract
No voice assisted trading, incl. clearing
Example EEX, NYMEX, ICE
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Estimates of Trade Volumes for Financial Coal Market
Source: EEX, Brokers
Trade Volume for the API#2 and API#4 Swap Market
+/- 150 % of the physicalunderlying market
1998 1999 2000 2001 2002 2003 2004 2005
1000
750
500
250
0
Mio. t