Trading Coal

E.ON Sales & Trading, THW Lars Wlecke

Content

y Demand and Supply in Coal

y Physical Trading
y Financial Trading
Content

y Demand and Supply in Coal

y Physical Trading
y Financial Trading
Comparison of Primary Energy Sources in 2005

40 % World
EU-25
35 % Germany
30 %

25 %

20 %

15 %

10 %

5%

0%
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
Percentage Hardcoal usage over different Industries
in the EU-25 in 2005

Heating Production 15 %

Coking Plants 20 % Power Plants 65 %

Source: Annual Report VDKI 2005

Development of Global Coal Consumption (1965 - 2005)
3500
North America Europe and Eurasia Africa
South and Central America Middle East Asia Pacific
3000
mn of tonnes Oil Equivalent

2500

2000

1500

1000

500

1998

2001

2004
1968

1974

1977

1989
1971
1965

1980

1983

1986

1992

1995
Source: BP Statistical Review 2006, EST-TA
Development of Global Coal Consumption (1990 - 2030)
12000 North America OECD-Europe Non-OECD Europe and Eurasia
Asia (no China/India) China India
10000 Middle East Africa Central/South America
mn of metric tonnes

8000

6000

4000

2000

0
1990 2002 2003 2010 2015 2020 2025 2030

Source: EIA Base Case, EST-TA

 Development in Europa: loss of 100.000 MW

Decommissioning of Capacity in Europe* (2005 - 2020)

Reduction of power production capacity in MW

2005 2010 2015 2020

0 Minimal Capacity Reduction:
~ 100.000 MW
-50.000 y Nuclear 45 years
y Hard Coal / Lignite 45 years
y Oil / Gas 50 years,
-100.000 CCGT 40 years

-150.000 Maximum Capacity Reduction:

~ 200.000 MW
y Nuclear 40 years / Phasing Out
-200.000
y Hard Coal / Lignite 40 years
y Oil / Gas 40 years, CCGT 35 years
-250.000

*EU-25 without GB, GR, IRL, SLO, CY, M + BG, RO, N, CH

New Powerplants in Germany
VE - Hamburg
RWE - Hamm Electrabel – (Stade) HC – 1.640 MW Concord Power – Lubmin I
HC – 1.400 MW HC – 800 MW CHP – 1.200 MW
Essent/swb - Bremen
HC – 800 MW SW Hannover
E.ON Energie - Datteln
HC – 1.000 MW (HC – Beteiligung)

Braunschweiger Vers. AG
STEAG – Herne 5
RWE - Lingen CHP – 400 MW
HC – 750 MW
CHP – 850 MW
TRIANEL/EWMR - Lünen
STEAG – Walsum 10 HC – 800 MW
HC – 700 MW
VE – Boxberg V
Lig. – 660 MW
RWE – Neurath BoA 2/3
Lig. – 2.100 MW TRIANEL - Hamm
CHP – 800 MW

Statkraft - Hürth MarkE/Statkraft - Herdecke

CHP – 800 MW KMW – Mainz CHP – 400 MW
HC – 750 MW Technology
N-ergie - Dettelbach
STEAG SaarEnergie –
CHP – 400 MW CHP 8.780 MW (13)
Querschied
CHP – 400 MW E.ON Energie – Irsching 4/5 Hardcoal (HC) 9.945 MW (11)
CHP – 1.330 MW Lignite (Lig.) 2.760 MW (2)
Electrabel – Saarland
CHP – 400 MW Standort offen

EnBW – Karlsruhe
HC – 750 MW
Referenz-KW NRW EnBW SüdWestStrom - Wertheim Iberdrola – Nordhessen Total: ~ 21.500 MW
HC – 555 MW CHP – 400 MW CHP – 400 MW CHP – 1.000 MW

(as per 04/2006) Seite 9

 Situation of hard coal in Germany (- 2010)

80

70

60

50
in mn mt

40

30

20

10

0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Domestic coal International coal

Quelle: EKW-MB, VdKi Jahresbericht 2005
Regional Dispersion of Hard Coal in the World

(stand 2004, 785 bln. T. Reserves)

Source: Kurzstudie Reserven, Ressourcen und Verfügbarkeit von Energierohstoffen 2004, BGR
Content

y Demand and Supply in Coal

y Physical Trading
y Financial Trading
Qualities of Coal: There is not one commodity

Coal from different mines are different in:

y Heating Value
y CO2 content
y SO2 Content
y Moist
y Ashes
y Etc.

Buyers of coal often have specific preferences, depending on:

y Burning facilities
y Government / EU Regulations
y Availability of Storage facilities
y Etc.
Freight

y Worldwide freight market …

y ca. 685 Capesize ships (130.000 – 180.000 t)
y ca. 1.348 Panamaxsize ships (60.000 – 80.000 t)
y ca. 4.195 Handymax & Handysize ships (10.000 – 59.000 t)

y … Carrying approximately
y 2/5 Coal and 3/5 Iron Ore with Capes
y 40 % Coal, 30 % Crop, 15 % Iron Ore with Panamaxes

y Physical freight market more short-term oriented

y (Financial) Forwards on exposures further out

Seaborn Coaltrade in 2005

Russland
57
Kanada / 11 Polen
6
USA
China
Kanada /
66
USA
Vietnam 18
62
Kolumbien / 128
Venezuela Indonesien

110
70
Australien
Südafrika
Total: 534 Mio. t
(+27 Mio. t)

Quelle: EKW-MB; VdKi Jahresbericht 2005

Important Players in the Physical Market

y Big Four y Eastern Europe & former USSR

y Xstrata / Glencore y Weglokoks
y BHP Biliton y Suek
y Anglo American y Krutrade
y Rio Tinto
y China y South East Asia
y China Coal Company y Banpu
y Vinacoal y Adaro
y Shenhua Group y KPC
y Shanxi Group y Arutmin

y South America
y Drummond
y Cerrejon Coal Company
Estimates of Trade Volumes for Physical Coal Market

World Coal Trade Volumes (Foreign Trade) - Coking and Steam Coal
800
Steam coal only
700
Total Seabourne Trade
(Coking and Steam Coal)
600

500
mn t

400

300

200

100

0
1997 1998 1999 2000 2001 2002 2003 2004 2005

Source: Verein der Kohlenimporteure

Content

y Demand and Supply in Coal

y Physical Trading
y Financial Trading
API#2 Index Market

y One „average“ Coal Contract, proxy for all seaborne Coal into
Western / North Europe
y 6000 kcal/kg
y CIF delivered to ARA (Amsterdam, Rotterdam or Antwerpen)
y 1 % sulphur NAR
y 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
y Also in Index: deliveries into France, Denmark, Germany, UK
netback for freight
y Like API #2 there is also a API #4 market for South-African Coal
Swaps on the API Index

Advantages:
y No handling / logistics
y Decoupling pricing question from quality issues
y „Hedge“ for more grades of Coal (with a basis risk)
y Standard size per trade much smaller compared to the physical market
y Standard contract

Disadvantages:
y Index settlement is not always transparent
y Premiums / Discounts for a specific grades of Coal are not hedged
Trading options (1):

Power-producer hedging his power sales

y Power producer profits depend on margin between producing costs
(eg. coal) and power proceeds
y Coal: dark spread, gas: spark spread
y Power sales-volume also depend on spread levels
y Every day a make-or-buy decision, some sales will be bought back when
spark- and dark spread falls
y To hedge those profits our producer needs to be able to act quickly, in
flexible volume and without any logistics / issues
Trading options (2):

Coal producer that wants to be exposed to Spot prices

y Producer holds the view that he cannot beat the market, thus wants to
leave its price-exposure open
y Physical customers however, are interested in fixed forward prices
y Every time the producer sells “fixed” (physical) to customers he buys the
corresponding API#2 contract to reach the preferred exposure
Trading options (3):

Coal producer wants to open an new mine

y Coal producer wants to open an new mine and needs financing
y Bank wants security of income stream throughout the investment
lifecycle
y Physical Market does not trade this far out (usually)
y In the financial market there are more parties with a risk appetite to
take on those risks (“at a fee”)
y Producer sells forward (say 5 years) part of his production to the
Financial participant to satisfy the bank
Players in Financial Market

y Banks (Deutsche, BNP Paribas, Morgan Stanley, etc.)

y Utilities (EDF, RWE, NUON, E.ON, etc.)
y Producers (BHP-Billition, Cargill, Glencore, etc.)
y Trading Houses (Constellation, Sempra, Foundation etc)
Marketplaces

y Brokers
y Voice / screen broking,
y Most trades on bilateral credit / contracts
y Clearing possible (eg. via European Energy eXchange)

y Exchange
y Standard contract
y No voice assisted trading, incl. clearing
y Example EEX, NYMEX, ICE
Estimates of Trade Volumes for Financial Coal Market

Trade Volume for the API#2 and API#4 Swap Market

1000
+/- 150 % of the physical
Mio. t underlying market

750

500

250

0
1998 1999 2000 2001 2002 2003 2004 2005

Source: EEX, Brokers