Steam coal

2.4.1. Introduction

Together with oil and natural gas, coal is a leading primary energy globally, accounting for around 32% of global primary energy consumption (VDKI 2012) and around 40% of global electricity generation (IEO 2013).Coal is a heterogeneous product with different coal types based on different geological ages, heating values, content in volatile components and generally chemical composition including ashes, as well as physical properties, notably size

(Brandt 2000). Coal price indices for standardized coal qualities are provided for steam coal⁶¹ and coking coal⁶².

Coal is transported by rail, road, and ship, depending on distance and available infrastructure, where generally ship transport is the most economical. Lignite, based on its lower heating value than hard coal, is usually transported only over very short distances, and consumed in dedicated power plants close to the mining area. Therefore, lignite trade is virtually non-existent. Production costs of lignite dominate its price, which is not affected by world energy markets (Panos 2009). Consequently, the following sections will focus on steam coal, where not indicated otherwise. Coal can be stored easily over long periods of time. An overview of the global coal market is provided in Annex B.

Compared to natural gas markets, coal markets are less in the scientific and political focus in Europe, but also globally. The level of publicly available analyses and data of coal markets is clearly lower for coal than for gas. Consequently, the analyses provided in this section, and the conclusions derived thereof, are less robust than those in the above section on gas.

Before discussing market fundamentals, various price formation mechanisms and showing the differences between EU Member States, a short overview on price trends is given.

Finally, the main findings are summarised by presenting direct and indirect drivers impacting coal prices.

2.4.2. Price trends

A strong correlation between crude oil spot prices and coal import costs into Europe is visible in Figure 29 and in Figure 31.

Figure 29: Steam coal import costs into Europe and the USA

Source: Study authors based on (BAFA 2013), (IEA 2013), (EIA 2013a), (Globalcoal 2013), (Eurostat 2013a) Statistical analysis gives a correlation coefficient of r=0.82 between the Brent spot price and EU steam coal import price until mid-2011 at 3 to 6 months delay.

61 Used for electricity generation.

62 Used for steel making. Hard coal includes both steam coal and coking coal.

For Germany the correlation is similar for the same period. However, using the available German coal data⁶³ until early 2013 results in a somewhat lower correlation coefficient at r=0.64 at 3 months delay.

Figure 30: Correlation of steam coal and natural gas prices in Europe, USA and Germany

Source: Study authors based on (BAFA 2013), (IEA 2013), (Eurostat 2013a), (IEA 2013f)

Figure 31: Steam coal import cost correlation to Brent crude oil for EU and Germany

Source: Study authors based on (IEA 2013a)

Note: Correlation at 4 and 3 months’ delay for EU and German import prices, repsectively.

63 For this period EU import prices are not available from the IEA on a monthly or quarterly basis.

This lower correlation is a result of the recent coal price development. After a relatively high European coal price in the previous years it has been decreasing since the second half of 2011 while oil prices have rather stayed constant. In essence, coal prices have moved in parallel to oil prices between 2007 and 2011, while since mid-2011 they display different trends with coal prices declining and the oil price remaining constant.

Looking at the correlation between steam coal and natural gas gives a mixed picture (see Figure 30). For the USA, natural gas and steam coal import prices did not develop in parallel between 2007 and 2011. Rather, prices tended to develop into opposite directions. It has to be noted, though, that coal import prices for the USA are less relevant since imported quantities are small. For Europe and Germany, a strong correlation is visible between 2007 and the second half of 2011. The statistic correlation factor for this period is r=0.92 for Germany with an NG price delay of 2 months and at r=0.90 for Europe without delay. For the period 2007 to early 2013 the correlation factor for Germany is r=0.82 reflecting the growing decoupling of prices between late 2011 and today.

In summary, the correlation between oil price and steam coal price is strong, and the correlation between coal and gas prices is even stronger. However, the correlations of coal prices wuth oil and with gas prices have decreased since 2011.

The US steam coal import price stayed at constant low levels until mid 2008, and has only increased slightly since then until mid-2011. No correlations are found with crude oil prices.

2.4.3. Market fundamentals

Coal production and supply in the EU-27

Hard coal production in the EU-27 is declining (see Figure 32). In 2011, almost all producing EU Member States recorded declining production. A further decline in production is expected.

Poland continues to be the largest producer in the EU-27 (VDKI 2012).

Figure 32: EU hard coal production

Source: Study authors based on (Eurostat 2013d)

Coal is an important source of energy in the European Union, representing 19% of primary energy supply in 2012 up from 16% in 2011 as a result of decreasing coal and CO2 emission prices (VDKI 2013); it had a 25% share in electricity generation in 2010. However, there are big differences between European countries: Poland, for example, produces more than 90% of its electricity from coal, while Lithuania’s and France’s electricity supply rely to less than 5% on coal (see Section 2.5 Electricity).

As a general long-term trend, coal consumption in the EU-27 has decreased over the last two decades (see Figure 33). However, since 2009 consumption has been increasing. Largest coal importers in the EU-27 are the UK and Germany, followed by Spain and Italy.

Figure 33: Hard coal gross inland consumption

Source: Study authors based on (Eurostat 2013d)

Currently, the biggest steam coal exporters to Europe are the USA, Colombia, and Russia, together covering 70% of EU imports. Australia and Indonesia play minor roles for Europe, although they are the largest exporters globally. This structure has changed over the past years. South Africa and the Ukraine, who used to be the main sources of coal a few years ago, have become less important for the EU; Russia’s importance has declined somewhat. At the same time, US coal imports to Europe have increased by 85% between 2007 and 2012 representing 19% of the EU-27 imports in 2012 (Eurostat 2013d), and coal trade from Colombia to the USA have decreased with the quantities redirected towards Europe (VDKI 2012), (VDKI 2013).

2.4.4. Price formation mechanisms

Typical contracts

The physical coal market is dominated by OTC (over-the-counter) trade. Contracts are concluded directly between producers and (large) clients. Transparency of the market is limited as trade structures are to a significant extent bilateral⁶⁴. For steam coal, trade platforms such as globalCoal as well as commodity markets with dedicated brokers have been established.

Spot market trade is increasing in quantities and relevance. In order to secure required quantities, contracts often have durations of 5 to 10 years. Prices are flexible and are typically adjusted on an annual basis based on spot market prices. Global competition is limited by transport costs (Ströbele et al. 2012), (Erdmann et al. 2010), (Panos 2009), (Ritschel et al.

2007).“Particularly in the global steam coal trade a trend towards more spot deals (3-6 months and less) can be recognized.” (Schernikau 2010)

64 In the European Union, the EMIR (European Market Infrastructure Regulation) and REMIT (Regulation on Energy Market Integrity and Transparency) regulations aim at increasing transparency. As an international example, the “Government of the Russian Federation approved an order to include coal in the list of exchange commodities, off-exchange transactions with which, including long-term supply contracts, are subject to mandatory registration by exchanges. From 20th July 2012, all coal producers, whose groups of persons sold over one million tons of coal in the preceding year, must register all off-exchange transactions with [hard] coal […]. Introduction of coal transaction registration will ensure transparent pricing on relevant markets.” Federal Antimonopoly Service of the Russian Federation, press release, 3 August 2012,

http://en.fas.gov.ru/news/news_32393.html.

Coal indices and derivatives trading

As coal qualities and places of delivery vary, price indices have been established on the basis of standards for quality, place of delivery and delivery conditions. An important coal price index for Europe is the MCIS (McCloskey Coal Industry Services) index for North-West-Europe (NWE). It describes CIF (cost, insurance, freight) prices for delivery to ARA (Amsterdam, Rotterdam, Antwerp) ports. Another important coal price index for Europe is the globalCoal DES ARA index⁶⁵, also based on delivery to ARA ports.

“The coal market is developing rapidly into a commodity market. More and more transactions are based on coal indices. In 2011, derivatives trade reached the 8-fold volume of physical trade in Europe.”⁶⁶ (HMS 2013)

The importance of price indices for the coal market is underlined by the fact that the German coal import prices follow the DES ARA price index closely, albeit with an offset and with a delay of up to three months (see section 2.4.1).

In spite of generally increasing derivatives trading in Europe and the USA, coal futures trading at the German EEX exchange (European Energy Exchange), established in 2006, practically ceased in 2012. According to EEX own assessment, this is based on a general trend towards off-exchange trade platforms (EEX 2012); see also Table 3 displaying EEX traded coal volumes between 2005 and 2012.

Table 3: Coal futures volumes traded at EEX starting in 2006

2005 2006 2007 2008 2009 2010 2011 2012

 Short-term marginal FOB (free on board) costs and supply/demand equilibrium

 CO₂ emission prices intersects with the demand curve (see below for more details).

65 The DES ARA Index is calculated based on firm bids and offers as well as transactions which are executed via the globalCOAL online trading platform. https://www.globalcoal.com/docs/ARAIndexMethodologyV1e.pdf

66 Translation from German by M. Altmann