Coal Trading. Moving Forward, Sideways, and. cha, cha, cha. Daniel Vaughn. Coal Trading Association s Mid-Year Conference June 2015.

Transcription

1 Coal Trading Moving Forward, Sideways, and cha, cha, cha Daniel Vaughn Coal Trading Association s Mid-Year Conference June 2015 Page 1

2 What Will Be Covered I am not one of those who in expressing opinions confine themselves to facts. Mark Twain (and Dan Vaughn s safe harbor clause) Coal Trading Market Direction Where we ve been Where we are now Where we are going In 2011, Coal Trading took a step backwards but moved forward again in 2012 and 2013 only to step back again in 2014 Page 2

3 Where We Have Been..it all started around the year Coal Trading evolved Clinton & Gore were in the White House Federal Debt was $5.5 Trillion Average Price of Gasoline was $1.04 per Gallon (August 1998) U.S. Coal Production was 1.12 Billion Tons U.S. Coal Consumption was 930 MT U.S. Coal Exports were 77.2 MT I also invented Coal Trading Page 3

4 and to counter Al s comments The difference between genius and stupidity is that genius has its limits. - Albert Einstein Page 4

5 What has been the Market Drivers for Trading Brought about by.. Trading Liquidity Supply Disruptions Equipment, Labor, Environmental, Weather (flooding, droughts, etc.) Regional Demand Outages, Weather, Economy Power Prices Natural Gas Prices Disagreements (legal matters) Simpler Times? Page 5

6 Former Trading Landscape Originally, the OTC Market had fewer participants (< 20) Banks, Hedge Funds, Speculators, and a handful of Producers and Utilities In early 2014, the OTC coal market had over 30 US coal clients with clearing accounts Credit Concerns always a factor but with more flexibility More physical coal delivery Participation critical Limited players, limited liquidity but more volatile tipping point No Clearing Exchange (initially) No Financial Swaps Page 6

7 Some Past Trading Observations Not enough trading to impact volatility and visa versa Took extremely low utility stockpiles combined with production cuts that caused price spike PRB was the original coal of choice Followed by CSX Nymex barge coal lagged Page 7

8 Coal Trading Begins to Take Hold Just under 100 MT traded in 2001 Many players came and went, but by 2007, the OTC market tops 200 MT in trade volume Price volatility enters the market for good. Price swings of 10% to 20% within a trading month Page 8

9 Moving Forward from 1998 to 2013 In 2013, Coal Trading at +370 MT A new record, exceeding 2010 s record by almost 40 MT Still no feasible Energy Policy but we now have Obama Care Federal Debt $16.7 Trillion Average Price of Gasoline is $3.50 per Gallon ($3.20 Dec 14) How do you turn this thing on? U.S. Coal Production at 996 MT U.S. Coal Consumption at 920 MT U.S. Coal Exports topped 118 MT Page 9

10 Taking a Step Back in 2014 (and 2015) OTC Coal Trading Volume 2015 Monthly OTC Volume thru June 12th MT MT MT MT projection In 2015, Coal Trading volume has declined further 52 MT Y-T-D thru May Page 10

11 Production No Change, Consumption Down What s up with that? 2014 U.S. Coal Prod. 997 MT June 6, 14 YTD was 428 MT vs June 6, 15 YTD 394 MT < 7.9% EIA projecting 927 MT for U.S. Coal Cons. 917 MT of which Electric Utilities 851 MT 2015 Utilities 792 MT < 6.9% DTC calling closer to 760 MT Vaughn s low end view 740 MT? 2014 U.S. Coal Exports 97 MT 2015 Exports est. 89 MT < 8.2% Coal Imports 11 MT/ yr Page 11

12 Market Road Signs Future Clearing Merchant Impact of Dodd-Frank Power Prices Natural Gas Prices Suppliers Financial Viability Shifting Global Supply / Demand Balances Planes, Trains and Things that Float Other Detours & Factors Page 12

13 Futures Market Futures Market Regulated by the CFTC (Commodity Futures Trading Commission) Standard contract Open outcry and screen trading Maximum price transparency Primarily financially settled Higher standard of credit Higher standard of performance Dodd-Frank Tightened trading regulations Strict compliance rules All financial coal products must comply Timely reporting of trades Page 13

14 Standardized Coal Trading Products (For complete specifications, terms, and conditions visit Standard OTC Products: Quality Parameters Standardized Product PRB 8400 PRB 8800 Nymex Look alike % (Barge) CAPP CSX lbs SO2 (Rail) Illinois Basin MP Lower Ohio River Moisture (%) / 14.0 Btu/lb / / / / / Sulfur (%) n/a n/a S02 (lbs/mmbtu) 0.80 / / 1.20 n/a n/a n/a Ash (%) / / 12.0 Volatile (%) n/a n/a Size <3" <3" <3" <2" <3" Grind n/a n/a Note: For full range of guaranteed specifications and rejection clauses, visit Secondary OTC Products: Quality Parameters Standardized Product PRB 8800 xbt 0.80 lbs SO2 CAPP CSX lbs SO2 (Rail) CAPP CSX SO2 (Rail) CAPP NS SO2 (Rail) NAPP /4.5 lbs SO2 (Rail) Moisture (%) Btu/lb / / / / / Sulfur (%) n/a 1.0 n/a 1.0 n/a S02 (lbs/mmbtu) 0.80 / 1.20 n/a 1.20 n/a < 4.5 Ash (%) / / / Volatile (%) n/a Size <3" <2" <2" <2" <2" Grind n/a Note: For full range of guaranteed specifications and rejection clauses, visit Napp Note: These quality standards are not completely standardized. Page 14

15 Page 15 Standardized Contract Information

16 Clearing is Essential to the Market Every commodity Futures Exchange is affiliated with a clearing house. The clearing process eliminates counter party credit risk. Clearing aids the physical market by providing price discovery and liquidity. Since January 2010, 91.6% of all reported US OTC coal transactions are given up to the exchange or cleared Cleared Percentages - CAPP barge 99% - CSX 91% - PRB 81% Page 16

17 Coal Trading Volume activty continues albeit at a much reduced pace Jan 2010 thru May 2015 Data aggregated by Phillip Vaughn Page 17

18 Natural Gas Prices tracking (over) supply vs. volatile demand Thursday 10:30 am EIA Inventory Report Prompt Pricing; regional power pricing Jan 2014: Henry Hub; $6.23 (F), then 5.47 (M), 4.69 (W), 4.47 (Th), 4.61 (F) how fast it changes within a day, a week Cost of production Supply limitations Page 18

19 Mo(r)e Nat Gas Most opportunities for US coal to compete with Nat Gas is with PRB coal, not CAPP coal Majority of growth in power capacity is focused on gas and renewables Traders recognized this trend and thus, moved 20-25% of their portfolio into PRB fin coal starting back in 2012 Page 19

20 Page 20 Nymex CAPP Coal vs. Nymex Natural Gas Prompt Quarter vs. Prompt Month

21 Nymex CAPP Coal vs. PJM-West (Wtd Average Price) Data as of June 1, 2015 Page 21

22 U.S. Met Coal Challenges Prices for 2015 continue to decline and are not expected to rise as supply continues to outpace demand. U.S. met coal producers will find it difficult to maintain a niche in the Asian market as Australia continues to increase production and grow their market share. Prices are below production costs for many mines, forcing many to be idled or closed. Australia and Canada combined have increased their coking coal exports by 27 M tons from 2012 to 2013 and another 10 M tons for Russia exports into China grew almost 80% from 2012 to 1013; 4.7 M tons to 8.44 M tons, respectively. Platts FOB US East Coast Low Vol HCC $ High Vol A $ High Vol B $99.00 June 15, 2015 There s no crying in baseball or coal trading Page 22

23 Coal Suppliers Financial Viability Stocks Jun-1-15 Jun wk low 52-wk high YTD change YOY change Alliance Resource Partners % % Alpha % % Arch % % BHP Billiton % % Cliff Natural Resources % % Cloud Peak % % Consol % % Natural Resource Partners % % Peabody % % Rio Tinto % % Walter Energy % % Westmoreland % % Data compiled on June 1, 2015 Page 23

24 Page 24 Today s Coal Traders Think Globally

25 Proposed Coal-Fired Plants By Installed Capacity (MW) Page 25

26 Global Coal Market Strength of regional economies Demand from Europe, China, India China s 2013 imports 323 MT vs imports of 291 MT <10.2% China s 2013 consumed 3.97 BT China s 2014 consumed 4.10 BT Supply competition, limitations from Indonesia, Colombia, South Africa World Steel Demand and demand for coking coal 2013 met coal exports 64 MT 2014 met coal exports 49 MT U.S. Utility and Industrial coal demand not so much China accounts for approx. 50% of global coal consumption almost as much as the entire rest of the world combined Page 26

27 Shifts in Supply/Demand Balances Relative S/D balances are always changing Richards Bay prices can remain high relative to ARA prices when Asia/India demands outpaces Pacific supply Over supply of Russian super low sulfur coal provides opportunity for cheap US high sulfur coal, pushing down ARA prices relative to FOB Colombia prices Freight is the link between the relative valuations Important in understanding the implications of changing prices as it relates back to US FOB points Page 27

28 Freight: Barge, Rail, Vessel (prototype: coal-fueled plane ) Heading to Europe look to API2 (ARA/Rotterdam) Less vessel midstream/terminal/demurrage Quality adjustment Sulfur ($5-$15 or more) Heat Content very valuable on these long hauls Less barge/rail ILB $14.00 ish BSR $16.00 ish KR $$17.25 ish Rail rates much more favorable than back in periods Terminal capacity expansion Less demand for met coal Bulk Ocean Chartering Inc. June 17, 2015 estimates spot freight rates Panamax dwt -P- Load/Discharge Rotterdam Qingdao E.C. India Hampton Roads P 8.50 P P C 8.00 C C Davant P P P Prto.Bolivar P C 7.00 P C Routing via Cape of Good Hope, except Panama Canal for R.Bank/Rotterdam P C Richards Bay P 8.25 P P C 5.75 C 9.00 C 8.50 TanjungBara P 8.50 P 6.25 P 7.25 Dalrymple P C 9.50 Newcastle P C Roberts Bank P C Cape dwt -C- P 9.25 C 6.50 P C 8.50 P C 8.50 P C 7.75 P C 9.75 P C Page 28

29 U.S. Coal Exports likely to always be the swing player The US is, and will remain, the global swing supplier Fright disadvantage to the demand growth regions India and Asia Met coal quality is generally considered inferior to Australia and western Canada Low cost US steam coal is high sulfur limited appetite Western US exports are challenged by logistics, Indo supply, and stingy Asian buyers Page 29

30 API 2 Price The Price Leader Looking at the basis differential between coal products Page 30

31 Other Considerations In 2014, EIA projects norm to be MT range thru 2020 Coal Inventories End-users & supply side Rail Transportation Availability, Cycle Times Currency Risk Seaborne coal trade is generally $US dominated Currency exchange rates Sustain supply disruptions in regions outside the US Costs of US production, in particular, met coal Crude Oil prices Page 31

32 Final Comments Thank you and may God Bless Domestic Coal Demand will be primary market Global Demand will be leader of price volatility Nat Gas Price will dictate power prices and where coal falls out Ocean Freight is the dog that wags the tail Europe and China will determine production balance for US producers (outlook not good) Global Coal trading will have its hiccups but will continue to be the choice over domestic coal for energy traders Page 32