About the author Guillaume Perret has eleven years extensive experience in coal, freight and commodities trading. Before establishing his own consulting business, Perret Associates Ltd, Perret spent five years with RWE Trading in London, setting up and developing the steam coal and freight derivatives trading desk, and five years with Louis Dreyfus Négoce in Paris, trading international grains and chartering physical vessels. Drawing on his extensive hands-on experience in front offices, Perret s consulting business provides business development, risk management and strategy support for companies eager to develop their coal, freight and commodity trading activities. Since the launch of his company in 2005, Perret has performed specific assignments for over two dozen industry clients. He is also on retainer at several major international groups involved in coal, energy and commodity trading. He is the Course director for Coal Trading and Risk Management, a course organized by Coaltrans twice a year in London and Singapore. He is also the author of the International Freight Market and is a regular contributor to international publications. A frequent speaker at international conferences, Perret earned his MBA from the London Business School. e-mail: guillaume.perret@btinternet.com About Coaltrans Coaltrans Conferences organizes large-scale international coal conferences, which attract delegates from all over the world. It also runs focused regional events, exhibitions, field trips and training courses. The organization has a reputation of employing the highest organizational standards. In 2007, Coaltrans conferences will run events in Australia, China, India, Indonesia, Italy, Russia, Singapore, South Africa, the UK and the US. Acknowledgments This report is based on Perret Associates Ltd s hands-on know-how of coal and commodities trading. It incorporates findings from over 70 interviews with key executives working for or with utilities, mining companies, financial institutions, brokerage companies and international exchanges conducted in 2006 and 2007. Report summary This 76-page report is an in-depth analysis of the fast-growing coal derivatives market in early 2007. It also provides a comprehensive analysis of the complex physical coal market and reviews the most promising clean coal technologies in development.
Chapter 1 This introductory chapter covers the physical steam coal market. It analyzes the main importing and exporting countries, the major flows, and how these flows have evolved over the last 20 years, and are still evolving today. This chapter also provides detailed maps of the main steam coal hubs. Lastly it summarizes the main clean coal technologies in development that will enable a more efficient and cleaner processing of coal in the next decade. Chapter 2 This chapter presents an in-depth analysis of the steam coal derivatives market. It focuses on the three most actively traded products and provides an assessment of historical trading volumes. It also analyzes the definition and methodology of existing products, and updates on the development of the options market. After giving an insightful history of the market since its launch in 2000, this chapter also analyzes the relative maturity of the Atlantic and Pacific coal markets compared to other commodities. It also explores the debate that has recently animated the market and examines in particular how the reliability of existing indices might be improved, whether the coal market needs other indices and whether physical futures could be developed. It concludes with some predictions on potential developments in the coal market in the foreseeable future. Chapter 3 This chapter provides a comprehensive study of the range of physical and financial coal products which can be traded. These are either existing products that have not taken off yet, or products recently launched in 2006 or in the pipe line in 2007. Chapter 4 This chapter reviews the intermediaries actively involved in coal derivatives, especially the over the-counter brokers and trading platforms, and provides useful insights into their respective histories and outlooks. It also covers the two exchanges that joined the coal market in 2006 and details their products characteristics and volumes traded so far before giving an outlook on exchange trading in the coal market. Chapter 5 This chapter studies the principals active in the coal derivatives market: utilities, supplier/traders and financial institutions. It also analyses the strategy of some groups and discusses recent developments. It also provides more detailed information about the main protagonists. Table of contents 1 Physical coal 6 1.1 The importance of steam coal as a primary fuel 6 1.2 International physical steam coal flows 9 1.2.1 Major steam coal importers 9 1.2.2 Major steam coal exporters 10 1.2.3 International steam coal trading volumes 11 1.2.4 The importance of freight in the international coal market 12 1.2.5 A permanent evolution in international flows 13 1.2.6 Steam coal quality 14 1.3 ARA: the main European hub 14 1.3.1 The logistics in ARA 14 1.3.2 A recent change in the market pattern in ARA 16 1.3.3 ARA: the main hub for coal derivatives 16 1.4 South Africa 17 1.5 Australia 19 1.6 Colombia 20 1.7 Indonesia 21 1.8 Russia 22 1.9 China 23 1.10 Clean Coal Technologies 24 1.10.1 Increase the efficiency of the existing process 24 1.10.2 New Clean Coal Technologies 25
1.10.3 Carbon Capture and Storage 27 2 The steam coal derivatives market 28 2.1 An exponential increase in volumes since 2000 28 2.2 Contract characteristics 29 2.2.1 Lot size 29 2.2.2 Maturity, price movement 30 2.2.3 Brokerage fees 30 2.3 Index definition and methodology 30 2.3.1 API2 definition 30 2.3.2 API2 methodology 32 2.3.3 Improved methodology since January 2007 33 2.3.4 API4, definition 34 2.3.5 API4 methodology 34 2.3.6 FOB NEWC globalcoal definition 35 2.3.7 FOB NEWC index methodology 37 2.4 Increased volatility and the development of options 37 2.5 Contract references for coal trading 38 2.5.1 Coal derivatives and the ISDA agreement 38 2.5.2 Physical coal and SCoTA 39 2.6 Brief market history 40 2.6.1 Launch 2000-01 40 2.6.2 Expansion 2001-02 41 2.6.3 Consolidation 2002-03 41 2.6.4 Accelerated growth Q3 2003 until today 41 2.7 The Atlantic market on its way to maturity 43 2.7.1 Typical evolution of a commodity market 43 2.7.2 The ratio of derivatives versus physical reached 5.6 in the Atlantic 43 2.7.3 Does the ARA market need physical futures? 45 2.7.4 Is this the end of API2? 46 2.8 The Pacific market is still in its infancy 46 2.8.1 Why has the Pacific market not taken off yet? 46 2.8.2 Some encouraging signs 47 3 Other indices 49 3.1 Atlantic products 49 3.1.1 Implied freight 49 3.1.2 globalcoal FOB Barge 49 3.1.3 globalcoal DES 50 3.1.4 GFI physical CIF ARA 50 3.1.5 Platts CIF ARA Coal Industry Markers (CIM) 51 3.1.6 Reuters new index 52 3.1.7 globalcoal FOB Richards Bay Contract 53 3.2 The Pacific contracts 54 3.2.1 globalcoal FOB Indonesia 54 3.2.2 China 55 3.2.3 CIF Japan 55 4 Market structure: brokers, exchanges 56 4.1 Brokers 56 4.1.1 Overview 56 4.1.2 GFI 56 4.1.3 ICAP 57 4.1.4 Spectron 58 4.1.5 TFS 58 4.1.6 Tullett Prebon 59 4.1.7 globalcoal 59 4.2 Exchanges and Clearing 61 4.2.1 The cheap sleeving paradox 61 4.2.2 Perspectives for Exchange and Clearing 61 4.2.3 ICE Futures 62 4.2.4 EEX 65
5 Principals 68 5.1 Utilities 68 5.1.1 Constellation 68 5.1.2 EDF Trading 69 5.1.3 Nuon, Essent 70 5.1.4 RWE 70 5.2 Suppliers / traders 71 5.2.1 BHP Billiton 71 5.2.2 Cargill 72 5.2.3 Glencore 73 5.2.4 Louis Dreyfus 74 5.2.5 Noble 75 5.3 Banks 75 Tables Table 1 Steam coal imports per major importing countries 9 Table 2 Steam coal exports per major exporting countries 11 Table 3 Richards Bay terminal exporting companies 18 Table 4 Steam coal OTC derivatives volume 2000 and 20006 29 Table 5 Main OTC coal products characteristics 29 Table 6 API2 index characteristics 31 Table 7 API2 index quality specifications 31 Table 8 API4 index characteristics 34 Table 1 globalcoal FOB NEWC physical contract characteristics 35 Table 2 globalcoal FOB NEWC physical quality specifications 35 Table 3 globalcoal FOB NEWC physical and financial volumes 2001-2006 36 Table 4 Churn factor physical seaborne volumes versus derivatives 44 Table 5 globalcoal FOB barge ARA physical contract characteristics 49 Table 6 globalcoal FOB barge ARA specifications 50 Table 7 GFI Physical CIF ARA contract characteristics 50 Table 8 GFI Physical CIF ARA quality specifications 51 Table 9 Platts Coal Industry Markers, 5th February 2007 52 Table 10 Platts Coal Industry Markers detail of survey, 5th February 2007 52 Table 11 globalcoal RB1 contract characteristics 53 Table 12 globalcoal price adjustment for Indonesian terminals 55 Table 13 Coal brokers summary 56 Table 14 globalcoal trading volumes with split physical / financial 2001-2006 60 Table 15 ICE Futures coal volumes and open interest July 06 January 07 63 Table 16 ICE Futures coal contracts specifications 64 Table 17 EEX coal trading volumes and open interest May 2006-January 2007 66 Table 18 EEX coal futures contract characteristics 67 Table 19 Main principals active in the coal derivatives market 68 Charts Chart 1 Steam coal major importing countries 1999-2005 5 Chart 2 Steam coal exports per major exporting countries 6 Chart 3 Steam coal seaborne exchanges 1999-2005 7 Chart 4 Major steam coal seaborne flows 2005 9 Chart 5 South African terminals and main collieries 12 Chart 6 Richards Bay Terminal exporting companies (percentage) 13 Chart 7 Australian main coal mines and export terminals 14 Chart 8 Average Australian port congestion 15 Chart 9 Indonesian main coal mines and export terminals 17 Chart 10 Integrated Gasification Combined Cycle process 20 Chart 11 Steam coal OTC derivatives volume 2000-2006 24 Chart 12 Argus Media survey for calculation of API2, 12th February 2007 29 Chart 13 globalcoal NEWC physical and financial volumes 2001-2006 32 Chart 14 Snapshot of globalcoal index methodology 33 Chart 15 Historical weekly index API2 and API4, 2002-2006 33 Chart 16 Historical daily index freight Richards Bay / Rotterdam Capezise 39 Chart 17 Typical evolution of a commodity 40 Chart 18 Steam coal trading volumes: physical seaborne and derivatives 2000-2006 41 Chart 19 globalcoal RB1 trading volumes, 2001-2006 49 Chart 20 globalcoal trading volumes physical and financial 2001-2006 57 Chart 21 ICE Futures coal volumes and open interest July 06 January 07 60 Chart 22 EEX shareholders January 2007 62 Chart 23 EEX coal trading volumes May 2006-January 2007 63
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