Since 2008 imported coal is a vital element of Polish market, which for some key participants is a thorn in the side. The issue of import prices competing with Polish producers was hysterically highlighted in 2013, when Kompania Węglowa was introducing their new strategy of sales on the domestic market (which was suppose to eliminate mainly Russian coal from the domestic market).
One of the most common factors in the sector of power&heat producers is seasonality. Heat&power plants use the coal mostly between October and April, which means the seasonal purchases (all the tenders and negotiations processes) starts around March and ends around July.
Apart of the factors listed before, sector of mid-size industrial consumers pays also attention to the terms of payments for the contracted commodity. According to the Payment Periods in Commercial Transactions Act of 8th March 2013, 30 days payment period is considered as a good practice for all the companies in Poland.
Costs of transportation are essential in the coal trade, since they have significant share in the final DAP price of delivered coal. In the sea freight from ARA market to Polish ports, cost of vessel transportation is usually based on the Baltic Dry Index. When considering purchasing coal imported via ports in Gdańsk, Gdynia, Szczecin and Świnoujście, buyer needs to remember about additional costs of reloading from a vessel to rail wagon.
Back to school: first article of the series on factors influencing the final coal price. Basics of the basics, so if you’re “from the industry” you should just skip it.
In the last week’s Polish Radio III debate about coal mining, few live callers had some troubles understanding what are the mechanisms behind the domestic coal pricing and how is it possible, that prices of coal available for retail customers are often 2-3 times higher than costs of production. Following the demand for certain knowledge, we introduce you to the basics of the basics, essentials of coal pricing – new series of Insights articles.
According to the numbers presented by the ARP, in 2013 PSCMI1 input prices were accounted for 48.9% of all transactions made between mining sector and power producers, which means the marker is slightly losing its credibility, since two years before that number was at a level of 57.3% (but the situation could also be caused by the fact that some of the power plants are adapted to use the coal of quality much worse than Qir 20,000 kJ/kg e.g. Energa’s power plant in Ostrołęka).
The algorithm behind the index is a weighted arithmetic mean of all the transactions completed in the month for which calculations are made. Only two quality parameters were defined as relevant: calorific value and sulphur content. No minimum tonnage was defined, but since ARP collects data only from the industry it could be assumed that min. volume could be around 5,000 tons. The price is expressed in both PLN/t and PLN/GJ and is calculated on the basis of EXW Polish mines. Indices are published monthly (usually at the last business day of the month for which the PSCMI listing is made).
Previously mentioned PIW, presented as a concept in 2006 was suppose to be an average of all transactional prices, calculated for the one given virtual place of sales in Poland (costs of transportation were excluded from the calculations). To collect input data TGE was planning to reach an agreements with all the key participants on the market: producers, consumers, traders and brokers. No more information were revealed after the above mentioned event in Zakopane and soon the concept was forgotten.
The need for creation the Polish coal price index (or indices) was first observed after Poland become the net coal importer. Although there were already some plans to create natural conditions for indices like commodities exchange, that would help standardize coal parameters for the needs of certain trade, nothing ever come out of these plans. Before Poland became net coal importer, the parity import was the only marker showing the volatility of actual steam coal prices. Increased import, and therefore increased coal trade in Poland stimulated some coal market participants to consider creating some solutions similar to the international indices.
In 1997 for the first time to establish the base price of normative coal experts had to set the import parity, which was the average price of coal hypothetically imported to Poland using sea freight, from the countries that were the main importers at the moment. The price was based on so called “franco” delivery terms to one of the Polish ports (not determined which one) and then calculated to respond with the quality parameters of coal used by Polish power sector. It was assumed that “loco” price of Polish coal in the mine could not at be any point higher than import parity, because it would lead to consumers buying foreign coal (if of course freight costs will be economically justified).
Two years after introducing W. Blaschke’s Formula, coal prices in Poland were released from mandatory using the governmental price systems, but were still used for calculations of contracts values between energy industry and mining sector for habitual reasons, despite the fact that formula clearly preferred producers interests. The Ministry of Finance’s objective was achieved and the quality of Polish coal increased, but energy industry did not needed coal of that high quality. Also, energy-consuming industry in Poland was in deep recession and soon coal market was dominated by the consumers, which eventually led to modification of W. Blaschke’s formula.
In 1990 for the first time Polish coal trade started using “pricing formulas” – mathematical equations that were suppose help in establishing correct price in regards to the coal parameters. The idea behind it was simple; due to very poor coal quality in late 1980s (ash content coming to even 40%), government decided to bring in new pricing system to promote production of high quality coal. Since May 1990 Ministry of Finance introduced in the mining sector two different pricing formulas that were used to create new pricing systems.
During the communist era, prices of coal were published in official, annually updated price-lists. Prices were referring to so called “coal grades” (or “coal classes”), which were systematized in regards to the coal quality, more specifically: calorific value and ash content. The prices were also diversified depending on who was the final consumer (different for industrial and retail customers). Since the economy was centrally planned, prices of coal were only a resultants of production costs of certain “coal grades”. In the new economic conditions, the system had to be changed taking into consideration rules of the free market.
Trying to classify Polish traders, the first group would be formed by the local trading representatives of major coal producers from CIS countries and Czech Republic, supplying Polish market with coal from their own mines.
Polish coal traders are very important element of Polish export. When in 2009 Poland exported 8.7 million tons of steam and coking coal, brokers (mainly Węglokoks) were responsible for more than 85% of all cargos leaving the country (6.9 million tons).
In recent years, Germany was always the key consumer of Polish hard coal (until 2014, when it lost its position at account of Czech Republic). In 2000 Poland was the main supplier for German market (29% of 23 million tons imported), followed by South Africa (20%) and Colombia (15%). Since then, German coal demand was increasing and in 2010 reached 38 million tons. Since Poland could not keep up with the German needs, the market was taken over by Russia (44% of total coal import) and Colombia (33%), leaving Poland with the third place (15%). Despite the fact that after Fukushima events German energy production is based on coal, Berlin environmental policies intent to shut down all coal mining operations, which is a chance for Poland to increase its export.
Between 1994 and 2005 Poland was exporting between 15-20 million tons per year, often generating loss. Polish coal producers were following a strategy (dictated by social and political pressure) in which they were willing to sell coal abroad on prices lower than they could get on the domestic market just to secure stable level of production in case of decreased demand for coal in Poland (maintain fixed employment).
Majority of Polish coal import comes from Russia (average of 59% of total coal import between 2004 and 2013), which since 2004 is running a policy of aggressive, increased export to European countries. During the financial crisis of 2008-2011, Russia was afraid of lower coal demand in western European countries and decided to direct as many cargos with coal to Poland as possible.
Polish coal import should be analyzed in two dimensions: before and after joining European Union. In early 1990s it was rather small and consisted mainly of coking coal. Shortly after restructuring Polish mines and privatization of energy industry, some of power companies newly owned by foreign entities introduced different policy of fuel purchases, not necessarily favorable for the coal producers. To stop large increase of coal import from Russia and Czech Republic, government passed few laws and introduced quotas.
Between 1966 and 1978 Polish share in the global coal trade accounted for 19%. In the late 1970s Poland was exporting more than 40 million tons of hard coal – almost as much as the total current consumption from the energy industry. In the following years Polish coal export was still at level of 20 million tons, until 1990s, when it fell drastically due to the political situation and global market events (lifting the economic sanctions for RPA thanks to the Comprehensive Anti-Apartheid Act). Once one of the key exporters, in 2008 Poland, the largest coal producer in EU became a net coal importer, with 1-2% share in the global coal trade.
The group of industrial consumers consists of numerous of companies representing variety of businesses. Most of them use steam coal to fulfill the individual energy demand, but some need the coal for the production purposes (chemical industry, e.g. Soda Polska Ciech). Almost all of the companies are private owned. The main industries within these group are: cement, sugar, paper, chemical, milk and oil.
Companies producing heat with power are the second most important coal consumers in Poland and the most numerous from all industrial coal users. Around 50% of all Polish inhabitants buys heat from large heating companies. The rest of it is covered by individual sources or by rather small local facilities. Poland is one of European leaders considering district heating. In whole EU only four countries have biggest percentage of citizens using district heating: Latvia (64%), Denmark (61%), Lithuania (60%) and Estonia (53%). Iceland is the European phenomenon with its 99% of inhabitants connected to district heating. In general, European Union supports development of district heating because even though in Poland coal is the main fuel powering facilities, it is still much more clean and efficient than coal-fired household systems.
Energy production industry is dominated by four energy groups, all listed on Warsaw Stock Exchange and with significant share owned by the Ministry of Treasury: PGE, Tauron Polska Energia, Enea and Energa. In total, they all produce 61.5% of electricity in Poland.
Polish hard coal demand is generated by three groups of consumers: electricity producers with heat and power plants, industrial consumers with construction companies and retail customers. According to the data of Polish Central Statistical Office (2013), energy and heat production is taking more than half of total Polish coal consumption.
In 2014 hard coal production accounted for 72.5 million tonnes with 83% was steam coal, and although it was 5.2% lower than year before, total overproduction for 2014 accounted for 8.2 million tonnes and was 23.4% higher than in 2013. This situation is going on in three state-owned coal mining companies: Kompania Węglowa, Katowicki Holding Węglowy and Jastrzębska Spółka Węglowa. Meanwhile, private owned companies like Lubelski Węgiel Bogdanka (LWB) or Przedsiębiorstwo Górnicze Silesia managed to balance their production to sales ratio.
In Poland, almost 74% of all hard coal balance resources is steam coal, while coking coal makes around 26% of it. They are located in three basins: Upper Silesian Coal Basin (GZW), Lublin Coal Basin (LZW) and Lower Silesian Coal Basin (DZW), however the last one is currently not operated due to the difficult and expensive mining conditions (coal exploration operations were shut down there in 2000).
During the period of economical reforms in 1990s, coal mining industry restructuring was one of the most problematic subjects. The main goal was to adjust coal sector to the conditions of market economy and make it profitable and competitive against international coal markets. In communist era coal was produced to fulfill the domestic demand and the demand from Eastern Bloc countries. Under the new economical conditions coal mining sector had many problems to meet the requirements of new environment.
40 years ago, Polish coal market accounted for 1/5 of total global coal trade. Since then, Polish mining industry went trough numerous restructuring processes, which in the end resulted with total marginalization of Polish coal on the international scale. First problems started, when coal producers had to face new market reality after 1989. Second wave of troubles came right after joining the EU in 2004, when Polish mines lost its protective umbrella and had to compete with foreign coal, flooding the Polish market from various directions. Today, Polish coal market is struggling with number of issues still to be solved. Every now and then another government is announcing its programme for healing the sector, but in the end they find out that it is best to just let things happen.