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.