Towards a recognised steam coal price marker in Ukraine

Towards a recognised steam coal price marker in Ukraine

IHS Markit was commissioned in late 2017 by DTEK to undertake a study of coal pricing methodology in Ukraine. In particular, it was asked to review and analyze the pricing for steam coal that are traded into or within Ukraine. To this end, in December 2017 IHS Markit reviewed price-setting processes elsewhere in the world in order to understand the best practices for price setting systems and how they may apply to Ukraine.

 

How coal is traded globally

 

Indexation has enabled trading, forward pricing and increased transparency

 

Ukrainian price-setting, NEURC Methodic[1]

Main Conclusions

  1. The pricing of steam coal is a fairly simple task because it is a widely and openly traded commodity, with major international hubs in NW Europe, South Africa, Southern China and Newcastle (New South Wales), plus many others.
  2. Prices on the main indices tend to move together, meaning that the simplest approach to price-setting in Ukraine would be to adjust an agreed base price by the same proportion as one of the main indices. In this case, we suggest the NW European hub provides the best indicator of price movement.
  3. Ukraine’s current system already uses the NW European hub in the form of the API#2 index but adds freight from Rotterdam to Ukraine. This is a valid approach to price setting, applying similar principles to the basic approach described above. However, the freight element of the calculation is neither regularly nor openly traded.
  4. An alternative to the existing Ukrainian system is to take the NW Europe price as a starting point, calculate netbacks to loading ports, and then apply freights to Ukraine in order to reach a delivered Ukraine price. However, this can introduce too many uncertainties to the process since it assumes reliable estimates of freights from export terminals to Ukraine, which could not necessarily be sustainably achieved. In addition, this approach exposes Ukrainian prices to movements in the values on the Asian market, which tend to be much higher than those in Europe and are likely to become more so as the European Union steam coal market increasingly shrinks in importance.
  5. Both of the above systems, however, expose the Ukrainian market to the volatility of the international coal market. For example, NW European prices today stand in the mid-$90s per tonne, 6,000kc basis, but in early-2016 they were at a weekly low of $42. Furthermore, during the commodities price boom in 2008, weekly NW European prices, same basis, peaked at $219, the all-time weekly high. Ukraine needs to be aware that price trends can be very damaging if there are no checks and balances in any price-setting system.
  6. There is a limited global anthracite market, so few data points are available for comparison.
  7. IHS Markit deliberately conducted this analysis without asking what it is to be used for in order to avoid considerations of acting in the interests of suppliers or buyers.


[1] National Energy and Utilities Regulatory Commission, Resolution #289, 03/03/2016, Approval of the Procedure for Forming Forecast Wholesale Electricity Market Price

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