Coal Market

1.1 Introduction

Coal is the energy source most abundant fossil fuel in the world, representing 26% of global demand for primary energy sources, and is responsible for approximately 41% of the energy produced in the world.

Coal is an important part of the matrix of power, both in developed countries like the U.S. and Germany, and in fast-growing emerging economies like China and India.

No other fossil fuel combines low prices, abundant, and easy removal. Furthermore, another advantage of coal as a fuel is derived from its basic geology. While oil and gas are relatively rare and are concentrated in certain regions of the world (and that form only in special circumstances), global coal reserves are more evenly distributed across the planet, reducing the possibility of having a large part of the world population concentrated in a small number of producer countries.

The largest coal reserves are located in the U.S., Russia, China and India. Proved reserves equal just over 820 billion tons, accounting, assuming current levels of consumption, coal sufficient for over 130 years. Furthermore, reserves of oil and natural gas are sufficient for approximately 42 and 60 years, respectively.

 1.2 World market for thermal coal

Most of the demand for coal in the world is supplied by domestic production. However, in some cases, the internal logistics of countries may have restrictions that make it more advantageous for finding sources of supply in the international market to rely on domestic production. An example is the case of India, which, despite having strong reservations, choose to import coal from Indonesia and other sources. Similarly, for U.S. power companies are in the Gulf of Mexico, it is more advantageous to import coal from Colombia, to buy in the country.

Purchases and sales of coal in the international market are usually made through bilateral contracts, which generally do not exceed two years. Among the main points of the contract under negotiation are: volume, price (usually indexed to an international reference price), specifications and mode of delivery (CIF or FOB).

The global carbon market can be divided into two main regions, the Atlantic Basin and the Pacific Basin.

 In the Atlantic Basin the largest exporters are Colombia, South Africa and the U.S., and Europe is the main destination of the cargo. Given the important U.S. stocks and a good port and rail infrastructure, the country is expected to maintain its important role in the Atlantic market. In Europe, where the rate of domestic coal has declined, countries have become heavily dependent on Russian coal.

 In the Pacific, the largest exporters are Indonesia and Australia, with the main destinations are Japan, South Korea and China. The latter stands out among importers in the region, and that, to support its growing demand for energy, has to resort to expand its power generation capacity by coal power plants. At present, China has been installing the equivalent of a 500 MW coal every two days and a half, and most of the supply base of this generation comes from domestic production, given that the country has large reserves of this fuel.

1.2.1 Major indexes thermal coal prices in the international market

The most representative reference prices for steam coal are: CIF ARA (Europe), FOB Richards Bay (South Africa) and FOB Newcastle (Australia). The FOB Bolivar (Colombia) is the reference coal prices in Colombia. Each contract refers to a set of standard coal, which means, above all, their heat, moisture, volatile matter and ash content and sulfur.

 If some of these items do not correspond to the specifications, the price is set at a discount relative to the market price. Similarly, if a premium is paid is a higher quality coal sold.

South African Coal (FOB Richards Bay), after increasing its position in the Asian market, now faces competition from Australia coal (FOB Newcastle). However, the second biggest market for South African coal is Europe (CIF ARA), which has a strong correlation with the great Atlantic seaboard, the FOB Bolivar. Therefore, all markets are linked, with all indices strongly correlated.

1.2.2 The market Colombian Thermal Coal

Colombia is the fifth largest exporter of coal in the world and one of the most important players in the Atlantic coal market, with South Africa, and with its main competitors in Russia.

Its proven reserves represent 6.8 billion tons (2008), but estimates are significantly larger, since investments in geological studies are still modest compared with the exploration potential in the country.

Most of the coal production in Colombia is thermal, and approximately 94% of production is exported. The country, which is predominantly driven by hydroelectric plants, only 700 MW of coal-generated power, accounting for 5.2% of the electrical grid in Colombia.

Colombian coal has quality specifications which places it in a higher standard compared to other producers. For example, the sulfur content is lower (0.8% -1.0%) in most of the other producers and the ash content (8%) is less than the South African coal (10%).

Total coal production in Colombia in 2009 was 70.0 million tons. Total exports reached 65.8 million, representing a decrease of 6.4% compared to 2008, due to shrinkage of the economy caused by the global crisis. The main markets for Colombian coal are Europe and North America, which account for about 80% of total exports.

Since Colombia has great potential for coal production, has become an object of interest from several major companies such as Xstrata, Vale, BHP, Drummond and Anglo American, who already have investments in the country.

Coal production in Colombia is highly concentrated in two companies, the Consortium Cerrejon (BHP, Xstrata, Anglo American) and Drummond, which together account for over 80% of total exports.

1.3 Outlook for the World thermal coal market (2010-2025)

During the given period of time a significant change is expected in the major coal trade flows. This has to occur, mainly due to the significant increase in imports of coal in the region of the Pacific Rim.

With the strong demand growth in Asia, particularly China and India, who traditionally sold their products to countries in the Atlantic Basin, such as South Africa and Colombia, is expected to send some of its exports to the Pacific.

Projections show that Colombia will present the third highest growth in thermal coal exports in the world for 2025, confirming the great potential of the country as a producer:

 China also has a large increase in demand, most of which will be supplied by domestic production. However, due to the large size of its market, the country must also be one of the main destinations of cargoes sold in the Pacific. Importantly, due to bad weather, Chinese demand is highly seasonal. The peak demand occurs during the winter, when production and logistics infrastructure are deeply affected by snow and freezing temperatures.

1.3.1 Prospects for the Colombian market

Due to the growing demand for coal in the Pacific market and its geographical position, it is expected that South Africa's exports are directed to that market, especially India and China. As a result, Colombia is likely to become the main supplier to the Atlantic market.

The following figures show the comparison between the export flows of Colombia in 2009 and projected flows in 2025. In comparison, we can see, in addition to increasing participation in the supply of the Atlantic basin, establishing exports to Pacific markets on a regular basis.

Coal production in Colombia has increased significantly in recent years and will continue to grow as new reserves are exploited and new infrastructure projects are implemented. The graph shows the estimated coal production in Colombia and in the production of the mines COLCCO.

 According to forecasts, although exports have declined in 2012 due to the global economic slowdown period, exports could return to an upward trend in 2013, reaching the level of 100 million tons in 2015, to be maintained until 2020 .

Cesar and La Guajira are the most important departments of mining in the country, with 48% and 43% of total production, respectively. Together, they represent about 90% of total production and may represent about 86% in 2020, to the extent that production will expand to the departments of Santander and Norte de Santander.