What's going on the 1st day at the 15th Coaltrans Asia?
DMO and domestic coal price, as expected, were the hot topic again Frankly, it remains unclear as government officials have not properly addressed some of the questions. How DMO and domestic coal pricing would actually work remain confusing, not until the government issues implementing regulation and ministerial decree.
. Minister of Energy and Mineral Resources stated the plan to actually set up a government agency to handle domestically-dedicated outputs from producers to be then sold to domestic customers. Should the government decide to go ahead with this scheme, then this could lead potentially lead to higher price for domestic customers.
. As for domestic coal pricing, government officials have repeatedly stated that the government would release monthly price guidance based on various coal indices. However, confusion growing with talks circulating that PLN has asked the government for the domestically sold coal to PLN to be priced on cost plus margin basis. At this juncture, we continue to feel that the government wants to make sure enough incentives for coal mines to grow their outputs.
Thermal coal bulls
There were two thermal coal bull presenting, Rick Navarre of Peabody, the biggest coal producers in the US, and Lars Schernikau of HMS, Coal trader and investor from Germany.
. Mr. Navarre of Peabody believed that sharp contango, with future price currently at much higher level than spot price, and underinvestment in the coal sector, with various coal projects being postponed following the collapse in the commodity price, would lead to a sharp recovery in spot thermal coal price. He believes that over the longer-term, growing urbanization, increasing electrification, and rising energy security issues would lead to a long-term structural increase in thermal coal demand. He sees China (to be slight net importer in years to come), India (100m
tonnes of import demand by 2013), and Indonesia (tripling domestic coal demand
for power from 30m tonnes to 100m tonnes in 10 years) would grow their power generation rapidly hence strong domestic thermal coal demand. He believes that Australia, rather than Indonesia, as potential beneficiaries of the growing seaborne thermal coal demand, largely reflecting Indonesia's growing domestic power needs.
. Meanwhile, Mr. Schernikau views that the relative importance of thermal coal would continue to increase as thermal coal remains the cheapest source of energy even after taking into account carbon emission. He shares Peabody view on China and India as the main growth drivers. He pointed out that top two drivers for thermal coal price are 1) Asian market demand growth, and 2) crude oil price direction. He then pointed out that of the total potential cumulative investment over the next 30 years, coal investment would only reach US$300bn or mere 5% of total investment in
oil and gas sector, signalling a massive potential under investment in coal.
Customers changing?
. Chubu Electric Power (CEP) has recently set up an energy trading company, in a JV with EDF Trading from Europe, named Chubu Energy Trading (CET) to manage procurement and logistics for the entire coal portfolio. Basically, Chubu feels that contract price, set annually with suppliers, has not served the company well during volatile condition. Spot price fluctuates a lot before annual settlement is reached only for the price to collapse thereafter. And if spot price rising post settlement, Chubu is facing shipment delays as suppliers asking for upward price adjustment. There is
also a problem in take-or-pay agreement, especially when Chubu faces collapsing power demand, as it is currently experiencing.
. Chubu is therefore considering European-style procurement, relying on not just term contract, but also spot and futures. At this juncture, we are not sure whether this would lead to an end of Asian-Australian annual pricing negotiation.
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