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Coal is a truly globalized commodity which is traded around the world and the dynamics of the price are persuaded by a very convoluted variety of the elements ranging from rains in Indonesia, and to the demand of steel.
Markets for coal
The two most important regional markets: The Atlantic and the Pacific. Main suppliers of the first market are: SA (South Africa), Colombia, Poland, Russia, Australia, Indonesia, and the United states, while on the Pacific side we find that the main suppliers are: Australia, China, Indonesia and Russia. Import demand usually comes from EU on the one hand and from Japan, Chinese Chipei and South Korea on the other hand, and with these countries altogether asking almost 70% of internationally traded volume of coal. The exchange between the two big markets is dependent of freight difference and the volumes can rise or diminish depending upon the level of the freight prices.
Generally, Steam coal prices are a based on a variety of different factors like the supply demand fundamentals, the freight charges and other external factors.
India Steam Coal consumption in India
The majority of steam coal in India is imported, because we don't have very good quality coal in the country which is particularly used for the power generation. Today majority of the power plants in India are state government owned, and its they who make the decision of buying the coal through MMTC. NTPC is a government owned company which is in charge of handling these power plants in the country.
Minerals and Metals Trading Corporation of India Ltd.Â (MMTC) is at the instant one of the two topmost earners of FE (foreign exchange) for the country and it is also the largest trading body in the country. It doesn't only handle the export of the primary products like coal, iron ore, and production of agro and industrial products. MMTC is also responsible for the import of few very important commodities like ferrous and the non-ferrous metals for the Indian industry, and agricultural fertilizers.
MMTC is known for its diverse nature of trade that cover the third country trade, joint ventures and the link deals and all the modern forms of the international trading.
MMTC has a vast international network spanning almost in all the nations in Asia, Europe, Oceania, Africa, US and also has a wholly owned, an international subsidiary, MTPL. MMTC is one of the Miniratnas companies of the country.
Currently, MMTC is one of the two uppermost FE (foreign exchange) earner for India (of course after the Petroleum refining companies in India). MMTC is also the first Public Sector Enterprise to be accorded the status of "FIVE STAR EXPORT HOUSE" by Government of India for long standing involvement to exports. MMTC is also the major non-oil importer in India. Few things about MMTC:
India's largest foreign trade Enterprise
Largest exporter of minerals from India
One of India's biggest importers of non-ferrous metals
India's largest importer of steam coal
One of India's largest traders of agro products
India's largest bullion trader
One of India's leading Importers of fertilizers
MMTC is basically in four areas:
Coal &Hydro carbons
Global energy scenario
Today the global coal industry is facing the challenges that are unlike its long history. In both India and China the surge in the coal-fired power plant construction is driving the demand that is stretching supply potential of the both international and local producers.
In North America the amalgamation of threatening climate change legislation & swelling natural gas production is threaten the conventional cost advantage of coal-fired power plants. These long-term trends are beginning to play out in global steam coal trade, driving unusual trading patterns and price shifts with which coal buyers and suppliers must now cope. The interrelationships between apparently disconnected markets from time to time take industry participants by shock. A full understanding of the new drivers of global coal markets requires awareness of wide-ranging trends.
The proven global coal reserve was estimated to be 9, 84,453 million tonnes by end of 2003. The SA had the largest share of the global reserve (25.4%) followed by Russia (15.9%), China (11.6%). India was 4th in the list with 8.6%.
Indian Energy scenario
Coal is the biggest factor in the energy mix in India. It contributes to about 55% of the total primary energy need of the country's production. Over the years, we find that there has been a very visible increase in the size of the share of gas in the primary energy pie. It has increased from about 10% in 1994 to 13% in 1999. There has been a marginal decline in the share of the oil in the primary energy production from once 20% tp 17% during the same period.
India has enormous coal reserves. There are at least 84, 396 million tones of proven recoverable reserves (at the end of 2003). This amount to abot 8.6% of the total world reserves, and it may last for about 230 years of consumption at the current reserve to production ratio.
Reserves/Production (R/P) proportion-
In this ration the reserves remaining at the end of the year are divided by the production in that year so that we get the length of time that the remaining reserves would last if the consumption and hence the rate of production were to continue.
India currently is the fourth biggest producer of coal and ignite in the world. Usually the coal production is concentrated in the following states:
Uttar Pradesh, Bihar,
Oil currently accounts for about 36 % of the total energy utilization in India. We are today one of the top 10 oil-guzzling nations in the world. We are confidant of becoming 3rd largest oil consumer, by overtaking Korea in Asia after China and Japan.
Natural Gas Supply
Today, natural gas records for about 8.9% of the energy utilization in the country. The present demand for the natural gas is said to be around 350 million cubic meters per day, as against the availability of 80 mcmd. By 2011, the demand is projected to be about 450 mcmd. Natural gas reserves are anticipated at 660 billion cubic meters.
Nuclear Power Supply
Today, Nuclear Power contributes to about 5.2% of electricity produced in India. Today, IndiaÂ has around 19Â nuclearÂ powerÂ plantsÂ in operation with the generating capacity of 4560 MW. And there are more nuclear reactors that have been approved for construction.
Hydro Power Supply
India is gifted with an enormous hydro potential for power generation of which only 15% has been harnessed so far. It is acknowledged that exploitable potential at 60% load factor is 84,000 MW.
Thermal Engergy Generation
Share of different components in the thermal energy (63.3% of total energy generation in the country) generation:
The power load factors over the years are shown below, with the maximum PLF achieved in 2007-08 and 2008-09.
The project can be described with the help of the triangular diagram shown below. The main object (represented by the central triangle) is to forecast the steam coal demand in India.
MMTC being the largest importer of steam coal, for several coal powered power plants in different states in India, curious to know who the power plant capacity building is going on through the country.
Other important objectives of the project is to understand the pricing fluctuation of steam coal throughout the world and study its effect on the steam coal demand.
The project plan includes the steps that I need to take to fulfill the stated objective the summer internship project. First I will compile the power generation capacity of the states in India. And then study the upcoming power plants. Using which I will calculate the total steam coal demand in India (by these power plants).
Secondly, I will carry out a study to understand the pricing mechanism and the global steam coal price fluctuations and its impact on the steam coal demand. And finally will do SWOT and Five force analysis of MMTC via-vie its competition.
Benefits of project
The biggest customers of MMTC are state electricity boards. And the companies running the power plants on those states. Hence the demand of coal is very fluctuating, depending upon the finances available with the states.
For setting reorder point (for A & B class of items) or deciding quantity required for fixed period (as in case of C class items) correct prediction about demand is required. According to Chambers, Mullick, & Smith there are three kind of forecasting methods. They are:
Qualitative technique: When there is no previous data or they are very difficult and expensive to get these techniques are used. One of the best examples for such situation is product launch. In case of product launch there is no previous data available. So only possible option is qualitative technique. The main objective in this case is to bring together all the information in a logical, unbiased and systematic way. Some of the methods under this technique are a) Delphi method, b) Market Research, c) Panel Consensus, d) Visionary Forecast, e) Historical Analogy etc (Chambers, Mullick & Smith, 1971).
Time series technique: In this case future prediction is done based on past data. This technique is used in the cases where cause and effect relationship is difficult to establish. This analysis looks at the past pattern in the variable to be forecast and tries to project those patterns into the future (Menizer, 1988). Time series analysis assumes that past data is made of four components (Ramasubramanian). They are:
Horizontal: When data value fluctuates around a constant value
Trend: When there is a long term increase or decrease in data
Seasonal: When a series is influenced by seasonal factor
Cyclical: When data shows a cyclical rise or fall
To deal with each kind of component or a combination of them, different time series forecasting method is available. Some of the frequently used methods are
a) Average Method: In this case simple average of data from a particular time period is the prediction for next time period. So here time period is not fixed. At each successive time period new data is added without removing any past data. This method is not popular for forecasting.
b) Moving Average: In this method prediction for any time period is average of data of last N time periods. So here time period for which data is considered is fixed. At each successive time period most recent data is added and furthest data is removed from consideration. No of data point to consider is key factor for accuracy of this method. We will be using this method for our study.
c) Exponential Smoothing: In this method instead of giving same weightage to each past data, recent data is given more importance. Here forecasting for t+1 period (F t+1) is calculated as
F t+1 = F t + Î±(Y t - F t) , where Y t and F t are respectively consumption and prediction for time period t and Î± is smoothing constant which lies between 0.1 and 0.9. Generally first month's consumption is taken as first month's prediction.
Value of smoothing constant determines how much weightage is give to which data. Higher the value of alpha means higher the weightage for recent data. A large value of alpha gives very little smoothing, whereas smaller value of alpha gives more smoothing. This method is capable of eliminating the effect of spikes in past data. Accuracy of this method is very much dependent on the selection of alpha.
Causal models: In this case cause and effect relationship is established. One of the key task here is to identify the factors which can lead to out put. Popularly used methods under this technique are a) Regression, b) Econometric, c) Leading indicator etc (Chambers, Mullick & Smith, 1971).
Data Collection Method
Data collection was the most important step during the summer internship. I could not use the MMTC's data source for the use of the project. I had to visit NTPC and Coal India's offices for that for several times.
I also collected data from the individual websites of different electricity boards in the country and several other data rich websites (listed in the reference section).
Data analysis of the coking and non-coking coal based on the appendix-D is shown below:
Results and Discussion
The final result of the analysis says that the demand of steam coal (non-coking coal) should be around 47.6 million tons for imported steam coal. We took the electricity generation and load factors as the independent factors to calculate the future demand of imported steam coal.
Limitation of this analysis lies on the fact of the variability of the utilizing factor (see appendix-B) and State wise power situation (appendix-A). If the variability remains high then the results could vary by huge amount. As we have already taken those variations into consideration in our forecasting, we are less likely to see this kind of trouble until some major blow to the thermal power generation sector happens in the near future.