Coal Swaps Daily Methodology

GENERAL METHODOLOGY

ICIS publishes market prices based on information continuously gathered from market participants about: spot transactions; spot bid and offer levels; contract price negotiations; prices of related commodities; and relevant freight costs.

ICIS includes in its price-generation process only information gathered up to the published market close time for each commodity and assessed period. ICIS does not make retrospective adjustments or changes to price quotations based on information subsequently received.

ICIS regards all arm’s length transactions that meet its specification criteria as carrying equal weight unless specifically stated otherwise.

ICIS uses proprietary models where necessary to normalise data to the typical specifications for cargo size and date ranges given for each commodity.

Some ICIS assessments are the product of calculation alone – for example, in markets where insufficient market activity takes place to permit price assessment, or where a market itself habitually sets prices according to a formula. Such calculated assessments are noted as such in their detailed methodology specifications.

ICIS endeavours to crosscheck all the transaction information it gathers. ICIS will not use information for assessment purposes where such checks call into doubt the accuracy of the original information, or where a transaction appears to have occurred under circumstances that render it non-repeatable or otherwise markedly unusual.

ICIS publishes a number of types of market quotations.

ICIS quotes coal swap prices and publishes physical indices for Europe, Africa and as follows:

 

Region	Assessment name	Type	Freq	Units
Europe	CIF Amsterdam, Rotterdam, Antwerp swaps (CIF ARA swaps)	Curve	D	US$/tonne
Africa	FOB Richards Bay swaps (FOB RB swaps)	Curve	D	US$/tonne
Asia-Pac	FOB Newcastle swaps	Curve	D	US$/tonne
Europe	DES ARA physical index monthly	Monthly index	M	US$/tonne
Africa	FOB RB physical index monthly	Monthly index	M	US$/tonne
Asia-Pac	FOB Newcastle physical index monthly	Monthly index	M	US$/tonne

 

Recent changes to this methodology:

 

Date	Assessment(s)	Change
1August 2012	Monthly physical indices	Calculation of the indices when fewer than three index-qualifying deals are recorded during the month leading up to the publication of the index .

 

Spot Close assessments:

Published daily and weekly, these reflect the transactable market value of the assessed product at the close of business for the assessed period (daily or weekly). Assessments are nevertheless shown as a low-high range, indicating the “space” in which a transaction is deemed to have been possible at the specified time. This low-high is typically tighter than that shown in a Spot Range assessment. The assessment is established taking into account:

- typical, repeatable transactions at arm’s length between non-affiliated market participants;

- standardized “atypical” transactions, where it is possible to derive a typical equivalent market value for a transaction which does not conform to standard specifications;

- bids and offers for typical spec material;

- movements in related markets.

In the absence of reliable, confirmable market information for a specific commodity, ICIS reserves the right to compute changes in specific assessments based on established relationships derived from manufacturing economics, product linkages, freight, and forward markets.

Instrument function: Reflects most recent tradable market value with high transparency and high accuracy. Suitable for inclusion in averaging mechanisms and market analysis tools.

Indices:

In some markets, ICIS publishes volume-weighted averages– known as “indexes” or “indices” – of verified typical transactions over specified periods, either daily, weekly or monthly.

Inputs to an index are checked editorially for conformity to specification and statistical outliers are eliminated. See individual methodologies for details.

Instrument function: An index is a mathematically derived indicator of typical traded value over a given period. Because it is an average, it should be noted that an index does not provide a currently transactable price indication – it is inevitably historical in nature; and both accuracy and volatility may vary with quantity of inputs. Suitable for long-term market analysis.

Assessment Window

All swap price assessments (CIF ARA, FOB RB and FOB Newcastle) reflect prevailing market prices at 16:30 London time.

The assessments are published on all UK working days, except on the final working day immediately preceding 25th December and 1st January each year, when these assessments reflect typical prevailing prices at 12:00 London time.

Rollover dates on the contracts will be the last day of the calendar month, quarter or year preceding the respective contracts. For example, the last date of quotes for May ’10 would be April 30 2010, the last date for quotes on Q3 ’10 would be June 30 2010, and the last date for quotes on Calendar Year 2011 would be 31 December 2010.

ICIS  monthly physical coal indices

Published on the final working day of each month, these are a volume weighted average of deals collected by ICIS in the month leading up to publication of the indices.

The three front months included in all three indices will roll in the second half of the month in which the index is being calculated. For example, between 1 and 15 May, the three front months will be June (double weighting), July (single weighting) and August (single weighting). From 16 May or the closest working day thereafter, the front three months will be July (double weighting), August (single weighting) and September (single weighting).

The months included in the index are given different weightings: month-1 has a weighting of 2 for the index, and month-2 and month-3 have a weighting of 1 for the index.

When fewer than three index-qualifying deals are recorded in the month leading up to publication of the indices, ICIS will use the average of daily front-month CIF ARA, FOB RB or FOB Newcastle swap assessments, recorded in the month leading up to the publication of the index, as index value.

For example, if during the month of May fewer than three qualifying DES ARA, FOB RB or FOB Newcastle physical trades are recorded, the ICIS index for the respective markets would be an average of the daily June (front-month) swap assessment published for that market between 1 and 31 May.

Assessed periods

CIF ARA swaps: The front three months, the front five quarters and the front three Calendar Year contracts are assessed.

FOB RB swaps: The front three months, the front four quarters and the front two Calendar Year contracts are assessed.

FOB Newcastle swaps: The front two months, the front two quarters and the front two Calendar Year contracts are assessed.

Quality

DES ARA specifications:

DES ARA deals reported to ICIS  must meet the following criteria in order to be included in the DES ARA monthly physical index:

Typical net calorific value of the coal will be 6,000kCal/kg NAR. Anything under 5,850kCal/kg NAR will be rejected.

The coal will typically originate from Australia, Colombia, Poland, Russia, South Africa and the USA. The provenance may or may not be disclosed when the trade is published.

Moisture content will not exceed 15%.

Sulphur content will not exceed 1%.

Cargo sizes will not be below 50,000 tonnes. Trades on cargo sizes below this will be reported and published by ICIS  for transparency purposes, but will not be included in the DES ARA monthly physical index.

All trades that take place before 17:30 London time on the last working day of a calendar month will be included in the index

For transparency purposes, ICIS  will publish a list of trades to be included in the index in the weekly physical report produced on the last working day of the week. Trades that take place after 17:30 on that day will be included in the following week’s list of trades.

The finalised DES ARA monthly physical index is published on the last working day of the calendar month after 17:30 London time. The final list of trades used in the index will be published by ICIS  on the final working day of the month alongside the finalised index. Any trades that were not reported to ICIS  in time for the updated weekly publication will not be included in the final index.

This will be followed by the publication of the final DES ARA monthly physical index on the last working day of the calendar month after 17:30 London time. The final list of trades used in the index will be published by ICIS  on the final working day of the month alongside the final index.

FOB RB specifications

FOB RB deals reported to ICIS  must meet certain criteria in order to be included in the FOB RB monthly physical index:

Typical net calorific value of the coal will be 6,000kCal/kg NAR. Anything under 5,850kCal/kg NAR will be rejected. Any trades for branded coal such as Kangra will be reported in the weekly physical report for transparency purposes, but the trades will not be included in the monthly index, unless they fit in with the specification criteria.

Moisture content will not exceed 15%.

Sulphur content will not exceed 1%.

Cargo sizes will not be below 50,000 tonnes. Trades on cargo sizes below this will be published by ICIS  for transparency purposes, but will not be included in the FOB RB monthly physical index.

ICIS  will publish a list of trades to be included in the index in the weekly physical report produced on the last working day of the week. Trades that take place after 17:30 London time on that day will be included in the following week’s list of trades.

 

This will be followed by the publication of the final FOB RB monthly physical index on the last working day of the calendar month after 17:30London time. The final list of trades used in the index will be published by ICIS  on the final working day of the month alongside the final index.

FOB Newcastle specifications:

All FOB Newcastle deals reported to ICIS  must meet certain criteria in order to be included in the FOB Newcastle monthly physical index.

Typical net calorific value of the coal will be 6,000kCal/kg NAR. Anything under 5,850kCal/kg NAR will be rejected.

Moisture content will not exceed 15%.

Sulphur content will not exceed 0.75%.

Cargo sizes will not be below 25,000 tonnes. Trades on cargo sizes below this will be published by ICIS  for transparency purposes, but will not be included in the FOB Newcastle monthly physical index.

Trades for branded coal that are reported to and verified by ICIS  will be published for the sake of transparency, but will not be included in the monthly physical index, unless they meet the specified criteria.

ICIS  will publish a list of trades to be included in the index in the weekly physical report produced on the last working day of the week. Trades that take place after 17:30 London time on that day will be included in the following week’s list of trades.

 

This will be followed by the publication of the finalised FOB Newcastle monthly physical index on the last working day of the calendar month after 17:30 London time. The final list of trades used in the index will be published by ICIS  on the final working day of the month alongside the final index.

The specification criteria for all physical contracts listed above is applicable to the underlying component around which swap prices reported by ICIS  are traded.

Conversion factors

Clean Spark and Clean Dark Spreads

Clean Spark/Clean Dark Spreads are a reflection of the cost of generating after taking into account fuel (gas/coal) and carbon allowance costs. A positive spread effectively means that it is theoretically profitable to generate electricity on a baseload basis for the period in question, while a negative spread means that generation would be a loss-making activity. However it is important to note that the Clean Spark/Clean Dark Spreads do not take into account additional generating charges (beyond fuel and carbon), such as operational costs.

The German Clean Dark and Spark Spread data represented in the line graph in Coal Swaps Daily is derived from ICIS  proprietary German power, gas and  EUA carbon data. These are published in European Daily Electricity Markets (EDEM), European Spot Gas Markets (ESGM), and European Daily Carbon Markets (EDCM). All the power prices quoted are for baseload delivery. Gas prices cited are Dutch TTF for Germany as the TTF hub is more liquid than the German gas hub and has a more robust forward curve. For a full explanation of how the power, gas and carbon prices are derived please see the EDEM/ESGM/EDCM methodologies.

Clean Spark Spread

 The German Spark Spread tables use a fuel efficiency factor of 49.13% for the gas conversion. In reality, each gas-fired plant has a different fuel efficiency, but 49.13% is used as a standard because it provides an easy conversion between gas and power volumes (25,000 therms of gas per day = 15 MW of power). The Spark Spread value is therefore the power price minus the gas price divided by 0.4913, i.e. Spark Spread = Power Price - (Gas price/0.4913).

 The Clean Spark Spread is calculated using a gas emissions intensity factor of 0.411 tCO2/MWh. Therefore the Clean Spark Spread is calculated by subtracting the carbon price (multiplied by 0.411) from the 'dirty' Spark Spread, i.e. Clean Spark Spread = Spark Spread - (Carbon Price*0.411).

Clean Dark Spread

 Clean Dark Spreads are a reflection of the cost of generating after taking into account fuel (coal) and carbon allowance costs. A positive spread effectively means that it is profitable to generate electricity on a baseload basis for the period in question, while a negative spread means that generation would be a loss-making activity. However it is important to note that the Clean Spark Spreads do not take into account additional generating charges (beyond fuel and carbon), such as operational costs.

 The German Dark Spread tables use a fuel efficiency factor of 35% for the coal conversion, and an energy conversion factor of 7.1 for converting tonnes/coal into MWh/electricity, on the basis that CIF ARA coal is rejected below a standard quality of 5,800kcal/kg. In reality, different types of coal have a different energy value and each coal-fired plant has a different fuel efficiency, but 35% is accepted as a broad standard. The Dark Spread value is the power price minus the coal price divided by 0.35, i.e. Dark Spread = Power price - (Coal price/0.35).

 The Clean Dark Spread is calculated using a coal emissions intensity factor of 0.96 tCO2/MWh. Therefore the Clean Dark Spread is calculated by subtracting the carbon price (multiplied by 0.96) from the 'dirty' Dark Spread, i.e. Clean Dark Spread = Dark Spread - (Carbon Price*0.96).

Publication schedule

Coal Swaps Daily is published every working day of the year in the UK. CIF ARA, FOB RB and FOB Newcastle swaps will be published on every working day, and a list of trades in the paper market will also be published.

A weekly physical market report will be provided on the last working day of the week with a list of reported physical trading activity in the week

The monthly physical indices will be published after 17:30 London time on the final working day of the calendar month.

 

To comment on any aspect of this methodology, or to propose changes, please contact Fionn O'Raghallaigh, Acting Editor of Coal Swaps Daily on +44(0)2079111941 or Fionn.O'Raghallaigh@icis.com

ICIS continuously develops reviews and revises its methodologies in consultation with industry participants. Product specifications and trading terms and conditions used are intended to reflect typical working practices in the industry.

 

Updated 1 August 2012