The Effect of Quality Differentials on Integration of the Seaborne Thermal Coal Market
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Author(s)
West, Jason
Griffith University Author(s)
Year published
2013
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This paper examines the structural components that characterize the price behavior and perceived arbitrage of the global thermal coal market. Index coal prices plus freight costs to India favor imports of Indonesian thermal coal however significant volumes are also imported from South Africa and Australia. The Indian energy market is characterized by homogeneous power plant technologies and coal procurement strategies which allows for seaborne coal brands to be benchmarked against a specific quality. In this study the index price of Australian, South African and Indonesian thermal coal is transformed using freight and ...
View more >This paper examines the structural components that characterize the price behavior and perceived arbitrage of the global thermal coal market. Index coal prices plus freight costs to India favor imports of Indonesian thermal coal however significant volumes are also imported from South Africa and Australia. The Indian energy market is characterized by homogeneous power plant technologies and coal procurement strategies which allows for seaborne coal brands to be benchmarked against a specific quality. In this study the index price of Australian, South African and Indonesian thermal coal is transformed using freight and quality adjustments to derive a measure for the expected electrical energy output in units of energy. The degree of market integration in the seaborne thermal coal market using the new price series is tested using cointegration analysis. The degree of convergence and the absolute level of arbitrage between major coal exporters are also tested using a recursive approach in the form of a Kalman filter. Using the transformation to units of energy the market is shown to be relatively integrated and the apparent arbitrage between exporters disappears when accounting for freight and coal quality differentials. This study challenges the common notion that thermal coal importers source material that has a freight price advantage and highlights the importance of coal quality differentials in power production.
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View more >This paper examines the structural components that characterize the price behavior and perceived arbitrage of the global thermal coal market. Index coal prices plus freight costs to India favor imports of Indonesian thermal coal however significant volumes are also imported from South Africa and Australia. The Indian energy market is characterized by homogeneous power plant technologies and coal procurement strategies which allows for seaborne coal brands to be benchmarked against a specific quality. In this study the index price of Australian, South African and Indonesian thermal coal is transformed using freight and quality adjustments to derive a measure for the expected electrical energy output in units of energy. The degree of market integration in the seaborne thermal coal market using the new price series is tested using cointegration analysis. The degree of convergence and the absolute level of arbitrage between major coal exporters are also tested using a recursive approach in the form of a Kalman filter. Using the transformation to units of energy the market is shown to be relatively integrated and the apparent arbitrage between exporters disappears when accounting for freight and coal quality differentials. This study challenges the common notion that thermal coal importers source material that has a freight price advantage and highlights the importance of coal quality differentials in power production.
View less >
Journal Title
International Journal of Business and Finance Research
Volume
7
Issue
1
Publisher URI
Copyright Statement
© 2013 The Institute for Business and Finance Research. The attached file is reproduced here in accordance with the copyright policy of the publisher. Please refer to the journal's website for access to the definitive, published version.
Subject
Financial Econometrics
Accounting, Auditing and Accountability
Banking, Finance and Investment