Coal importers dig deep for bottom dollar

Researchers at Griffith University have shed new light on sophisticated purchasing strategies adopted by Indian power generators previously not known to Australian coal producers.

A study of coal brands and coal prices in Australia, Indonesia and South Africa during a four-year period has revealed complex, computational analysis by power generators aimed at maximising delivered units of energy.

Griffith Business School researcher Dr Rakesh Gupta said understanding the purchasing behaviour of power generators may help coal producers in Australia develop marketing strategies to better target coal buyers in India.

“The general perception is that power generation companies buy coal based on the coal prices and the freight alone. Recent discussion has also argued that these companies factor in the coal quality in their purchase decisions,” he said.

“But this study finds they also account for the inter-relationship between the price changes among different coal brands and quality differentials among these coal brands.”

Dr Gupta and Dr Jason West from the Department of Accounting, Finance and Economics, analysed weekly coal prices in Australia, Indonesia and South Africa for the period from July 2006 to August 2010. Australia has 54 coal brands, South Africa 58 and Indonesia 56. The pair considered the different quality factors of each brands and used a sophisticated technique to convert freight and export prices into prices per unit of delivered energy.

Australia exported 148 million tons of thermal coal in 2011. Projections for the period 2017 indicate an 11 per cent increase forecast.

“A proper understanding of the importers’ purchasing strategy is crucial to coal producers in Australia,” Dr Gupta said.

“There is clear evidence that Indian power generators base their decisions on thermal coal purchase on the efficient generation of units of power, and not solely on FOB prices or freight.”

Dr Gupta said the research found power producers either computationally or intuitively account for coal quality gaps, freight prices and generator efficiencies in a mean variance efficient way.

“They buy a mean variance portfolio, effectively a range of investments they hold, which maximises delivered units of energy for the power generator, and simultaneously minimises the variances in the per dollar fluctuations in the delivered units of energy,” he said.

“Minimising variance of per dollar energy production controls the risk for power generator in terms of fluctuations in the price of production for power generator. Because of price power, generation for a producer is not dependent on one single contract or a series of contracts with one supplier. Price and risk of production over time is determined by the portfolio of coal it purchases.”

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