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Coal – How Deloitte MarketPoint Solutions help inform your key decisions

What can be expected for steam coal supply and demand, and what are prices likely to be?

When making strategic decisions, there are many unknowns that must be analyzed and understood, such as the answer to the question above, in order to make informed choices for your business. We’ve categorized important questions addressing many issues to be considered in making strategic decisions, questions that MarketBuilder (Deloitte MarketPoint’s premier software solution for fundamental market analysis and price forecasting for commodities) can help you answer. Each category is listed below, with two questions included as examples. Following the question section below is a brief introduction of how MarketBuilder can help you answer these questions in making strategic decisions.

  1. Price
    • What will happen to the price of coal in the face of greenhouse gas regulation and other market changes and how will it affect your business?
    • How many different coal types do you need to distinguish in order to analyze supply, transportation, and demand in the coal market?
  2. Demand
    • Will demand for steam coal differ by type of coal? Will any particular type be favored by the market?
    • What effect will greenhouse gas legislation if passed have on coal consumption (and therefore production) and how will it affect your business?
  3. Supply and Resource
    • What is the future profitability of mining coal in each of the North American production basins?
    • What is the nature of the resource base in the known regions of North America (e.g., seam thickness, coal composition, stripping ratio, other geology)?
  4. Transportation and Import/Export
    • Will the import and/or export market change with a change in domestic coal use and how will that affect your business?
    • What will be the future prices at which coal can be imported from various Atlantic basin sources?
  5. Environment
    • How will the various environmental policies for SO2, NOx, mercury, and CO2 combine to change the mix of coal production and how will this affect your business?
    • How would various forms of CO2 regulation affect your business?
      • Cap and trade
      • Tax
      • Maximum Achievable Control Technology (MACT)/Best Available Control Technology (BACT)
      • Auction versus allocation
  6. Technology and Advanced Use
    • There are a number of CO2 sequestration ideas (direct CO2 removal from the flue gas stream, oxygenation, hydrogenization, aquifer injection). Are any of them economic with or without subsidy?
    • Is integrated combined cycle coal gasification expected to be economical, with or without CO2 sequestration? When?

How MarketBuilder helps inform your decisions in coal

Companies typically calculate the profitability of assets they build, buy, or sell as depicted in Diagram 1. They estimate the capital cost, operating cost, and energy efficiency of the asset (bottom Diagram 1); they specify the time and risk preference, book and tax parameters, and taxes and other “takes” (top of Diag. 1); and they project the price of the output over time (top left – Diag. 1) and the price of the input over time (bottom left – Diag. 1) and then use the results in a profit calculation (e.g., Discounted Cash Flow or DCF).

Profit Calculator

What do they find? They often find that the most important determinant of profitability is the difference between the expected price of the output and the expected price of the input. That difference is a key driver of asset profitability, and yet, often, this is the least accurate component of the analysis. MarketBuilder models the supply curves for the input and output commodities in your markets, treating each component as a competitive independent agent simulating the way the real market works. As a result it helps you to calculate the estimated price of both the input and the output by providing a justifiable price difference for each of your assets.

MarketBuilder enables you to calculate the forecasted profitability, forward through time, of new or existing assets, depicted in the shaded area of Diagram 2, using time-tested technology and data. Diagram 2 illustrates that margins are not level, normalized, or annuitized, and they are determined by simulating market behavior forward through time. Having a tool you can use to project prices and the profitability of each of your assets through time is central to your strategic and asset decisions.

Margin Capture

This analysis of output-input price difference is suitable for the following types of assets:

  • Upstream assets – coal mining
  • Transportation assets - trains, ships, and barges
  • Downstream assets including power generation and industrial end use

MarketBuilder with its flexibility, sound methodology, ease of use, and time-tested accuracy, help you to easily adjust parameters to model potential market and policy changes (e.g., shale gas cost, CO2 policy, renewable, etc.) and incorporate them in your analysis.

Returning to the question: What can be expected for steam coal supply and consumption, and what are prices likely to be?

MarketBuilder provides you with the coal supply chains from mine mouth through transportation and into power plant, industrial, and export consumption, treating each component as an independent, profit seeking, competitive agent, as in real-world markets. With this thoroughness and many other easy-to-use features, MarketBuilder helps you understand the future coal market industry, from resources in the ground to consumption, and helps you forecast price and quality differentials throughout the market. MarketBuilder assists you in analyzing the market in many different potential future scenarios and its reporting capabilities help you to visualize how these prices apply to your business by asset, by business, in aggregate, etc. in each scenario.

As used in this document, ‘Deloitte’ means Deloitte LLP (and its subsidiaries). Please see www.deloitte.com/us/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries.