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How the petcoke market functions - Petroleum coke used as a combustible in cement kilns

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This report is written by Sven Rydahl, Energy Manager, Cimeurope especially for the attention of Eurobrief readers.

Most industries operate with fixed prices for their input materials, for periods of at least 3–6 months ahead, with prices set either by contracts or by the hedging of future prices. However, the situation is different in terms of petcoke purchasing by the European cement industry.

The European cement industry (including its non European subsidiaries) consumes around 13Mt of petroleum coke per annum, around 10Mt of which are priced according to indices set monthly, in US dollars on an FOBi basis US Gulf/Venezuela, by Jacobs Consultancy (a unit of Jacobs Engineering Group Inc) in the US, and called the Pace indices.

The indices should, theoretically, be assessed as an average of the previous month’s spot price deals and other new price agreements for petcoke cargoes on an FOB basis from the US Gulf/Venezuela. The way the indices are evaluated is not published and very often the price changes between months are inexplicable and direct. This is surprising given the known FOB prices of petcoke cargoes to European customers and the price developments of other combustibles, such as steam coal and natural gas.

The price assessments for January 2011 (published in mid February and used for the pricing of cargoes - depending on contracts - for loading in January or for loading at a later date), which are up around 15% from the indices in December of 2010, are very difficult to explain, given declines in steam coal prices of 10–15% based on FOB prices from South Africa, and falls in natural gas and crude oil prices, WTI. Furthermore, a number of spot cargoes to European buyers in January were priced at below the January Pace indices.

Historically, 100% of the petcoke from the US Gulf/Venezuela was shipped to buyers in the Atlantic basin (mainly to cement companies), meaning that the price assessments for new cargoes were based on FOB prices for Atlantic destinations.

However, petcoke has become a global commodity since 2008, with buyers in Asia (power and industrial users) becoming more and more focused on US Gulf/Venezuelan petcoke, whenever the C&F price Asia for petcoke is competitive with C&F prices Asia for Pacific steam coal. With record low freights (and Asian steam coal prices), due to a tighter supply/demand balance, set to level at US$10–20 above Atlantic coal prices, Asian buyers have come to set the floor price for FOB prices for petcoke in the Atlantic.

This development has meant that the price assessments by Pace have become more a gauge of Asian demand and prices than of the petcoke market in the Atlantic.
In fact, by applying these indices, European buyers accept the bidding up of the petcoke market in line with what Asian buyers are accepting.

The assessment of the future Pace indices are more and more difficult to predict. This means an extremely uncertain price pattern for European and Atlantic buyers of petcoke.

Most cement companies commit their petcoke volumes on an annual basis, but the actual FOB price for a given loading month is determined by the Pace indices (normally with a premium of US$8–18 above these indices, as the premiums reflect the tightness of the market).
This means that it is impossible for a buyer who uses Pace indices for pricing to evaluate the cost of the petcoke to be delivered during the calendar year, in his/her budgets, forecasting etc...

An additional problem is that it is not possible to hedge the petcoke prices with most other commodities and, specifically, all other combustibles. A buyer can hedge the prices of steam coal, oil product and natural gas purchases, but not the petcoke price.

Buyers, such as power companies in Europe, are being banned from using petcoke by their risk management departments, as open positions of petcoke cannot be hedged. Other buyers, such as lime producers and brick companies, will only accept petcoke purchases based on a system with fixed prices. Contrary to these policies, the Atlantic cement industry continuously has huge positions of petcoke with unhedged prices. Every month a change in the Pace indices affects the liability of these positions.

The increasing Asian impact makes the indices more volatile and less predictable.
The Pace indices increased by nearly 15% both at the beginning of 2008 and in January 2011, and similar price jumps will be seen even more frequently in the future.

The only way to reduce the uncertainty in the cost of future petcoke shipments is for cement companies, acting individually, to reconsider their purchasing policy. This may be done by an increased share of the annual petcoke volume being agreed on fixed prices instead of being set on Pace indices. The petcoke price situation at the beginning of 2011 has, furthermore, been aggravated by overall low inventories, both with refineries and with end users. A more flexible system, with higher inventories during periods of rising prices, would alleviate buyers from the price shocks seen in January.

Buyers may also choose to switch to increasing their use of steam coal, with prices which are directly hedgeable.

The best alternative to petcoke is to burn the most competitive US steam coal. Already Asian cement plants are burning such coal and some European cement companies are also considering this option, such coal being priced at 30-40% discount for calorific content against petcoke.

However, given the very high growth in demand for steam coal in Asia over the next 5 years, steam coal prices, and thus petcoke prices, will stay at very high levels. For medium/long term, the only option for the world cement industry is to sharply increase its consumption of alternative fuels.