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Multi-product coal distribution and price discovery for the domestic market via mathematical optimisation

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Mineral Economics
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Maryke Rademeyer
Maryke Rademeyer
Maryke Rademeyer
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Richard Minnitt at University of the Witwatersrand
Richard Minnitt
Rosemary Falcon
Rosemary Falcon
Rosemary Falcon
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This paper investigates the implications for coal supply security for the domestic South African market when faced with weaker export demand. A model is proposed of domestic coal trade via a trading hub which links coal production to consumer markets. An application of the theory for equilibrium price discovery at the mine-trader and trader-consumer interfaces is also described. It is found that the profit-maximising trader seeks to sell more volumes to domestic consumers of higher-grade coal to compensate for earnings lost due to lower export volumes. This results in lower prices on higher-grade product. Supply to domestic consumers of lower-grade coal appears to be unaffected by the weaker export market, with the price on lower-grade coal constant.
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https://doi.org/10.1007/s13563-020-00232-5
ORIGINAL PAPER
Multi-product coal distribution and price discovery for the domestic
market via mathematical optimisation
Maryke Rademeyer1·Richard Minnitt2·Rosemary Falcon3
Received: 8 December 2019 / Accepted: 2 June 2020
©Springer-Verlag GmbH Germany, part of Springer Nature 2020
Abstract
This paper investigates the implications for coal supply security for the domestic South African market when faced with
weaker export demand. A model is proposed of domestic coal trade via a trading hub which links coal production to
consumer markets. An application of the theory for equilibrium price discovery at the mine-trader and trader-consumer
interfaces is also described. It is found that the profit-maximising trader seeks to sell more volumes to domestic consumers
of higher-grade coal to compensate for earnings lost due to lower export volumes. This results in lower prices on higher-
grade product. Supply to domestic consumers of lower-grade coal appears to be unaffected by the weaker export market,
with the price on lower-grade coal constant.
Keywords Commodity economics ·Coal marketing ·Computational optimisation
Introduction
Mining is considered an important part of the South African
economy, contributing 6% to gross domestic product and
35% to export earnings in 2016 (Ericsson and L¨
of 2019).
Almost 50% of the value of mining production in South
Africa is attributable to coal mining (Ericsson and L¨
of
2019). Coal sales data suggest that the value of coal
mining in South Africa is strongly dependent on the
revenues yielded by coal exports. Coal sales make a sizeable
contribution to South Africa’s earnings, contributing R
61.5 billion from domestic sales and R 50.5 billion from
Maryke Rademeyer
maryke.rademeyer@students.wits.ac.za
Richard Minnitt
Richard.Minnitt@wits.ac.za
Rosemary Falcon
Rosemary.Falcon@wits.ac.za
1School of Mining Engineering, The University
of the Witwatersrand, Johannesburg, South Africa
2School of Mining Engineering, The University
of the Witwatersrand, Private Bag 3, WITS,
Johannesburg, 2050 South Africa
3Clean Coal Research Group, Faculty of Engineering, Genmin
Laboratory, The University of the Witwatersrand, Private Bag
3, WITS, Johannesburg, 2050 South Africa
exports in 2016 (MCSA 2018). These figures highlight the
importance of exports in the earnings equation. Despite
accounting for just under 30% of coal sales volumes in
20161, exports accounted for 45% of total sales value due
to higher prices on exported coal tonnages. The fact that
domestic coal consumers are linked to the coal export
market via the inland trade market raises the question as to
how the domestic coal market might be affected by changes
in demand for South African export coal.
Recent industry research initiatives, such as the South
African Coal Road Map (SACR, 2013) and the Chamber of
Mines’s Coal Strategy (2018), have looked to estimate the
value of the coal industry for the South African economy
and broader society. South Africa is a major supplier of coal
internationally, accounting for 6% of global exports (MCSA
2018). More importantly, however, is that coal is used in
the generation of over 80% of state-owned power utility
Eskom’s electricity supply (MCSA 2018). It follows that the
South African economy is largely fuelled by domestically
produced coal.
The South African Coal Road Map (SACR, 2013) sought
to bring coal industry stakeholders, i.e. producers, support
services and consumers, together in an attempt to develop
1Some 250 million tonnes of coal was produced in South Africa in
2016. Of the 180 million tonnes sold domestically, about 115 million
tonnes was sold to state-owned power producer Eskom, 40 million
tonnes was sold to liquid fuels producer Sasol, and the remainder was
sold to various smaller industrial users (MCSA 2018).
/ Published online: 9 July 2020
Mineral Economics (2021) 34:113–126
Content courtesy of Springer Nature, terms of use apply. Rights reserved.
... As discussions on the role of coal in the global energy mix continue, it is worthwhile to consider what impact a global shift away from coal fuel and a subsequent deterioration in international coal trade would have on South Africa's coal market and, by extension, South Africa's economy. The DOTRAMOD model for domestic coal trade, as proposed by Rademeyer et al. (2020b), was developed with the purpose of clarifying the relationships spanning South Africa's domestic coal industry and connecting this industry to the international coal market. However, this model does not account for the mining investment problem which drives the supply-side equation of the market equilibrium model. ...
... The objective of this research paper is to build the mining investment problem into the model of domestic coal trade introduced in Rademeyer et al. (2020b) by taking account of the miner's profit. That is, an algorithm is proposed in this paper that effectively allows for the miners to evaluate the future profitability of their operations and the subsequent decision on whether to continue producing coal or shut down the mine. ...
... DOTRAMOD is a computational model of domestic coal trade in which trade is facilitated by a single trader intermediary (Rademeyer et al. 2020b). This construction is illustrated in Fig. 1. ...
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