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The distinction between coking coal and steaming coal — implications for the assessment of energy resources
Communications on energy The distinction between coking coal and steaming c o a l implications for the assessment of energy resource Contemporary energy policy has been characterized by many assessments of in situ national energy stocks. While such assessments often include estimates of black coal reserves, no a t t e m p t is usually made to classify these reserves on the basis of their suitability for transformation into coke. This paper shows, by reference to the economic relationship between fossil fuels in the pig iron manufacturing and bulk heat markets, that coking coal and steaming coal are poor economic substitutes at current prices. From this it is concluded that there is a potential for misguided energy policymaking so long as national in situ black coal stocks continue to be assessed w i t h o u t regard for their coking properties.
Since the so-called energy crisis there have been numerous appraisals of both national and world energy resources. Typically these stoektaking exercises have involved measurement of recoverable reserves of fossil fuels and uranium, given varying assumptions about the price of O P E C oil. In most cases the fossil fuel estimates include large quantities of black coal, but typically there is no distinction, within the black coal category, between eoking coal and steaming coal? Thus coking coal is treated simply as a source of heat, despite its use in metal manufacturing where it is more than just a heat source. All fossil fuels (and organic fuels such as timber and bagasse) have uses other than as simple sources of heat energy, but, as in the coal case, no distinction is usually made between reserves destined for heat generation and those destined for other uses - oil, for example, may be used for heating, for lubricants or as feedstock for petrochemical industries. This multiplicity of applications is not, of course, confined to mineral resources. For example, consider water reserves in a storage dam which are used both for irrigation and f o r reticulation to urban areas. Clearly there is no possibility of classifying a portion of these reserves as
E N E R G Y P O L I C Y March 1 9 7 9
suitable for one use and another portion suitable for an alternative use. In the case of black coal, however, a distinction can and should be made at the outset between coking coal and steaming coal. While the former can be a good technical substitute for the latter the reverse is not true, and furthermore at current prices coking coal and steaming coal are not good economic substitutes. 2 Although this discussion of the relationships between coking coal and steaming coal requires some discussion of price elasticities of demand for each coal type, this paper is not an attempt to estimate the price elasticities for coking coal or steaming
coal
Continuum of coal quality Black coal occurs in a continuum of qualities - from low quality subbituminous steaming coal to high quality low volatile coking coal. While there is much uninformed comment on the coal industry which fails to distinguish between coals of different types and qualities, particularly when coal prices are discussed, this paper goes but part of the way towards resolving the problems associated with variations in the characteristics of coals
by considering black coal as being composed of only two types - coking coal and steaming coal. However, it cannot be emphasized too much t h a t within each of these two types there lies a wide range of qualities. High quality steaming coal may have twice the calorific value (per unit mass) of the lowest marketable quality, while the level of impurities, including sulphur, ash and moisture may vary from 5% to 25%. 3 Marketable qualities of coking coal may have a volatile matter content ranging between 10 and 40%, and the range of other quality determinants, including impurities, is also extensive. 4 While the range of qualities within these two coal types and the lack of empirical data relating quality to price present difficulties for quantitative analysis of the relationship between coal prices and coal quality, a broad distinction should at least be made between steaming coal and coking coal. 5 This distinction may be best understood by discussing the economic relationship between fuel oil and each of these coal types.
Fuel oil and steaming coal Steaming coal performs only a single function, that of providing energy in the form of heat. The value of steaming coals will be related primarily to their heat value but will also depend on other quality determinants. For steaming coal of a given quality there will be a price per unit of heat at which bulk heat consumers will be indifferent between this coal and fuel oil of a given quality and price. In a competitive energy market in long run equilibrium the price of steaming coal will be equal to that of fuel oil on a heat basis after adjustment for quality differentials2 At this price the cross elasticity of demand for steaming coal with respect to the price of fuel oxl approaches infinity.
Fuel oil and coking coal Coking coal performs more than a simple heating function. Coke, which is derived from coking coal burned in an air free environment, performs three basic functions in manufacture of pig iron in the blast furnace: 7 •
it provides
a permeable physical
69
Communications on energy support to the charge of materials in the blast furnace; • it acts as a fuel to give heat; and finally, • it provides carbon which acts as a reducing agent. For none of these functions is coke necessary. Oil, steaming coal or natural gas combined with refractory materials could theoretically be used in its place, s Changes in the steelmaking process associated with the injection into the blast furnace of solid, liquid and gaseous fuels - although experimented with as early as last century - did not become common until the 1960s when the increasing price of coke relative to other fuels provided the motivation for perfecting injection techniques. 9 Injection of solid, liquid or gaseous fuels into the blast furnace allows a reduction of the ratio (by mass) of coke to pig iron produced (the coke rate). The most commonly injected fuel is oil, and a discussion of the effect of increasing the rate of oil injection on the economics of blast furnace operation will indicate the economic relationship between fuel oil and coke. When small quantities of oil are injected into the blast furnace the coke rate falls and the amount of heat energy required per unit mass of pig iron output also falls. As the injection rate increases the amount of heat required per unit mass of pig iron output continues to fall, but at a decreasing rate. However, injected oil performs only heating and reducing functions and as the coke rate falls, physical support for the charge of materials in the furnace declines and blast furnace capacity is reduced. This reduction in capacity occurs at an increasing rate as the injection rate increases. If the ratio of fuel oil to coke prices, when taken with other factor prices, indicates that the commencement of oil injection will be profitable, then as injection is increased the steelmaker will be faced with a trade off between declining fuel costs and increasing capital costs per unit of pig iron output. For a given ratio of fuel oil prices to coke prices there will, ceteris paribus, be a unique i-atio of fuel oil to coke inputs which minimizes costs. 1° If this is so it must also be the case for a given ratio of fuel oil prices to coking coal prices.
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Effect o f price on coking coal input Holding all factor prices constant except for the price of coking coal, the physical quantity of coking coal input demanded per unit output of pig iron can be expressed as a function of the price of coking coal or, using the price of fuel oil as the numeraire, as a function of the ratio of the price per unit heat of coking coal to the price per unit heat of fuel oil. This functional relationship is expressed in Table 1. The decline in coking coal input in the second column reflects the increasing injection of oil as the price of coking coal increases. It is immediately obvious from Table 1 that the economic relationship between fuel oil and coking coal is very different from that between fuel oil and steaming coal. Substitution of fuel oil for coking coal commences when the ratio of coal price to fuel oil price is about 0.7 and even though substitution continues (oil injection increases) as the coal price increases, at a coal price to fuel oil price ratio of almost two, coal continues to be a major input. H Although changes in price ratios since 1972 (particularly the increase in the relative price of fossil fuels) may have resulted in a change in the ratio of fuel inputs to pig iron output this should have no substantive effect on the change in coal input in relation to the change in the ratio of coking coal price to oil price. The figures in Table 1 indicate that the cross elasticity of demand for coking coal with respect to the price of fuel oil is low over a wide range of prices.~2 The own price elasticity of demand for coking coal will be greater than the elasticity indicated by the figures in
Table 1 since these figures take accounl only of the effect of substitutior between inputs. With an increase in the price of coking c0al, there will not onb be substitution between fuel inputs but also, because the supply curve for pig iron shifts to the left, substitution for the ouput. ~3 While the elasticity of demand for pig iron or for steel (or steel products) is not known, coking coal costs are not a large proportion of steel costs (around 30%) and an even smaller proportion of the cost of products which constitute final demand and for which steel is an input. Although the own price elasticity of demand for coking coal will be greater than the elasticity indicated by Table 1 it is still likely to be low over a wide range of prices. The lower limit of this range will, of course, be the price at which coking coal is a perfect substitute for oil in simple bulk heating applications. Since the early 1960s coking coal prices have been very much higher than oil prices per unit of heat. TM The finding that elasticity of demand for coking coal is low is based on the current state of the art and therefore may not hold in the long term. However, although the long run elasticity will certainly be greater than the elasticity indicated by this analysis, there is, as yet, no viable technology which avoids the use of coke in the blast furhace and elasticity should remain low for some time.
Conclusion Taking quality differentials into account, fuel oil is a good substitute for steaming coal at equivalent prices per unit of heat. On the other hand, fuel oil is a poor substitute for coking coal over a wide range of relative prices. While coking coal will be a good substitute for
Table 1. Approximate relationship between coking coal input and price Ratio of coking coal price to fuel oil price per unit heat
Coking coal input per unit mass of pig iron output
0.5 0.7 0.9 1.2 1,5 1.8
0.75 0.75 0.68 0.62 0.56 0.61
Source: Derived from data presented in papers in N. Standish, ed, Blast Furnace Injection, Australasian Institute of Mining and Metallurgy, Illawarra Branch, 1972; in particular, D. Schulz and D. Butler, 'The effect of oil injection on blast furnace process data'.
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C o m m u n i c a t i o n s on e n e r g y
steaming coal at equivalent prices per unit of heat (adjusted for quality differentials) the reverse is not the case; and since average coking coal prices are currently well above average steaming coal prices, at current prices coking coals and steaming coals are poor economic substitutes for each other.~5 It should be clear then, that there is a potential for misguided policymaking as long as in situ coal stocks are not classified on the basis of those characteristics which enable important quality distinctions to be made - in particular, the distinction between coal of coking quality and that of steaming quality. An in situ black coal stock which is composed primarily of coking coal is a very different resource base from a stock composed primarily of steaming quality coal. T.J.C. R o b i n s o n University o f Q u e e n s l a n d Queensland, A u s t r a l i a The pursuit of this topic has been made possible by a grant from the Australian Research Grants Committee. I wish t(y thank Professor H.M. Kolsen, Dr S.McL. Cochrane and Mrs B.A. Cuthbertson for their valuable comments on earlier drafts of this paper. 1See, for example, Federal Energy Administration, Project Independence Blueprint, Final Task Force Report - Coal, US Government Printing Office, Washington, 1974, Chapter II; An Energy Policy for Canada - Phase I, Information Canada, Ottawa, 1973, Volume II, Chapter 2B; Energy Prospects to 1985, OECD, Paris, 1974, Volume II, Annex 7A. When reserves are classified in some way it is common to find a geological ranking (from anthracitic to subbituminous) although a classification based on ease of mining (whether reserves can be won by surface or underground methods), which is essentially an economic classification, is sometimes employed. 2The importance of coking coal is illustrated by consumption figures for OECD countries which indicate that in 1 9 7 4 consumption of coal in coke ovens was 277 million tonnes or approximately 30% of total OECD hard coal consumption. See Statistics of Energy, 1960-1974, OECD, Paris, 1975, Table 1, p17. 3 See G.E. Edwards, 'Marketable Resources of Australian Coal', in A.C. Cook, ed, Australian Black Coal, Australasian Institute of Mining and Metallurgy, Illawarra Branch, 1975, p 85. Other quality determinants include friability, hardness and size. 41bid. Volatile matter content is one of
E N E R G Y POLICY March 1 9 7 9
the most important determinants of quality in coking coals. As an indication of the range of quality in coking coals, the highest fob contract price for Australian coking coal in early 1975 was over twice that of the lowest contract price. Queensland Government Mining Journal, February 1975, p 48. The fundamental technical difference between steaming and coking coals is that the latter wi[i 'cake' (form coke) when burned in an air free environment while the former will not. For a general discussion of coal quality, see G.L. Reid, K. Allen and D.J. Harris, The Nationalized Fuel Industries, Heinemann, London, 1973, pp 50-51 and H. Townshend-Rose, The British Coal Industry, George Allen and Unwin, London, 1951, Chapter 7. borne idea of the range of qualities can be gained from this description of the British National Coal Board's pricing structure: 'lThe price structure of the National Coal Board] sets out standard relative prices for coals of different physical qualities. There are seven such 'quality" grades for household coals ... and several thousand grades for all other types o f coals.' W.G. Shepherd, 'Crosssubsidization in Coal', in R. Turvey, ed, Public Enterprise, Pe ng u i n, Harmondsworth, 1968, p 320, emphasis in the original. Published prices for Australian coals (excepting contract prices for export coal) are available only on a district basis and are a weighted average for coals of differing quality supplied from a number of mines. SEven for the simplest bulk heating applications coal is an inferior fuel to oil and equilibrium coal prices will, ceteris paribus, always be lower than for oil on a heat basis. This is because both capital
and operating costs for coal fired plant are greater than for oil fired plant for any given level of capacity. 7See R.L. Gordon, The Evolution of Energy Policy in Western Europe, Praeger, New York, 1970, p 12 and L. Coche, 'Why i n j e c t i o n ? - Some facts and figures', in N. Standish, ed, Blast Furnace Injection, Australasian Institute of Mining and Metallurgy, Illawarra Branch, 1972, p1.1. The use of coke for smelting non ferrous ores is small and is not considered here. 8L. Coche, op cit, Ref 7, p1.1. Ceteris paribus, coke is preferred because it is a solid fuel. 9 Injection involves the addition of hydrocarbons to the top of the blast furnace while reduction is taking place. lo D. Schulz and D. Butler, 'The effect of oil injection on blast furnace process data', in N. Standish, op cit, Ref 7, p 17.7. ~1Table 1 shows that for a 2 6 0 % increase in the price of coal (from 0.5 to 1.8) there has been a reduction of coal input of approximately one third (from 0.75 to 0.51 ). 12 A reduction of coal input of approximately one third (from 0.75 to 0.51) is associated with a decrease in the relative price of oil of almost 75% (from 1/0.5 to 1/1.8). 13 As long as the elasticity of demand for the output is not zero. 14 See N. Standish, op cit, Ref 7. 15 Average fob export coking coal prices were approximately 60% greater than average export steaming coal prices per tonne in 1974- 75. This difference is much greater than the difference in average calorific value between these t w o types. See Joint Coal Board Annual Report, Sydney, Government Mining Journal, op cit, Ref 4.
South African coal- Challenge to Petrick findings T h e Petrick C o m m i s s i o n ' s coal r e s e r v e e s t i m a t e s f o r S o u t h A f r i c a led t o t h e p r e d i c t i o n in its r e p o r t t h a t o u t p u t w o u l d p e a k in a b o u t 5 0 years. S o m e r e c e n t shifts in p r i c i n g policy, e x p e c t e d d e v e l o p m e n t s in e x t r a c t i o n t e c h n o l o g y a n d a d d i t i o n s to r e s e r v e s s u g g e s t t h a t P e t r i c k ' s a s s e s s m e n t o f r e c o v e r a b l e reserves was too pessimistic.
Since the publication of the report of the Petrick Commission on South African coal resourcesJ there have been notable developments concerning South African coal. First, there has been a marked shift in official policy towards coal pricing, manifested by a new willingness to award regular increases in the (controlled) price of coal for the inland
market, and by a more generous basis of payment for coal sold to the statecontrolled E S C O M (Electricity Supply Commission) under long-term contracts with specific mines. Second, there has been a strong rise in coal exports through the new bulk terminal at Richards Bay in Natal, soon to attain an annual rate of 20 million
71
Since the so-called energy crisis there have been numerous appraisals of both national and world energy resources. Typically these stoektaking exercises have involved measurement of recoverable reserves of fossil fuels and uranium, given varying assumptions about the price of O P E C oil. In most cases the fossil fuel estimates include large quantities of black coal, but typically there is no distinction, within the black coal category, between eoking coal and steaming coal? Thus coking coal is treated simply as a source of heat, despite its use in metal manufacturing where it is more than just a heat source. All fossil fuels (and organic fuels such as timber and bagasse) have uses other than as simple sources of heat energy, but, as in the coal case, no distinction is usually made between reserves destined for heat generation and those destined for other uses - oil, for example, may be used for heating, for lubricants or as feedstock for petrochemical industries. This multiplicity of applications is not, of course, confined to mineral resources. For example, consider water reserves in a storage dam which are used both for irrigation and f o r reticulation to urban areas. Clearly there is no possibility of classifying a portion of these reserves as
E N E R G Y P O L I C Y March 1 9 7 9
suitable for one use and another portion suitable for an alternative use. In the case of black coal, however, a distinction can and should be made at the outset between coking coal and steaming coal. While the former can be a good technical substitute for the latter the reverse is not true, and furthermore at current prices coking coal and steaming coal are not good economic substitutes. 2 Although this discussion of the relationships between coking coal and steaming coal requires some discussion of price elasticities of demand for each coal type, this paper is not an attempt to estimate the price elasticities for coking coal or steaming
coal
Continuum of coal quality Black coal occurs in a continuum of qualities - from low quality subbituminous steaming coal to high quality low volatile coking coal. While there is much uninformed comment on the coal industry which fails to distinguish between coals of different types and qualities, particularly when coal prices are discussed, this paper goes but part of the way towards resolving the problems associated with variations in the characteristics of coals
by considering black coal as being composed of only two types - coking coal and steaming coal. However, it cannot be emphasized too much t h a t within each of these two types there lies a wide range of qualities. High quality steaming coal may have twice the calorific value (per unit mass) of the lowest marketable quality, while the level of impurities, including sulphur, ash and moisture may vary from 5% to 25%. 3 Marketable qualities of coking coal may have a volatile matter content ranging between 10 and 40%, and the range of other quality determinants, including impurities, is also extensive. 4 While the range of qualities within these two coal types and the lack of empirical data relating quality to price present difficulties for quantitative analysis of the relationship between coal prices and coal quality, a broad distinction should at least be made between steaming coal and coking coal. 5 This distinction may be best understood by discussing the economic relationship between fuel oil and each of these coal types.
Fuel oil and steaming coal Steaming coal performs only a single function, that of providing energy in the form of heat. The value of steaming coals will be related primarily to their heat value but will also depend on other quality determinants. For steaming coal of a given quality there will be a price per unit of heat at which bulk heat consumers will be indifferent between this coal and fuel oil of a given quality and price. In a competitive energy market in long run equilibrium the price of steaming coal will be equal to that of fuel oil on a heat basis after adjustment for quality differentials2 At this price the cross elasticity of demand for steaming coal with respect to the price of fuel oxl approaches infinity.
Fuel oil and coking coal Coking coal performs more than a simple heating function. Coke, which is derived from coking coal burned in an air free environment, performs three basic functions in manufacture of pig iron in the blast furnace: 7 •
it provides
a permeable physical
69
Communications on energy support to the charge of materials in the blast furnace; • it acts as a fuel to give heat; and finally, • it provides carbon which acts as a reducing agent. For none of these functions is coke necessary. Oil, steaming coal or natural gas combined with refractory materials could theoretically be used in its place, s Changes in the steelmaking process associated with the injection into the blast furnace of solid, liquid and gaseous fuels - although experimented with as early as last century - did not become common until the 1960s when the increasing price of coke relative to other fuels provided the motivation for perfecting injection techniques. 9 Injection of solid, liquid or gaseous fuels into the blast furnace allows a reduction of the ratio (by mass) of coke to pig iron produced (the coke rate). The most commonly injected fuel is oil, and a discussion of the effect of increasing the rate of oil injection on the economics of blast furnace operation will indicate the economic relationship between fuel oil and coke. When small quantities of oil are injected into the blast furnace the coke rate falls and the amount of heat energy required per unit mass of pig iron output also falls. As the injection rate increases the amount of heat required per unit mass of pig iron output continues to fall, but at a decreasing rate. However, injected oil performs only heating and reducing functions and as the coke rate falls, physical support for the charge of materials in the furnace declines and blast furnace capacity is reduced. This reduction in capacity occurs at an increasing rate as the injection rate increases. If the ratio of fuel oil to coke prices, when taken with other factor prices, indicates that the commencement of oil injection will be profitable, then as injection is increased the steelmaker will be faced with a trade off between declining fuel costs and increasing capital costs per unit of pig iron output. For a given ratio of fuel oil prices to coke prices there will, ceteris paribus, be a unique i-atio of fuel oil to coke inputs which minimizes costs. 1° If this is so it must also be the case for a given ratio of fuel oil prices to coking coal prices.
technically
70
Effect o f price on coking coal input Holding all factor prices constant except for the price of coking coal, the physical quantity of coking coal input demanded per unit output of pig iron can be expressed as a function of the price of coking coal or, using the price of fuel oil as the numeraire, as a function of the ratio of the price per unit heat of coking coal to the price per unit heat of fuel oil. This functional relationship is expressed in Table 1. The decline in coking coal input in the second column reflects the increasing injection of oil as the price of coking coal increases. It is immediately obvious from Table 1 that the economic relationship between fuel oil and coking coal is very different from that between fuel oil and steaming coal. Substitution of fuel oil for coking coal commences when the ratio of coal price to fuel oil price is about 0.7 and even though substitution continues (oil injection increases) as the coal price increases, at a coal price to fuel oil price ratio of almost two, coal continues to be a major input. H Although changes in price ratios since 1972 (particularly the increase in the relative price of fossil fuels) may have resulted in a change in the ratio of fuel inputs to pig iron output this should have no substantive effect on the change in coal input in relation to the change in the ratio of coking coal price to oil price. The figures in Table 1 indicate that the cross elasticity of demand for coking coal with respect to the price of fuel oil is low over a wide range of prices.~2 The own price elasticity of demand for coking coal will be greater than the elasticity indicated by the figures in
Table 1 since these figures take accounl only of the effect of substitutior between inputs. With an increase in the price of coking c0al, there will not onb be substitution between fuel inputs but also, because the supply curve for pig iron shifts to the left, substitution for the ouput. ~3 While the elasticity of demand for pig iron or for steel (or steel products) is not known, coking coal costs are not a large proportion of steel costs (around 30%) and an even smaller proportion of the cost of products which constitute final demand and for which steel is an input. Although the own price elasticity of demand for coking coal will be greater than the elasticity indicated by Table 1 it is still likely to be low over a wide range of prices. The lower limit of this range will, of course, be the price at which coking coal is a perfect substitute for oil in simple bulk heating applications. Since the early 1960s coking coal prices have been very much higher than oil prices per unit of heat. TM The finding that elasticity of demand for coking coal is low is based on the current state of the art and therefore may not hold in the long term. However, although the long run elasticity will certainly be greater than the elasticity indicated by this analysis, there is, as yet, no viable technology which avoids the use of coke in the blast furhace and elasticity should remain low for some time.
Conclusion Taking quality differentials into account, fuel oil is a good substitute for steaming coal at equivalent prices per unit of heat. On the other hand, fuel oil is a poor substitute for coking coal over a wide range of relative prices. While coking coal will be a good substitute for
Table 1. Approximate relationship between coking coal input and price Ratio of coking coal price to fuel oil price per unit heat
Coking coal input per unit mass of pig iron output
0.5 0.7 0.9 1.2 1,5 1.8
0.75 0.75 0.68 0.62 0.56 0.61
Source: Derived from data presented in papers in N. Standish, ed, Blast Furnace Injection, Australasian Institute of Mining and Metallurgy, Illawarra Branch, 1972; in particular, D. Schulz and D. Butler, 'The effect of oil injection on blast furnace process data'.
ENERGY
POLICY
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1979
C o m m u n i c a t i o n s on e n e r g y
steaming coal at equivalent prices per unit of heat (adjusted for quality differentials) the reverse is not the case; and since average coking coal prices are currently well above average steaming coal prices, at current prices coking coals and steaming coals are poor economic substitutes for each other.~5 It should be clear then, that there is a potential for misguided policymaking as long as in situ coal stocks are not classified on the basis of those characteristics which enable important quality distinctions to be made - in particular, the distinction between coal of coking quality and that of steaming quality. An in situ black coal stock which is composed primarily of coking coal is a very different resource base from a stock composed primarily of steaming quality coal. T.J.C. R o b i n s o n University o f Q u e e n s l a n d Queensland, A u s t r a l i a The pursuit of this topic has been made possible by a grant from the Australian Research Grants Committee. I wish t(y thank Professor H.M. Kolsen, Dr S.McL. Cochrane and Mrs B.A. Cuthbertson for their valuable comments on earlier drafts of this paper. 1See, for example, Federal Energy Administration, Project Independence Blueprint, Final Task Force Report - Coal, US Government Printing Office, Washington, 1974, Chapter II; An Energy Policy for Canada - Phase I, Information Canada, Ottawa, 1973, Volume II, Chapter 2B; Energy Prospects to 1985, OECD, Paris, 1974, Volume II, Annex 7A. When reserves are classified in some way it is common to find a geological ranking (from anthracitic to subbituminous) although a classification based on ease of mining (whether reserves can be won by surface or underground methods), which is essentially an economic classification, is sometimes employed. 2The importance of coking coal is illustrated by consumption figures for OECD countries which indicate that in 1 9 7 4 consumption of coal in coke ovens was 277 million tonnes or approximately 30% of total OECD hard coal consumption. See Statistics of Energy, 1960-1974, OECD, Paris, 1975, Table 1, p17. 3 See G.E. Edwards, 'Marketable Resources of Australian Coal', in A.C. Cook, ed, Australian Black Coal, Australasian Institute of Mining and Metallurgy, Illawarra Branch, 1975, p 85. Other quality determinants include friability, hardness and size. 41bid. Volatile matter content is one of
E N E R G Y POLICY March 1 9 7 9
the most important determinants of quality in coking coals. As an indication of the range of quality in coking coals, the highest fob contract price for Australian coking coal in early 1975 was over twice that of the lowest contract price. Queensland Government Mining Journal, February 1975, p 48. The fundamental technical difference between steaming and coking coals is that the latter wi[i 'cake' (form coke) when burned in an air free environment while the former will not. For a general discussion of coal quality, see G.L. Reid, K. Allen and D.J. Harris, The Nationalized Fuel Industries, Heinemann, London, 1973, pp 50-51 and H. Townshend-Rose, The British Coal Industry, George Allen and Unwin, London, 1951, Chapter 7. borne idea of the range of qualities can be gained from this description of the British National Coal Board's pricing structure: 'lThe price structure of the National Coal Board] sets out standard relative prices for coals of different physical qualities. There are seven such 'quality" grades for household coals ... and several thousand grades for all other types o f coals.' W.G. Shepherd, 'Crosssubsidization in Coal', in R. Turvey, ed, Public Enterprise, Pe ng u i n, Harmondsworth, 1968, p 320, emphasis in the original. Published prices for Australian coals (excepting contract prices for export coal) are available only on a district basis and are a weighted average for coals of differing quality supplied from a number of mines. SEven for the simplest bulk heating applications coal is an inferior fuel to oil and equilibrium coal prices will, ceteris paribus, always be lower than for oil on a heat basis. This is because both capital
and operating costs for coal fired plant are greater than for oil fired plant for any given level of capacity. 7See R.L. Gordon, The Evolution of Energy Policy in Western Europe, Praeger, New York, 1970, p 12 and L. Coche, 'Why i n j e c t i o n ? - Some facts and figures', in N. Standish, ed, Blast Furnace Injection, Australasian Institute of Mining and Metallurgy, Illawarra Branch, 1972, p1.1. The use of coke for smelting non ferrous ores is small and is not considered here. 8L. Coche, op cit, Ref 7, p1.1. Ceteris paribus, coke is preferred because it is a solid fuel. 9 Injection involves the addition of hydrocarbons to the top of the blast furnace while reduction is taking place. lo D. Schulz and D. Butler, 'The effect of oil injection on blast furnace process data', in N. Standish, op cit, Ref 7, p 17.7. ~1Table 1 shows that for a 2 6 0 % increase in the price of coal (from 0.5 to 1.8) there has been a reduction of coal input of approximately one third (from 0.75 to 0.51 ). 12 A reduction of coal input of approximately one third (from 0.75 to 0.51) is associated with a decrease in the relative price of oil of almost 75% (from 1/0.5 to 1/1.8). 13 As long as the elasticity of demand for the output is not zero. 14 See N. Standish, op cit, Ref 7. 15 Average fob export coking coal prices were approximately 60% greater than average export steaming coal prices per tonne in 1974- 75. This difference is much greater than the difference in average calorific value between these t w o types. See Joint Coal Board Annual Report, Sydney, Government Mining Journal, op cit, Ref 4.
South African coal- Challenge to Petrick findings T h e Petrick C o m m i s s i o n ' s coal r e s e r v e e s t i m a t e s f o r S o u t h A f r i c a led t o t h e p r e d i c t i o n in its r e p o r t t h a t o u t p u t w o u l d p e a k in a b o u t 5 0 years. S o m e r e c e n t shifts in p r i c i n g policy, e x p e c t e d d e v e l o p m e n t s in e x t r a c t i o n t e c h n o l o g y a n d a d d i t i o n s to r e s e r v e s s u g g e s t t h a t P e t r i c k ' s a s s e s s m e n t o f r e c o v e r a b l e reserves was too pessimistic.
Since the publication of the report of the Petrick Commission on South African coal resourcesJ there have been notable developments concerning South African coal. First, there has been a marked shift in official policy towards coal pricing, manifested by a new willingness to award regular increases in the (controlled) price of coal for the inland
market, and by a more generous basis of payment for coal sold to the statecontrolled E S C O M (Electricity Supply Commission) under long-term contracts with specific mines. Second, there has been a strong rise in coal exports through the new bulk terminal at Richards Bay in Natal, soon to attain an annual rate of 20 million
71