rory simington, wood mackenzie - an overview of current coal market conditions

Trusted commercial intelligence www.woodmac.com

The coal market, margins and project economics

Kalimantan Coal Conference,

Balikpapan, 1 September 2014


2

About us

We are a global leader in commercial intelligence for the energy, metals

and mining industries

We use a foundation of proprietary data and models to analyse, value

and advise on assets, companies and markets

Our experienced sector teams are based around the world and are

closely connected with their clients and markets

We have been a trusted source of knowledge and forward-looking insight for over 40 years

Our insight helps clients to identify new opportunities, define strategy,

and improve their performance


3

Agenda

1. The state of today’s thermal coal market and how we got here

2. The future for the thermal coal market

3. Cost developments - Indonesia in context

4. Indonesian project economics – how do they stack up?

5. Conclusion


4

Agenda





5. Conclusion


5

Prices traditionally found their floor at the 90th percentile of

cost

Supply availability perpetuated by market-

distorting supply and infrastructure

contracts and debt servicing requirements

» Less costly to produce and sell at a

loss than to rationalise production

» Producers increasing production to

reduce unit costs and maintain cash

flow

Weak underlying demand in China

» Slower power demand growth

» Stronger hydro generation

» Credit tightening

» Anti-pollution measures

» Aggressive domestic pricing strategies

from major producers

Thermal spot price versus 90th percentile cost

Source: Wood Mackenzie Coal Market Service, Coal Supply Service

But thermal margins have been under pressure for a sustained period of time

$0

$30

$60

$90

$120

$150

$180

2000 2002 2004 2006 2008 2010 2012 2014 F

US

$/t

onn

e (

FO

B P

ort

)

90th percentile costNewcastle spot priceNewcastle spot price forecast


6

Supply rationalisation has occurred

However has been offset by production increases elsewhere

Announced global thermal production cuts 2014

Source: Wood Mackenzie Coal Supply & Markets Service

however export supply expansion is still expected

345

390412

280

320

360

400

440

2012 2013 2014 (f)

mil

lio

n t

on

ne

s

Indonesia thermal exports

173

187197

150

160

170

180

190

200

2012 2013 2014 (f)

mil

lio

n t

on

nes

Australia thermal exports

Company Region / Basin Mines Mt

Alpha Natural Resources PRB, Appalachia Various 1.9

Arch Coal PRB, Appalachia Various 1.8

Banpu/Centennial Australia (NSW) Newstan Lochiel 0.1

Bayan Resources Indonesia Various 0.2

China Coal Group China Various 20.0

Cloud Peak Energy PRB Various 1.8

Coal River Mining Central Appalachia Various 0.3

Glencore Australia (Queensland) Newlands Northern 0.6

Glencore Australia (Queensland) Newlands surface 0.6

Hallador ILB 0.1

Harum Energy Indonesia Various 3.8

James River CAPP Various 1.8

Mechel CAPP Bluestone 0.6

Oxbow West Bit Elk Creek 0.4

Oxford ILB 0.7

Patriot Coal Appalachia Various 0.5

Peabody Energy Corp PRB Various 2.3

Shenhua China Various 50.0

Springfield ILB 0.8

Vale Australia (NSW) Integra surface + u/g 0.1

Yancoal Australia Duralie/Stratford 0.3

- no company - China Various/other 29.0

Total 117.7


7

Weaker Chinese demand the key driver for price

weakness While demand has continued to grow: total thermal volume 961 Mt (+7.1% y-o-y) in

2013, Chinese demand growth has slowed

Source: Wood Mackenzie Coal Supply & Markets Service

… and with Chinese imports now >25% of global seaborne trade prices heavily impacted

China’s underlying demand growth has slowed …

0%

5%

10%

15%

20%

25%

30%

0

200

400

600

800

1000

1200

Mtp

a

China Thermal Seaborne Imports

Global Thermal Seaborne Imports

China % Thermal Seaborne Imports


8

Agenda





5. Conclusion


9

“Slower not lower” growth dominates drivers of coal demand

over five year time horizon

Source: Wood Mackenzie MacroEconomics

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

GD

P %

Y-o

-Y

China India Japan Europe

-8%

-4%

0%

4%

8%

12%

16%

2001 2003 2005 2007 2009 2011 2013 2015 2017

Po

we

rGe

n %

Y-o

-Y

PowerGen % China PowerGen % India

PowerGen % Japan PowerGen % Europe

Lower phase of growth: Chinese GDP revised downwards ~0.6% pa

PowerGen growth significantly reduced


10

Coal-fired generation capacity to grow strongly in Asia over

the longer term despite losing share to renewables, nuclear

and gas

China – an additional 858GW at 3% CAGR India - an additional 243GW at 5% CAGR


11

Coal facing headwinds in China with coastal demand flat – but

imports will keep growing

Air pollution concerns: APPCAP released in Sept 2013:

» Rapid coal->gas switching targeted for captive plants

in urban centres and industrial provinces by 2017 (total

cons.190 Mt)

» Likely to be challenging given economics and gas

supply availability

The APPC Energy policy was released in May 2014:

» appears to opt for alternates and concentrate on

emissions control tightening

» i.e. continue to burn coal but more cleanly through

IGCC technology

Potential lignite / high sulphur / high ash ban: Does it

matter to the market?

» A trial ban operating in Fujian province

» Minimum energy contents of 2870nar (lignite) and 3587nar

(other thermal)

» For coals transported over 600km 3946nar (lignite) and

4305nar (other thermal)

» <5Mt impact on imported coal

Coal demand in coastal regions to remain flat to 2020

» Shift in industrial activity to central and west regions will limit

growth in coal demand

» However imports remain competitive and demand will

increase with import dependence increasing from 19% this

year to 50% by 2035

Chinese power demand economics do not support a simple switch from coal to gas

Source: Wood Mackenzie

0

2

4

6

8

10

12

14

16

18

20

13

pri

ce

s (

US

$/m

mb

tu)

Coal price Natural gas price


12

Coal demand growth continues longer term to meet energy demand –

dominated by Asia Pacific

Source: Wood Mackenzie Coal Market Service

Global thermal coal demand for power generation by region (Mt)

Global thermal coal demand for non-power by region (Mt)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2008 2014 2020 2026 2032

Mt

EMEA Russia and FSU Americas Asia Pacific

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2008 2014 2020 2026 2032

Mt

EMEA Russia and FSU Americas Asia Pacific


13

Chronic overcapacity in seaborne markets will continue to

weigh on prices… but prices will recover as newer, costlier

projects required

Source: Wood Mackenzie Coal Markets Service

Supply by mine status versus seaborne demand (Mt) Supply gap versus Newcastle market price

0

500

1,000

1,500

2,000

2,500

2014 2017 2020 2023 2026 2029 2032 2035

Mt

Probable + possible capacityHighly probable capacityOperating capacitySeaborne demand

0

20

40

60

80

100

120

140

-1,000

-800

-600

-400

-200

0

200

400

2014 2017 2020 2023 2026 2029 2032 2035

New

castl

e m

ark

et

pri

ce,

real

2014U

S$/t

Mt

Seaborne demand vs operating + highlyprobable capacity

Newcastle market price


14

Agenda





5. Conclusion


15

Costs and prices are strongly correlated

Indonesian weighted average thermal costs, prices and margins


16

Key cost trends

Indonesian weighted average thermal export cash costs

Mining costs 43%

of total cash costs

in 2004

Mining costs 62%

of total cash costs

in 2013


17

Weighted average thermal export cash costs

Thermal coal cost reductions

Significant reductions in 2013, slowing in 2014


18

Weighted average strip ratio Contractor margins have come down

Physicals and unit costs have played their parts in mining

cost reductions

Source: Wood Mackenzie Coal Global Economic Model


19

Margins for Indonesian thermal exporters are under pressure

at current prices

Export thermal coal margins, US$69/tonne


-40

-30

-20

-10

0

10

20

30

40

0 50 100 150 200 250 300 350

marg

in U

S $

/t

million tonnesSource: Wood Mackenzie


20

The situation for the broader export market is

very similar

Export thermal coal margins, US$69/tonne


21

Over 60% of China’s thermal production is at negative margin

Thermal coal margins, US$77/tonne

-250

-200

-150

-100

-50

0

50

100

150

200

0.0 0.4 0.8 1.2 1.6 2.0 2.4 2.8 3.2

CN

Y /

tp

a

Billion tonnes

Other mines KSOE

Lu

an

Pin

gd

ing

sh

an

Inn

er

Mo

ng

oli

a H

ou

lin

he

Sh

en

hu

a_

Ord

os

U

G

Ch

ina

Co

al_

Sh

an

xi N

ort

h

Su

rfac

e

Sh

en

hu

a_

Ord

os

O

P


Small mines will exit the market on cashflow difficulties, supporting price recovery


22

216 Mt

11 Mt

Source: Wood Mackenzie Coal Market Service

Majority of China’s seaborne imports are consumed in the coastal region

Seaborne thermal coal trade flows into China (2014)


23

Competitive positioning into the Chinese coastal market is key

and imported coal is the cheapest

Export thermal and Chinese domestic supply cost curve cfr China coastal

1.2bt coastal

demand

US$80/t cfr China


24

Under a low demand scenario for thermal coal into Coastal China

Volume of lowest cost source of supply to meet demand (Mt)

Source: Wood Mackenzie Coal Supply Service, Coal Markets Service

Both supply sources will be displaced

Base case demand Low demand scenario (25% lower)

0

200

400

600

800

1,000

1,200

1,400

China ROW Base casedemand

Mill

ion

to

nn

es

-23%

-28%

-25% 0

200

400

600

800

1,000

1,200

1,400

China ROW Low casedemand

Mill

ion

to

nn

es


26

global thermal coal projects NPV at 15% discount rate

Indonesian projects broadly NPV positive and low capital

intensity

Terra

Energy’s

South Gobi

(SCC) $97/t


27

Incentive price for global thermal coal projects at 15% IRR

Committing to new projects will be more difficult….

Prices will need to increase significantly to incentivise further thermal coal investment

particularly for Australian projects

Terra

Energy’s

South Gobi

(SCC) $97/t

July 2014 spot price US$69/t fob

GVK’s

Alpha $113/t

PTBA’s Banko

Tengah $58/t

Bumi’s Fajar

Bumi Sakti $85/t

Bumi’s Pendopo

Energi Batubara

$108/t

Monnet Group’s

Sarwa Sembada

Karyabumi $108/t


28

Agenda

1. The current market and how we got here

2. Cost developments - Indonesian margins in context


4. Longer term implications for coal markets

5. Conclusion


29

Conclusion

Strong supply expansion and weaker demand growth in China have the

main drivers of current market weakness

Indonesian costs have fallen 13% since 2012 but margins still

squeezed due to lower prices

Additional supply will be required to satisfy demand after 2019

Significantly higher prices will be required to incentivise new

greenfield capacity

Despite initiatives to move away from coal in major consumers

including China, long term demand growth is strong

rory simington, wood mackenzie - an overview of current coal market conditions

News & Politics

thermal coal market3

china coal group china

comthe coal market

arch coal prb

shenhua china various

drivers of coal demandover

chinese demand growth

total thermal volume