Global market outlook for coking coal

Prepared for:

Assochams coal conference 2011

3rd February 2011

Manish Pande
LONDON | BEIJING | SANTIAGO | SEATTLE | SYDNEY | RIO DE JANEIRO | PITTSBURGH | MUMBAI
31 Mount Pleasant, London WC1X 0AD UK Tel: +44 20 7903 2000 Fax: +44 20 7278 0003 517, Tower 2, Bright China Chan An Building, 7 Jianguomennei Avenue, Beijing 100005, China Tel: +86 10 6510 2206 Fax: +86 10 6510 2207 www.crustrategies.com Augusto Legua Norte N 100 of.506, Las Condes, Santiago, Chile Tel: +56 2 231 3900 Fax: +56 2 231 4314 PO Box 1269, Langley, WA 98260 USA Tel: +1 360 321 4707 Fax: +1 360 3214709 2000 Corporate Drive, Suite 200, Wexford, PA 15090, USA Tel: +1 724 940 7100 Fax: +1 724 940 4488 Level 2, Kalpataru Synergy, Opp. Grand Hyatt, Santa Cruz (East), Mumbai 400055, INDIA Tel: +91 22 3953 7395 Fax: +91 22 3953 7200

Regional Director, India CRU International

Agenda 1. Demand-side developments 2. Metallurgical Coal 3. Forecast

Global steel production towards year-end remained below its recent peak
Global steel production, (m tonnes) 140 Rest of the World 120 100 80 60 40 20 0 China

Data: World Steel Association

but has maintained modest year-on-year growth

Year-on-year change in global steel production
40% 30% 20% 10% 0% -10% -20% -30%
J A 2005 J O J A 2006 J O J A 2007 J O J A 2008 J O J A 2009 J O J A 2010 J O

Data: World Steel Association

and 2010 is set to be a record year for steel production

Crude steel production, Global
20% 1400 1200 1000

15%

y-on-y % change

10%

800
5% 600 0% 400 -5% 200

-10%
2003
Data: CRU Strategies

0
2004 2005 2006 2007 2008 2009 2010e

m tonnes

Steel prices remain somewhat elevated, but have underperformed raw material costs
CRU Steel Price Index, Raw Materials Index, Global 2007-2010, (Q1 2007=100)
250 Raw Materials index 200 150 100 50 0
2007 Data: CRU Strategies 2008 2009 2010

CRUspi

CRUspi : The weighted average of steel prices in Europe, Asia and North America Raw Materials Index is a weighted average of iron ore, coal, coke, scrap and freight

However elevated cost pressures will make steelmakers to deal with thin margins
Global average integrated route HRC operating costs and HRC price, $/t
Other Quasi-fixed Reductants Other Variable Costs Iron Ore Electricity and Energy HRC price Metallics

1,000 800

30%
600 400 200 0

15%

2007

2008

2009

2010f

2011f
7

Data: CRU Analysis, Hot Strip Costs Model 2010

The key drivers of real demand remain fundamentally weak in the developed economies
Industrial Production (IP), index Q1 2007 = 100
120
USA Japan EU-27 World

110 100 90 80 70 60

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2f Q3f Q4f Q1f Q2f Q3f Q4f

2007 2008 2009 2010 2011

Data: OE, CRU Strategies

but further out, the prognosis is bullish, as India and China both at relatively early stages of their development
GDP of selected countries, 2008 14 12 US$ trillions 10
2008 population, millions

1,500 1,000 500

India EU Latin America

6 4 2 0

Data: CRU Strategies, Note that figures are in real 2005 US dollars

North America

China

Steel intensity per capita grows strongly when a country becomes wealthier
X-axis: 2010 GDP/capita, US$000(1), Y-axis: 2010 Apparent finished steel consumption/capita, kg Bubble area proportional to 2010 apparent finished steel consumption
1,200
South Korea

1,000 800 600 400 200 0 0

India
Russia

China Taiwan Saudi Arabia Italy Spain UK France Japan Germany

Canada

Turkey
Russia Brazil

USA

10

15

20

25

30

35

40

45

50
10

Data: International Monetary Fund, CRU Strategies. Note: (1) current prices.

10

While urbanisation in China (and India) has a way to go

% urban 100 90
Brazil Japan UK Netherlands

S.Korea
Spain Russia France Germany

80 70 60 50 40 30 20 10 0 0 5 10 15 20
Vietnam Philippines Indonesia Thailand Malaysia

USA

'Line of best fit' R2 = 0.6093

Taiwan

Italy

China
India

US$'000s/capita (PPP, 2005) 25 30 35 40 45 50 55 60 65 70 75

Data: NBS, Japan Statistics Bureau, Taiwan National Statistics, UN, ICP, CRU Strategies

Therefore the longer-term potential for growth in Chinese steel consumption remains high
Per capita crude steel equivalent consumption kg/head
Shanghai Tianjin Beijing Jiangsu Zhejiang Guangdong Inner Mongolia Shandong Liaoning Fujian Jilin Hebei Hubei Heilongjiang Henan Chongqing Hunan Xinjiang Shaanxi Sichuan Qinghai Ningxia Jiangxi Guangxi Anhui Shanxi Hainan Tibet Yunnan Gansu Guizhou

Regional Kg/head 2009 Forecast national average 610 2020 = 794kg/head 341 Coastal Central

258

Western

Regional Kg/head 2020 1000 700 Coastal Central

National average 2009 = 430kg/head

600

Western

100

200

300

400

500

600

700

800

900

1000

1100

1200

Source: CRU China

On that basis, steel production growth may moderate, but remain significant
Crude Steel Production, 2006-2015
20% 2000

15%

China other % growth y-oy

1800 1600 1400 1200

10%

m tonnes

% change y-o-y

5%

1000

800
0% 600 400 200 -10% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 0

-5%

Data: GTIS, CRU Strategies

In summary
Near-term steel demand trends turned bearish at year-end as
economic indicators weaken, though production remains in growth territory

Prices remain elevated by historical standards but this reflects

contrasting forces weak demand offset by rising cost pressures as raw material costs have outperformed steel prices.

Steel demand and production is likely to maintain slow recovery into

2011 in the developed economies while growth should accelerate in emerging economies.

The medium-term expectation is for continued strong growth in crude

steel output, with China and India the principal drivers.

Agenda 1. Demand-side developments 2. Metallurgical Coal 3. Forecast

Coking coal supply has surged to record levels, though H2 saw shipments cool in line with steel cutbacks
Metallurgical coal exports, selected countries, 2008-2010 80
Russia Canada USA Australia

70 60 50
m tonnes

40 30 20 10 0 Q1 Q2 2008 Q3 Q4 Q1 Q2 2009 Q3 Q4 Q1 Q2 2010 Q3 Q4f

16

Data: GTIS, CRU Strategies. (f) denotes forecast

And Australian hard coking coal exports also touched new highs, despite no major capacity additions
Annual exports of hard coking coal, Australia, 2000-2010, m tonnes
120 100 80 60 40 20 0 2000
Data: GTIS

+ 18%

2001

2002

2003

2004

2005

2006

2007

2008

2009 2010 (f)

17

Even before flooding ensued, a wet December had led Queensland production and shipments lower at year-end
Coal throughput, port of Hay Point coal terminals, Nov 2009-Dec 2010 7 6 5
m tonnes

Hay Point

Dalrymple Bay

4 3 2 1 0

Data: North Queensland Bulk Ports Corporation

18

But the coal supply will be severely constrained through the first half of 2011 and beyond as flooding in Queensland has taken tonnage out of the market
Company Queensland met coal mines affected
Peak Downs, Norwich Park, Goonyella Riverside, Blackwater Hail Creek, Kestrel Dawson, German Creek, Foxleigh, Moranbah North Burton, Millennium, North Goonyella, Eaglefield Oaky Creek Broadlea, Carborough Downs, Isaac Plains Curragh Jellinbah, Lake Vermont Moorvale, Coppabella Baralaba HCC, WCC, PCI HCC, WCC HCC, WCC, PCI HCC, WCC, PCI HCC HCC, WCC, PCI HCC, WCC, PCI HCC, WCC, PCI PCI PCI

Weekly production (tonnes)

690,000 220,000 380,000 200,000 140,000 120,000 130,000 83,000 90,000 10,000 2,063,000

BHP Billiton Rio Tinto Anglo Coal Peabody Xstrata Vale Wesfarmers Jellinbah Macarthur Coal Cockatoo Coal Total:

19

And rail suspensions and mine outages have have led port shipments to fall drastically below capacity
Coal throughput, Gladstone Port, Dec 2010-Jan 2011
1.6

Coal loading
1.4 1.2 m tonnes 1

Coal arrivals

2010 Average Weekly Exports 0.8 0.6 0.4 0.2 0

13/12

20/12

27/12

03/01

10/01

17/01
20

Data: Gladstone Port Authority

2011: Assessing the Queensland situation

We expect that for most of January, rail outages led exports per week to average around 60% of usual throughput from late December until the week beginning January 23. From our calculations, a worst case figure for lost met coal supply totals around 12m tonnes. However, taking into account announced recovery timetables and market intelligence, we estimate total losses will be just over 9.5m tonnes

While shipments should recover by the end of Q1, the pinch created will be felt in prices throughout the year as was the case in 2008. This is assuming that there is no renewed flooding, which is not out of the question.
Though the amount of damage done in 2010 is much greater, we believe that the industrys response has been more robust and production levels will return but with no new capacity coming on-stream, suppliers will have difficulty making up lost tonnage. Therefore a massive increase in exports from elsewhere, notably the US, will again be needed to keep the market in its precarious balance.

21

Exports out of US reached levels last seen in the 1990s.

Annual exports of met coal, USA, 1992-2010, m tonnes
60 50 40 30 20 10 0

2003

2007

Data: GTIS

22

2010 (f)

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2004

2005

2006

2008

2009

Prices supported by another strong year for Chinese imports Monthly coking coal imports to China, m tonnes
120% 100% 5000 80% YoY percentage change 60% 40% 3000 20% 0% -20% 2000 4000 000 tonnes 6000

1000
-40% -60% 0

23

as the coal industry consolidation in China is still ongoing across the country
List of known consolidation efforts, targets, Chinese coal mines, to 2015
No. of mines before consolidation

Province

No. of mines in 2010

1,053 (producing above 1mtpy) 6 majors

2015
800 majors (producing above 1.2mtpy)

Shanxi Henan Inner Mongolia Hebei Shaanxi Heilongjia ng Sichuan China Total

4,237 1,670

1,165 349

350 60 600

180

400(above 1mt/mine/year)

1,252 1,337 15,000

860 1,300 10,000 4,000

Data: CRU Strategies, Shanxi Coking Coal Group

24

Indian met coal imports appear set for massive year-on-year growth
Monthly imports of metallurgical coal, India, 2007-Dec 2010
4.5
4.0 3.5
m tonnes

2007

2008

2009

2010

3.0 2.5 2.0 1.5 1.0 0.5 0.0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
25

Data: GTIS, CRU Analysis, Note: Indian imports are calculated from combined Australian and US metallurgical coal export data

Agenda 1. Demand-side developments 2. Metallurgical Coal 3. Forecast

India is expected to constitute the principal source of new demand through new capacity addition
Indian crude steel production by process, mt

BOF 120 100 80 60 40 20 0 2007

Data: CRU Analysis

EAF

2008

2009

2010

2011

2012

2013

2014

2015
27

which will almost certainly mean upside to coking coal prices in 2011
Quarterly average spot prices (2007-Q2-2010) and quarterly benchmark prices (from Q2-2010) for hard coking coal, fob Australia
450
400 350
$/tonne

300
250 200

150
100 50

2007
Data: CRU Analysis

2008

2009

2010

2011

2012 28

Hard coking coal supply will remain tight, as very little new capacity is in the pipeline for the next two years
Exports of hard coking coal, 2006-2012, m tonnes Australia
300
4.5%

Russia

Canada

US

Other

250 200 M tonnes 150

100
50 0 2011 2012 2013 2014 2015
29

Global sea-borne trade to witness 4% growth in 2011.

Estimated y-on-y change in global met coal trade, 2005-2011, m tonnes
60

Origin

2010

2011 (f)

change

50
40 30
Total
of which: Australia 154.7 51.0 28.1 17.9 10.5 145.1 57.2 30.6 21.8 10.8 -6.2% +12% +9% +18% +3%

276.3

287.6

+4.1%

m tonnes

20
USA

10 0 -10 -20

Canada Russia Mongolia

2005 2006 2007 2008 2009 2010 2011 Additional tonnage needed to offset Australias loss 30 Data: CRU Analysis

However the ability to increase exports from other seaborne suppliers is limited.
Forecast share of global trade in coking coal
Global hard coking coal market (%) Other 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Australia USA Canada

Data: CRU Analysis

31

But there are no perfect solutions for supply

A picture of current and future supply sources hard coking coal

Russia (Kuzbass)
Quality questionable. Will continue to struggle with transport limitations, and focus on domestic market Western Canada High cost to develop, run coal operations Poland, Eastern Europe Deep reserves, poor geology, increased local demand. Western Ukraine Size and quality of deposits largely unknown Mongolia

Siberia (Elga deposit) Infrastructure lacking, transport costly, and export capacity uncertain

Appalachia

Dwindling base of quality reserves, high operating costs, decreasing yields, increased regulation

Political risks, no infrastructure, and limited seaborne export options Indonesia Limited current production. Development of hard coal deposits has proven difficult logistically

Mozambique Primary seaborne supply sources Other important suppliers Prospective major projects Good reserves and mining conditions, but limited infrastructure, and high ash

Central Queensland Costs rising, fewer development opportunities though substantial reserve base remains

32

This precarious balance has been reflected in strong prices

Hard coking coal: Contract and spot prices, June 2007 to October 2010
400 350 YoY percentage change 300 250 200 150 100 50 0
Jan Feb Mar Apr May Jun July Aug Sept Oct Nov Dec Jan Feb Mar Apr May Jun July Aug Sept Oct Nov Dec Jan 2009 2010

33

..coking coal price Outlook 2015

Hard Coking Coal PCI

300
250

US$ per tonne

200 150 100

50
0 2010 2011 2012 2013 2014 2015
34

Key points
China remains a sizeable importer of coking coal, and is playing a
significant role in global pricing. This should also continue, though Chinese domestic supply potential is uncertain.

Supply tightness at the top end of the market has kept prices firm, even
ahead of recent flooding in Queensland. This constant risk of supply shocks should persist beyond 2011 until Australias supply situation improves

India is the other major growth market, and all BOF steel production
increases there will require imported met coal

Substantial new seaborne supply in coking coal is only expected from

2013 and beyond and in the meantime US swing exports will be required to keep the market in balance

There are no ideal sources of substantial new coking coal supply