Risk Analysis of current and future Coal Imports of Germany

Felix P. Lehnen

RWTH Aachen University, Institute of Mining Engineering I (BBK I)

Per N. Martens

RWTH Aachen University, Institute of Mining Engineering I (BBK I)

Tobias Katz

RWTH Aachen University, Institute of Mining Engineering I (BBK I)

Sebastian Janssen

RWTH Aachen University, Institute of Mining Engineering I (BBK I)

Abstract

In 2018, Germany will abandon its subsidized domestic hard coal mining. Accordingly, the German
coal imports are becoming more important as the demand for hard coal will continue after the phase-
out of domestic production. The demand is even expected to increase as the nuclear energy program
will be shut down within the next decade.

Germany currently has an annual demand for hard coal of about 60 million metric tons (mt). The
remaining German hard coal mines will be closed until 2018, resulting in a supply gap of about
15 million mt/a. Germany will entirely depend on hard coal imports. This paper identifies today’s
most important supplying countries. A country-specific risk assessment on future developments is
presented.

First, an ABC analysis was carried out in order to identify the most important hard coal supplying
countries for Germany based on their respective levels of imports. To assess the security of supply in
the next step, several generally accepted risk indices were examined regarding the major coal
producing countries from the German perspective. In each step, the study distinguishes between
thermal coal, coking coal and coke.

Risks regarding each supplier country become apparent. Taking this into account, the security of a
future stable German hard coal supply has to be questioned. The risk analysis presented can be
considered of high relevance for the future coal supply structure of the German energy and steel
industry.
 Biography

Felix Lehnen (Dipl.-Wirt.-Ing., Industrial Engineer) is working as a junior researcher at the Institute of
Mining Engineering I (BBK I) since 2010. He is involved in teaching of graduate and undergraduate
courses in the field of mineral economics, project financing, business administration as well as
underground mine development, mining methods, ventilation and backfill. He is also the responsible
project engineer for market surveys for industrial partners. Since 2012, Felix Lehnen is working within
the European I²Mine research network in the field of deep mine rescue.
 Paper

Introduction
After the political decision to phase out the German subsidized hard coal mining by 2018, hard coal
imports gain more and more importance for Germany. Hard coal demand will still exist after the end
of domestic production, especially after the decision to phase out nuclear power generation in
Germany. The energy-focused survey “Energieszenarien 2011” forecasts an increase of power
generation in German hard coal plants coupled along with growing imports within the next decades
(EWI, GWS, & Prognos, 2011).

Against this background it is reasonable and important to carry out a risk assessment of the hard coal
supplier countries, which could meet the German demand for hard coal after 2018. The analysis
presented below aggregates different risk indices on the most important hard coal producing countries
for Germany to evaluate the security of supply (subdivided into thermal coal, coking coal and coke).

International Coal Market

In 2010, the world hard coal production amounted to 6.7 billion mt of which only around 1 billion mt
were traded internationally. The most important producing countries were the People's Republic of
China (3.4 billion mt) and the USA (982 million mt). Other major producing countries
(> 200 million mt) are India, Australia, Indonesia, South Africa and Russia. Of all these major
producing countries, China and India are net importing countries of coal. The largest hard coal
exporter is Australia with an export volume of 300 million mt followed by Indonesia with
277 million mt (VDKi, 2011). The International Energy Agency (IEA) expects the expansion of global
coal production up to 8.7 billion mt by 2030 (VDKi, 2010).

The international hard coal market or trade can be broadly divided into an Atlantic and a Pacific
market based on the shipping routes. The interchange between these two markets only accounts for 6-
7% of the total trade volume. With a volume of 541 million mt (2010) the Pacific coal market is more
than twice as large as the Atlantic market (172 million mt).

Due to its high growth rate (around 4% pa), the Pacific market is constantly gaining importance.
International hard coal producers expect an increase in trading volume on the Asia/Pacific market by
up to 100 million mt of thermal coal by 2015. For the Atlantic market an increase in trading volume by
only 30 million mt (2015) is expected (Wedig, 2009).

Situation on the German Hard Coal Market

Figure 1 shows the current sources of German hard coal imports. The current domestic production
amounts for 22% of the total consumption. With a relatively constant demand, the relation between
production and import shows a clear trend in favor of imports (see Figure 2), which are expected to
reach 100% in 2018.

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 Other non-EU;
10%
Domestic
RSA; 6% Production; 22%

Australia; 7%

Total:
~ 60 million mt Poland; 10%
Colombia; 13%

Other EU; 4%

USA; 10%
Russia; 18%

Figure 1: Origin of the Hard Coal consumed in Germany (own Illustration according to VDKi, 2011)

60

50

40
million mt

30

20

10

Domestic Production Imports

Figure 2: Germany's Coal Production/Import Ratio (VDKi, 2011)

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ABC Analysis
In the following, the major import partners for coking coal, thermal coal and coke are identified by
means of an ABC analysis. In this analysis the source countries for thermal coal, coking coal and coke
are divided into three categories (A, B and C), depending on their share of German imports. The
results of the ABC analysis are shown below divided by coal type in the form of tables which illustrate
the cumulative percentages of the respective countries. The countries that fall into the highest
Category A (approximately 80% of imports) are then subject to a more detailed risk analysis.

Thermal Coal Imports

In 2010, Russia was the largest exporter of thermal coal and anthracite for Germany with about
9.3 million mt, followed by Colombia with around 7.4 million mt, Poland with 3.7 million mt,
Republic of South Africa (RSA) with 3.3 million mt and the United States with 2.8 million mt. They
are assigned to Category A (see Table 1).

Country Tonnage [1,000 t] Share [%] Category Cumulative Share [%]

Russia 9,300 29.2 A 29.2
Colombia 7,397 23.2 A 52.4
Poland 3,651 11.5 A 63.8
RSA 3,331 10.5 A 74.3
USA 2,771 8.7 A 83.0
Other non-EU 2,536 8.0 B 91.0
Other EU 1,177 3.7 B 94.6
Norway 856 2.7 B 97.3
Venezuela 410 1.3 C 98.6
Australia 289 0.9 C 99.5
Indonesia 70 0.2 C 99.7
Czech Republic 63 0.2 C 99.9
PR of China 7 0.0 C 100.0
Table 1: Thermal Coal Imports of Germany 2010 (VDKi, 2011)

Coking Coal Imports

Concerning the German coking coal imports, Australia was the largest supplier with 4 million mt of
coking coal, followed by the United States with about 3 million mt coking coal. Regarding coking
coal, only two countries form the group of Category A suppliers (see Table 2).

Country Tonnage [1,000 t] Share [%] Category Cumulative Share [%]

Australia 4,014 42.4 A 42.4
USA 2,956 31.2 A 73.6
Canada 1,203 12.7 B 86.3
Russia 1,000 10.6 B 96.9
Colombia 191 2.0 C 98.9
Other EU 74 0.8 C 99.7
Venezuela 20 0.2 C 99.9
Poland 8 0.1 C 100.0
Other non-EU 3 0.0 C 100.0
Table 2: Coking Coal Imports of Germany 2010 (VDKi, 2011)

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Coke Imports
In 2010, the largest proportion of German coke imports originated from Poland with around
2.4 million mt. Other notable imports came from other EU countries. Thus, only the European Union
is to be regarded as a Category A supplier of coke to Germany (see Table 3). Poland, as major supplier
of thermal coal, will be subject of a more detailed country analysis. Since the trade volume of the other
EU countries is negligible, there is no country specific risk assessment carried out at this point.

Country Tonnage [1,000 t] Share [%] Category Cumulative Share [%]

Poland 2,399 58.3 A 58.3
Other EU 869 21.1 A 79.4
Russia 200 4.9 B 84.3
PR of China 199 4.8 B 89.1
France 179 4.4 B 93.5
Other non-EU 141 3.4 C 96.9
Spain 86 2.1 C 99.0
Colombia 39 0.9 C 100.0
Venezuela 2 0.0 C 100.0
Table 3: Coke Imports of Germany 2010 (VDKi, 2011)

Risk Assessment
The countries that were classified as Category A suppliers in the ABC analysis will be subject to a risk
assessment. The approach as well as the applied parameters/indices are introduced prior to their
application below.

Approach
Import risks may have diverse causes. Suitable indices were selected in order to be able to analyze the
main supplier countries. These hard coal export markets are briefly introduced below. The values for
the various countries were added to a result matrix.

The German hard coal market is characterized by a high dependence on imports. Major risks have to
be seen in an inadequate fulfillment of demand caused by possible supply shortages in the supplying
markets. The reasons for such impairments can basically be divided into the following categories:

- Reserve Situation (Range of Reserves)

- Political and social Conditions (e.g. Economic Framework, Political Stability)
- Environmental Impacts by Means of Influences of Climate Change

In the following discussion the reserve situation is taken into account through the inclusion of the
range of reserves. The “Policy Potential Index” and the “Governance Matters Index” refer to political
framework conditions, whereas the Gini Index covers the risks that can arise from social riots. The
Climate Risk Index accordingly reflects the environmental influences on export stability. The applied
indicators are briefly presented below:

- Range of Reserves: The raw material potential of a country characterizes the availability of
raw materials (here: thermal and coking coal) by means of reserves and resources. The range
of reserves is the ratio of reserves of a country to its annual extraction. In this paper the range
of reserves is considered assuming current market prices and production costs (BGR, 2009).
- Policy Potential Index (PPI): The PPI is compiled annually through an expert survey and
describes the influences of administration and policy on national exploration investments.
Uncertainties regarding the administration, tax equity, infrastructure, geological information
etc. significantly affect the further exploration of resources (Fraser Institute, 2011). The
appropriate rankings are given in the matrix below.

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 - Governance Matters Index: The assessment of political stability by the World Bank (2011a)
examines several indicators of a country such as regulatory policy, constitutional legality,
corruption control, participation rights and efficiency of the government or political stability.
Within this risk assessment only the political stability was taken into account. Each country
was assigned to either one of the categories “stable”, “neutral” or “instable”.
- Climate Risk Index: The Climate Risk Index represents to what extent countries and country
groups are affected by the impact of weather-related events (storms, floods, drought, etc.). As
criteria, the average annual number of deaths and the resulting financial losses are taken into
account, both caused by climate change (Harmeling, S., 2010). The respective rankings for
2009 are shown below in the results matrix.
- Gini Index: The Gini Index is a statistical measure that indicates how evenly the income is
distributed within an economy. This enables the estimation of the probability of social riots,
political upheavals, civil wars or national strikes. All these events have the potential to cause
significant production shortfalls. A high value of the Gini Index reflects a high degree of risk
within the respective country (World Bank, 2011b).

For the subsequent categorization of the countries analyzed, the categorization of individual indicators
was partially adopted. The values “stable”, “neutral” and “instable” of the parameter “Political
Stability” were directly adopted, while all other indicators first had to be adjusted. According to the
rankings of the parameters "Policy Potential", "Climate Risk Index" and "Gini Index", each upper
quarter was characterized as “stable”. Each second quarter was assigned to the value “unremarkable”
and each lower half was assigned to the value “instable”. Concerning the “Range of Reserves”, a range
of over 100 years was assessed as stable, while a range between 100 and 50 years was considered
neutral and a range of 50 years or shorter was rated as unstable.

Results
The selected indicators are summarized and categorized in different shades in the risk matrix below
(Figure 3). The white boxes represent stable conditions, black represents unstable conditions and the
light grey shaded boxes may be regarded as risk-neutral:
ex

dex
nd

Index Ri sk

Index Ri sk
[a]

ce

90-09

2009
ers In
tial I

rnan
Rese f
rves
eo

ate

ate
y

Index
Poten
Ran g

Gove
Matt
Polic

Clim

Clim

Gini

Country Total
Australia 123 25/79 neutral 44/183 6/128 35 Cat. II
Colombia 76 40/79 instable 94/183 100/128 58 Cat. III
Poland 144 o.A. stable 65/183 14/128 34 Cat. II
Russia 290 69/79 instable 66/183 75/128 42 Cat. III
RSA 131 67/79 instable 75/183 49/128 67 Cat. III
USA 240 36/79 neutral 34/183 17/128 41 Cat. II

Figure 3: Risk Assessment of the Category A Supplier Countries for Germany

In the following presentation, supplier countries for which no export or production impairments are
expected at all, have been classified as stable (Risk Category I). On the basis of the values assembled
in the matrix above, none of the major supplying countries of Germany may be considered long-term
stable.

The risk-neutral export countries (Risk Category II) are the ones, in which the exports to Germany can
be considered secure, but still many improvements among different criteria are possible. The table
shows that Australia, Poland and the USA are among the unremarkable Category A supplier countries.

5
The greatest risk of export losses exists in the unstable export countries (Risk Category III). There is a
strong need for improvement of the current situation. The risk analysis showed that Colombia, Russia
and South Africa are among the most unstable major coal exporters to Germany.

Discussion of Results
According to the characteristics of the individual indicators, the countries were grouped into risk
categories. Following this outline, the “Category A Countries” of Category II (risk-neutral) and the
“Category A Countries” of Category III (unstable) are presented in detail below.

Risk Category II: Australia, Poland, USA

The increase in coal production has already led to bottlenecks within the Australian infrastructure
(railways and ports) in the past. In order to solve this “congestion”, some investments were already
made. Unfortunately they were partially counteracted by the 2010/11 floods in Queensland. During
that flood, large parts of the production came to a standstill, which directly confirms the categorization
made due to the Climate Risk Index. Other uncertainties may also result from the planned tax increase
in the context of combating climate change (Carbon Tax Proposal) as well as from a possible "Mineral
Resource Rent Tax" (Rutherford, A., Bayer, A., & Rademacher, M., 2009; VDKi, 2010, 2011).

Poland has invested inadequately in the development of its 13 billion mt hard coal reserves. Due to the
declining export volume, the Polish infrastructure is oversized (VDKi, 2010; Wedig, 2009). But
currently, Poland is a reliable exporter of coal to Germany. The continuing decline of the Polish hard
coal production and the lack of investments in further exploration of existing hard coal reserves are,
however, still considerable problems.

The existing hard coal production capacities of the U.S. will probably be expanded in order to reduce
the dependence on imported petroleum (GVSt, 2010; Watson, W., Paduano, N., Raghuveer, T., &
Thapa, S., 2011). The U.S. infrastructure is proving to be flexible and is sufficiently developed. In
general, the production costs are around 100 U.S. $ per metric ton. Accordingly, many mines are
operating close to the edge of profitability (Wedig, 2009). Further pressure on the coal production
results from the large drop in natural gas prices (EIA, 2011).

Risk Category III: Colombia, Russia, RSA

Currently, the main customer for Colombian coal is the Atlantic market. With the planned expansion
of the Panama Canal in 2014, Colombia could also open up to the Pacific market. This could
consequently lead to a shortage on the Atlantic coal market, if Colombia does not manage to increase
its export capacity. On the other hand, the capacity increase in exports would also lead to a further
shortening of the range of the remaining reserves potential. The ongoing conflict with Venezuela
continues to be of significance to the security of the region and thus could also affect the hard coal
industry massively. In 2009, diplomatic relations were frozen and broken off entirely in 2010. Now
they are slowly being rebuilt (BBC News, 2011).

In order to increase gas exports, Russia is increasing the share of coal in primary energy consumption
and replace gas-fired with coal-fired power plants (VDKi, 2010; Wedig, 2009). The increased
domestic demand led to the decline in export volumes, particularly in the thermal coal sector
(85 million mt in 2009 to 80 million mt in 2010). In addition to such energy policy changes, also
foreign policy tensions could affect the Russian hard coal exports to Germany, just as the conflict with
the Ukraine already demonstrated for the example of natural gas. Overall, Russia has to be regarded as
a rather insecure partner of Germany in the hard coal market.

To cover the (critical) domestic energy supply in South Africa, new power plants of the state-owned
energy provider will be connected to the grid, starting in 2015. Consequently, an increase in domestic
consumption can be expected. The stagnant domestic production, the growing domestic demand and a
high demand from India reduce South Africa’s export potential in the long term (VDKi, 2010, 2011).
A further complicating factor is the high utilization of the existing infrastructure – especially the

6
railway transport is poorly balanced. An additional risk is posed by the political stability
(nationalization efforts), as well as the consequences of Black Economic Empowerment in terms of
qualified local personnel (GTAI, 2011).

Conclusions
Germany’s major import partners, that have been identified applying an ABC analysis, were divided
into different risk categories and the specific risk factors were discussed above. In the following, these
findings are projected on the product classes coking coal, thermal coal and coke.

Thermal Coal
The coverage of the German thermal coal demand largely depends on unstable export countries. This
is aggravated by the steadily declining Polish hard coal production and the expected lower export
capacities in the future. Therefore, a higher probability for upcoming supply shortfalls on the German
hard coal and anthracite market could be assessed.

A way to prevent supply shortfalls could be through the increase in imports of thermal coal from
Australia. In 2010 Australia exported 141 million mt of thermal coal, of which Germany claimed only
0.29 million mt (0.45 million mt in 2009).

Thermal coal exports from Indonesia could provide another alternative. In 2010, Indonesia exported
about 277 million mt of thermal coal. However, Indonesia’s export stability is generally considered
questionable, though transportation infrastructure is well developed. It should be noted that so far only
reserves have been mined, which either are located near the coast, or have a good waterway access.
The infrastructures for mining areas which are located further away from the coast are still under
construction. In 2010, Germany imported 96,000 mt of hard coal from Indonesia (VDKi, 2010, 2011).

The German thermal coal imports are mainly coming from unstable supply countries like South Africa
and Colombia and thus the risk of possible delivery problems is remarkable. However, the Atlantic
market does not provide alternative thermal coal exporters, which can be considered stable. In the
Pacific market, Australia and Indonesia can be considered as potential exporters of thermal coal for
Germany. But since the Atlantic and the Pacific market are nearly self-contained, an export of large
quantities of thermal coal from the Pacific to the Atlantic market is rather improbable.

Coking Coal
The ABC analysis for the German coking coal market shows that approx. 75% of the German demand
is covered by the supplier countries Australia and USA. Based on the risk assessment that has been
conducted, these countries were identified as risk-neutral export countries. Accordingly, the risk of
possible shortages of coking coal for the German market can be considered very low.

Coke
The ABC analysis of the German coke imports shows an 80% coverage by Poland and other EU
countries. Due to the declining Polish hard coal production, the long-term coverage of German coke
demand can be regarded questionable.

The alternatives for coke exports are low on the Atlantic market. Other German coke imports
originated from France and the Czech Republic in 2008. However, the low production numbers of
those two countries don’t indicate an increase in their export volumes. The increase in Russian coke
exports is not an adequate alternative for Germany, due to the political instability in Russia.
Consequently, it should be noted for the German coke supply that a sufficient security of supply is not
guaranteed for the next decades.

The possibility of operating coking plants in Germany, even after the phasing out of domestic
production, has to be seen as an alternative to the import of coke. These coking plants would be 100%

7
supplied with imported coking coal, which will be exported to Germany by stable suppliers, as shown
above. The acquisition of the coking plant Prosper by ArcelorMittal in 2011 argues for this theory.

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