Coal Market Outlook
Manish Garg & Tim Crossley
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the information contained in this paper.
Recent Trend in Thermal Coal Price
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Mid CV Newcastle FOB- 5500kcal/kg NAR
• Prices for Newcastle benchmark coal has risen by 60% in US$ terms since January 2016. Price for
Sept was US$72/t while spot price is US$83/t now. In A$ terms, prices have gone up from $66/t to the
current level of $94/t in Sept.
• Medium CV power grade coal has also shown a similar trend with a 55% growth.
• The current spike in thermal coal price can be largely attributed to planned production cuts in China,
after Chinese government imposed restriction on operations to only 276 days in a year.
Thermal Seaborne Coal Demand
• Thermal Coal demand in Asia is the real driver of coal price as Asian economies are the most populous nation of
world and still developing.
• Asian trade in the thermal coal market has increased significantly in the last five years, growing from 528Mt in
2010 to 685 Mt in 2015, registering an impressive compound average growth rate (CAGR) of 7.21% while the rest
of the world has grown at 2.15% CAGR from 194 Mt to 216 Mt.
16%
10%
47%
27%
2010
China India Other Asian Countries Rest of World
Total -720 Mt
15%
19%
42%
24%
2015
China India Other Asian Countries Rest of World
Total- 901 Mt
Asian Power Growth & Coal Demand
• Per capital electricity consumption across the entire
region is relatively low in comparison to the
developed economy.
• India, World’s 7th largest economy has capita
consumption is 1/3rd of the world average and is just
10% of that of Australia. Other Southeast Asian
economy has similar per capita electricity trend -
offering a significant potential for upside growth.
• Moving Forward, Coal being by far the cheapest
source of energy will continue to fuel growth of key
economics.
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Power Capacity Addition (GW)
China India North Asia South East Asia
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Coal Demand (Imports)
China India North Asia South East Asia
Japan - Imports expected is remain flat
7
• Imports for the H1 2016 has slipped by 2% y-o-y
to 64 Mt
• Coal consumption by 10 major Japanese utilities
increased by 15% in April–June 2016, to 13 Mt,
compared with 11.3 Mt a year earlier
• Japan’s nuclear power plants are slowing coming
back online although with a cautious pace,
Shikoku is planning to restart one of its reactor
while two units of Takahama units have taken
offline because of safety issue.
• As per our assessment around only 3GW of coal
fired plant is in construction while 17.5 GW of
planned coal fired plants are in different stage of
feasibility.
• Imports is expected to remain lacklustre in 2016,
and will grow at a modest pace from 2017
onwards.
Japan’s Import Trend
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2014 2015 2016
Indian Imports – Set to remain weaken for another year
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• Indian coal-fired capacity at the end of the first half was
186.2 GW, accounting for 61% of the total, and grew by
11%, compared with the level of 167.2 GW a year earlier.
• The power consumption has not grown as financially
struggling distribution companies across India are not
buying power, resulting in frequent and heavy power cuts.
• On supply side, CIL is projecting that output will rise by 62
Mt (11.5%) in FY 2016/17, to 599 Mt. CIL will likely miss its
target but that production will still grow around 8%.
• With the current government’s ambitious project “UDAY’ set
to take off to for the financial turnaround and revival package
for electricity distribution companies, demand for the coal
fired electricity will rise.
• Imports are expected to remain subdued this year, however
India will continue to rely on the international market to help
meet its coal requirements as long term fundamental for
Indian demand is still robust
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Mt
2014 2015 2016
Indian Import Trend
Chinese import demand has gone up after two years of consecutive fall
• Years of overexpansion in capacity and a dramatic
slowdown in coal demand meant a third of the
nation’s coal mining capacity is in surplus.
• China’s coal market is showing signs of recovery,
with demand increasing as the government cuts
domestic production.
• Domestic coal production has registered a drop of
10.2% until to ~1.8 billion tonne, after falling by
3.5% in 2015.
• Imports of steam coal and lignite have returned to
growth in 2016, increasing by 3% in the first half, to
68.1 Mt.
• Domestic prices have risen rapidly; the
Qinhuangdao FOB price, basis 5,500 kcal/kg-
NAR, increased by 23%, from $56 per metric ton at
the start of 2016 to $69 in early August.
• Imports have become more attractive with the rise
in domestic prices, and shipments are likely to
remain relatively high in the third quarter as china
prepares for winter.
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2014 2015 2016
Overall SE Asian Outlook is Bullish
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• In Malaysia, Coal consumption has been boosted by Tenaga Nasional Berhad’s (TNB) 1 GW Manjung
plant, which began operations in April 2015, and Malakoff’s 1 GW Tanjung Bin 4 plant, which entered
into operation at the end of March 2016.
• In Thailand, Imports grew by 4%, to reach 11.1 Mt during first half 2016, compared with 10.7 Mt in 2015.
A number of coal-fired projects are in the pipeline, but progress with development has been slow.
• In Indonesia, domestic demand of coal fired power has risen at a very rapid pace in with PLN’s fast
track-1 program is almost complete. As per PLN’s Annual Report 2015, around 7.5 GW of coal fired
plants are in construction phase while PLN and Indonesian government is planning to add 35GW of
additional capacity by end of year 2019.
• In Philippines, Coal-fired generation increased to 4.4 TWh in the first two months of 2016, up from 4.1
TWh in the same period of 2015, as power demand in the Philippines increased by 1.1 TWh, to 10.4
TWh. Thermal coal demand is expected to remain robust with another 2 GW of coal-fired capacity
scheduled to commission next year.
• In Vietnam, coal demand is expected to remain robust, as construction is under way on some 11 GW of
capacity, and around 13 GW of capacity are in the approval process.
Emerging Asian countries are going to burn more and more coal !!!
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Mt
Axis Title
Incremental Coal Requirement (Mt)
Incremental Coal Requirement (Mt)
• As per our own estimate, around 50GW
of new import based coal fired plant, is
under various stage of development,
which will increase coal demand by
approximately 160 Mt to 180 Mt of coal.
• These number do not includes – two key
economies (India and China).
Thermal Coal Supply
12
• Indonesia, Australia, South Africa, Russia and the USA are the major thermal coal suppliers
globally with Indonesia being the largest among these.
• The recent downturn in the coal market has impacted every one including low cost producers like
Indonesia whose exports fell in 2015 for the first time in a decade and expected to remain
lacklustre in 2016.
• Biggest private coal miner, Peabody Energy, has filed for bankruptcy protection in the United
States amid the slump in coal prices.
• China’s leading state-owned miner, Shenhua Group, appears to have shelved the development
of its largest overseas coal mine, the 10 Mtpa Watermark thermal coal project in New South
Wales, Australia.
• As per Chinese National Coal Association, China has cut almost 560Mt of coal production
capacity by closing 7,250 mines in last 5 years. However, the country still had around 10,000
coal mines in operation by the end of 2016, with a total capacity of 5.3 billion tonnes.
• China plans to close about 4,300 coal mines, remove outdated production capacity of 700 million
tonnes and redeploy around 1 million workers over the next three years.
• Excluding China, approximately 98 Mt of reportable supply output has been cut in last 3 years.
Indonesian domestic demand offsets decline in exports
13
• Indonesian exports in 2015 fell for the first time in over
a decade, down to 362Mt and expected to be flat in
2016. The decline in exports was led by shipments of
thermal coal to India, which fell by 14.7 Mt, to 42.3 Mt.
• The Indonesian subbituminous FOB price, on a 4,700
kcal basis, remained at or near its nine-year low of
$36/t for much of the first half but recovered to $45/t
by early August, on account of renewed Chinese
demand.
• Contrary to Indonesian government’s focus and driven
by recent rise in prices, several of the larger miners
are targeting steady growth in output in Q4,2016, with
some pushing for further growth.
• Adaro is targeting 52–54 Mt of production this year,
up from 51.5 Mt in 2015.
• PT Bukit Asam is aiming to produce 28.3 Mt in 2016,
up from 20.7 Mt.
• Bayan Resources expects to increase production to
12–14 Mt in 2016, up from 11.3 Mt.
• Indonesian President has announced an additional
35GW of power generation capacity will be developed,
over and above the Fast Track -1 and 2 programs,
which together will add around 25GW.
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Mt
2014 2015 2016
Indonesia's seaborne exports
Date source: MEMR, Trademap. Siecap
Australian Exports
14
• Thermal coal production in Australia is relatively
flat. Glencore and Rio Tinto is growing steady
while output from BHP fell by 20% in H1 on
account of heavy rain and higher strip ratio
• Exports from Australia fell 2% during first half
2016, to 96.4 Mt, compared with 98.2 Mt in the
same period of 2015.
• Moving forwards, in 2016, Thermal coal exports
from Australia is expected to remain flat while
exports are expected to increase from 2017
onwards mainly driven by coal demand growth.
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Mt
2014 2015 2016
Australia's seaborne export
Source: IHS Energy, Australian Bureau of Statistics
Australian Coal M&A activity heats up
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• Going forward, the Australian coal sector may look very different as current corporate seeks to cash-in by
divesting assets. Several Asset sales have been announced in last 18 months but yet to be completed.
Company Asset Current Status
Anglo American Moranbah North &
Grosvenor Project
• Potentially 2 players are still in the foray including private
equity Apollo Global, BHP and US based Coronado group.
• Price Range ……
Foxleigh Coal Mine • Closure of deal with Taurus Fund Management is yet to close
apparently because of operational changes including closure of
mine and future mine plan, in which Nippon steel, the largest
off taker has key role to play.
Dawson • 51% stake sale in Dawson is going slow may be because of
rehabilitation liabilities and take or pay agreements
Callide • Sale of Callide to Batchfire is likely to be delayed after a legal
dispute over coal supply agreement to Callide power station.
Dartbrook • Sale of Dartbrook to Australian Pacific coal is expected to be
dragged a bit longer as APC is still securing fund to finance
acquisition.
Rio Tinto Mount Pleasant
Project
• Rio completed the sale of $220.7m this month with MACH
Energy. The includes a 2% Royalty payment to Rio if prices are
over $72.50/t.
M&A….
16
Company Asset
Vale Carborough
Downs
• Sales close to be announced.
Eagle Downs • Under negotiations.
Mozambique • 15% Stake to Mitsui for $450M.
Itoschu/Sumitomo Newlands and
Collinsville
• Two Japanese company had announced sale of 45% stake
and access to Abbot point coal terminal
QCoal Byerwen • Qcoal is in the process of second stage divestment of a
minority stake in Byerwen project to a potential end user
company.
Cuesta Moorlands
and others
• A$8.73m off market take over bid from Beijing Guoli
Energy, who already hold 53.4% stake in Cuesta
TerraCom Blair Athol • It received a capital through bond.
• Plan to commence production at 2 Mtpa soon.
Sojitz Moorlarben • A potential sale of 10% minority stake
Price Outlook
17
• In short term, Thermal coal price is expected to be driven by import demand
from China as it wants to keep a tight balance between eliminating inefficient
coal mining capacity and at the same time keeping price under control.
• In Siecap’s opinion, thermal coal price is expected to be stabilised at $75/t
(500 Yuan/t)
• Significant M&A activity and recommissioning of latent capacity is anticipated.
• In medium to long term, thermal coal prices is expected to be driven by
fundamentals which clearly favours a better price environment.
Metallurgical Coal
Tim Crossley
18
Recent Trend in Metallurgical Coal Price
• Current price rally is mostly driven by supply insecurities causing “panic buying”.
• Chinese logistical bottlenecks from weather events appeared to be triggering factor, but eventually
spread to the global market on account of Mozambique supply outage and South 32’s “Force Majeure”.
• The volume in the spot market has been good (9.8Mt) spread over diverse buyers(~75% end users) and
dominated by Asian players (~81%).
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US
$/t
Australian Prime Hard Coking Coal
142% Growth
from July to
September
Date source: IHS, Platts, Siecap
Current Price Rally in Metallurgical Coal
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Triggers behind the current Rally
Date Events Significance
Jul 4-18 • Major rains and floods south and
east China
• Vale’s Carborough Downs roof
collapse
• South and East Chinese steel mills
came out in force to buy imported
cargoes
• Force majeure declared by Vale
causing supply to tighten for the
second-tier market
July 18-22 • Flash floods in north China
(Shanxi) causing logistics
disruptions (rail and truck)
• Creating Chinese supply insecurities
• Stoked domestic coke prices upwards
for the 2nd time
July 25-29
• Mozambique coal supply risk on
railway outage
• Creating supply anxieties for global
steelmakers prompting them to enter
the spot market
Aug 8-22
• Chinese end-users actively
procuring on the spot market
• Rest of the world holding back,
thinking that the Chinese bubble
will burst
• Mostly a China-led rally
• Chinese steelmakers start pre-winter
re-stocking
21
Triggers behind the current Rally
22
Date Events Significance
August 29-September 2 • International steelmakers join
the foray in the scramble to
secure spot cargoes
• Price rally becomes truly global
• Surge in met coal prices puts costs
equal or higher than iron ore in the
blast furnace composition
September 5 onwards • South32 declares force majeure
on roof issues
• China’s NDRC meeting
maintains that coal production
will not be meaningfully
loosened
• 2nd trigger: Rest of the world
comes into the market to cover
short positions caused by the
production problems
• Spot liquidity shifts in favour of
global, rather than China centric
• Strengthen the view that downside
pressure in China in the short-term
will be minimal
Buyer Profile –Current Rally
23
30%
20%
42%
6%
2%
Buyer’s Profile
Miner to End-user Miner to Trader Trader to End-user
Trader to Trader End-user to Trader
72% of the deals were
done by End-users
56%
25%
19%
Buyer's profile by Geography
China Other Asian Countries Rest of World
81% of the deals were
done by Asian countries
Date source :Platts, Siecap
Global Steel Scenario
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683 709 775 823 804 804
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2011 2012 2013 2014 2015 2016Annualised
Mt
Global Steel production by Country
China Rest of Asia EU Rest of World
• Crude steel production in 2016 is
expected to remain flat after it fell by
2.8% in 2015.
• In 2015 all countries except India,
(shown in green bar in the bottom right
chart), steel production from all major
economies has registered a fall.
However, in 2016 Indian mills posted
slow growth rate of 0.2% mainly
because of higher Chinese imports.
• Production from Chinese steel mills is
expected to remain flat mainly because
of lower raw material cost and increased
focus in export market.
• EU, Japan and South Korean steel mills
has been contracting since 2015, mainly
because of poor domestic demand and
increased imports of cheaper steel from
China.-10.0%
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2012 2013 2014 2015 2016Annualised
Growth Rate, Steel production, Major Economics
Growth Rate World Growth Rate China
Growth Rate India Growth Rate EU
Growth Rate Japan Growth Rate South KoreaDate source: World Steel Association
Apparent Steel Use Per Capita
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59.4
233.7
321.2
335
488
550
1005.4
1115
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India
World
EU
USA
China
Japan
Taiwan
South Korea
Apparant Steel Use Per Capita (Kg)
Steel Production in China
• Crude steel production rose to 68.57 Mt in August,
up 3 percent from a year earlier and 2.6 percent
higher than July, according to the National
Statistics Bureau.
• In the first eight months, output of 536.32 million
tons was just 0.1 percent less than that of last
year.
• Apparent Domestic demand for crude steel in
China is lacklustre as result if this exports have
grown up by 20% CAGR during 2011-2015.
Exports are expected to reached to ~115 Mt by
2016.
• The domestic demand in china is expected to
contract to 690Mt in 2016 from a peak of 712Mt in
2013.
• Chinese steel plant utilisation in 2015 was around
67%, well below the 85% or above it achieved
between 2000 and 2008;
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Crude Steel Output Change-y-o-y
Source: National Bureau of Statistics, PRC
634 653712 729 699 690
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2011 2012 2013 2014 2015 2016Annualised
Mill
ion
Chinese steel demand and exports
Apparent Demand Chinese Exports
Source: National Bureau of Statistics, PRC
Metallurgical Coal Demand
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Metallurgical Coal Demand
China Rest of Asia EU Rest of World
• Based on 670 kg of coking coal needed to produce 1 tonne of steel, the
apparent demand for metallurgical coal is expected to around 1Bt
• China produces more than 60% of world’s metallurgical coal
Seaborne Metallurgical Coal Supply
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• Australia is the largest supplier into the seaborne metallurgical
coal market, accounting for around 60% of the global supply.
• Other major suppliers are the USA and Canada with market
share of 15% and 9% respectively.
• Very high prices over the period 2008-12 incentivised a
number of new supply sources, notably Mozambique and
Mongolia.
• In response to the low price environment, coking coal
producers cut high cost supply, resulting in a massive drop of
29% and 19% of production from high cost jurisdictions like
Russia and USA.
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
Australia USA Canada Others Mongolia Russia
Supply Cuts 2015 (%)
Australia USA Canada Others Mongolia Russia
60%15%
9%
9%
4% 3%
Australia
USA
Canada
Others
Mongolia
Russia
Coking coal suppliers
0
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80
120
160
200
2010 2011 2012 2013 2014 2015
Met Coal Exports
Australia USA Canada
Others Mongolia Russia
Data source: Siecap
Data source: Siecap
Seaborne Coking coal
29
Seaborne market for coking coal increased from estimated ~130 Mt in 2005 to ~190 Mt to 2015, A
compound annual growth rate of 3.87%
More than half of the seaborne coking coal have been supplied by Australia, ranging from 51% to 65%.
More than 2/3 of growth in exports came from Australia
Coking coal production / Exports by Suppliers
30
40%
11%8%
7%
6%
5%
5%
1%
17%
Metallurgical Coal Production Share 2015 (%)
BHP/BMA/ South32
Anglo American
Peabody
Jelinbah
Rio Tinto
Glencore
Westfarmers
Vale
Others
• BMA/BHP/BMC is by far the largest producer of
metallurgical coal in Australia. The total
production for CY2015 of BHP group (including
South 32) stood at 78Mt (almost 40%).
• Anglo American is the second largest producer
which produced 21.1Mt of coking coal form its
Queensland mines. Jellinbah, Peabody,
Glencore, Wesfarmers, Whitehaven are the
other key producers of coking coal in Australia.
• The extended period of adverse coal-market
conditions has forced coal producers to cut
costs. Big Players such as BHP, Rio, Anglo,
Peabody, Glencore - all have registered a
decline in their profits.
• Metallurgical coal producers have done well to
reduce costs by approximately 30% in the last
two years - resulting in mine closures in Australia
being slower than anticipated.
Steel Production and Coking coal Demand outlook
• In the short term, driven by government’s stimulus and better profitability owing to lower raw material prices,
Chinese steel mills are expected to keep producing. This means demand for imported coal is expected to be
strong.
• However, in the medium term, Chinese government is expected to cut capacity as much as 150Mt as global
steel industry is suffering because of cheap influx of Chinese steel.
• The Group of 20 leaders wrapped up their two-day summit in Hangzhou, China with a pledge to establish a
global forum on steel overcapacity.
• Chinese policymakers have indicated they will tackle overcapacity to cut as much as 150 million tons, or
about 13 percent of its total, by 2020.
• China is expected to enforce stricter environmental safety and energy efficiency standards as well as
tougher credit controls to reduce overcapacity.
• If this happens, Chinese demand for coking coal is expected to fall by 120Mt by 2020.
• At the same time, China is also targeting to close approximately 150 -180Mt of smaller size metallurgical
coal mines in the next five years.
• As a result of this, in the medium term, the demand supply balance is expected to still be in the suppliers
favour.
31
Coking coal price outlook
32
• Q4 contract settlement price is expected to double from previous quarter (around $190-$200/t)
• However, under medium term, coking coal price is expected to ease out, but its highly unlikely to fall below
$100/t threshold.
33
Tim Crossley
Advisory Board Member
[email protected] +61 448 848 680
Tim is the former President and Chief Operating Officer with BHP Billiton’s West
Australian Iron Ore business. He was COO of ASX-listed Gloucester Coal and most
recently Executive Chairman of Trans Tasman Resources in New Zealand. Tim has
extensive experience in managing large complex operations with a focus on
identifying innovation and improvement opportunities.
Manish Garg
Director Advisory
[email protected] +61 407 771 528
Having worked for some of the largest global resource companies like BHP Billiton and
Rio Tinto, Manish has demonstrated experience in the various disciplines of the mining
industry, including mining, mineral processing, marketing, feasibility studies, project
management, business planning, business improvement and as corporate consulting
in valuation, due diligence, M&A and stock market listings on ASX, SGX and TSX..
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