INDUSTRIAL METALS, MINERALS AND MINEABLE ENERGYINVESTMENT SUMMIT 2010

LONDON CHAMBER OF COMMERCE & INDUSTRY ● WEDNESDAY, 30 NOV 2010

www.ObjectiveCapitalConferences.com1

International steam coal market outlook David Price – Steam Coal Advisory Service

The international steam coal market outlook

November 3, 2010 • London

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Major Import Stories in 2010–15

Importer 2008 2009 2010 2011 2012 2013 2014 2015

Germany 31 28 29 30 32 32 32 32

United Kingdom

37 31 19 25 24 23 22 21

Italy 19 16 17 18 18 18 19 20

Spain 17 14 8 7 7 7 7 7

Europe 191 175 164 176 175 174 177 178

USA 29 19 15 13 15 17 19 20

China 15 62 97 107 110 114 118 122

India 36 60 75 90 95 100 110 117

Total Asia 369 423 489 517 527 541 567 584

World 606 636 688 730 745 763 797 817

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Source: IHS CERA. IHS_CERA_GSC_RT_London_101510

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Short-term Atlantic Fundamentals:The Market Wakes Up?

• Scandinavian hydro—still weak.— A poor hydro year normally means a period of stronger coal demand

in Denmark and Finland— Danish stocks ended summer very low— Buyers should be in the market already

• UK stockdraw should end this winter.— Falling utility stocks going into winter but…— Late and short shoulder months this autumn and rising local

production— Even so, 2011 should see imports back in growth

• Spain—mining support law may change things.— Support for domestic mines offers support to power stations using

international coals as well• United States—still caught up in the shale gale.• But will the supply be there when things turn up?

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Norwegian Hydro Reserves—Weak Going into Autumn

20

30

40

50

60

70

80

90

100

1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52

Percent

Weeks

2008

2009

2006

2007

2010

Source: Nordpool

Source: Nordpool. IHS_CERA_GSC_RT_London_101510

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Danish Power Station Coal Stocks

0

1,000

2,000

3,000

4,000

5,000

6,000

ThousandTons

Source: Danish Energy AgencySource: Danish Energy Agency. IHS_CERA_GSC_RT_London_101510

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UK Electricity Supply Industry Coal-burn

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

ThousandTons

2005 2006 2008

2009 2007 2010

Source: DECC. IHS_CERA_GSC_RT_London_101510

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UK Utility Stocks

0

5

10

15

20

25

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

MillionTons

Source: IHS CERA. IHS_CERA_GSC_RT_London_101510

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United Kingdom’s Seaborne Import Trends (End Year)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

ThousandTons

2008 2009

2010 2009 Smoothed

2010 Smoothed

Source: IHS CERA. IHS_CERA_GSC_RT_London_101510

© 2010, IHS CERA Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.

UK Mining Capacity Is Stabilizing

• UK coal investment program is complete.— Daw Mill. Output of 3–3.5 million metric tons (mt) in 2011, against 2.9 mt

in 2009 and a probable 2–2.5 mt in 2010— Kellingley. Now working Beeston seam, boosting production to over 2mt

per year, from 1.0 mt in 2009 and estimated 1.5–2.0 mt in 2010— Thoresby. Now in the Deep Soft seam, raising output from second quarter

2010 to 1.6–2.0 met per year. Output in 2009 was 0.8 mt and 2010 expected at 1.5 mt

• Other deep mines are steady.— Hatfield on course for 0.5 mt per year— Maltby at just over 1 mt per year, should aim for 1.5 mt per year

• Surface mining stable at c. 10 mt per year—could rise another 0.5 mt per year.

• Overall 2011 output to rise by 1 mt per year in 2011 and then stabilize.

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Spanish Hydro Reserves—The Highest since 2004

20

30

40

50

60

70

80

90

J F M A M J J A S O N D

Percent

2005 2006 2008

2009 2010 2007

Source: IHS CERA. IHS_CERA_GSC_RT_London_101510

© 2010, IHS CERA Inc. No portion of this presentation may be reproduced, reused, or otherwise distributed in any form without prior written consent.

Where Is There Growth in Europe?

• Germany—Local mine displacement to continue to 2018.— New nuke provisions could squeeze coal-burn into 2020s

• Italy—Power station construction continuing.

• United Kingdom/Poland—Local mines have a better chance but each closure offers room for imports.

• Turkey—Potentially massive power station construction on the way.

• Morocco—Jorf 2 looks a strong possibility.

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The US Is a Demand Story Today

• Henry Hub prices remain low, so gas-burn should stay high.

• Stockdraw needs to continue into 2011.

• Buyers don’t need to buy.

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0

2

4

6

8

10

12

14

16

Jan-05 Apr-07 Jul-09 Oct-11 Jan-14

The Henry Hub Outlook is Weak(US dollars per MMBtu)

Source: IHS CERA. IHS_CERA_GSC_RT_London_101510

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US Generator Stocks

40,000

50,000

60,000

70,000

80,000

90,000

100,000

110,000

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

ThousandShort Tons

2005 2008 2006

2009 2007 2010

Source: EIA. IHS_CERA_GSC_RT_London_101510

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But the United States Could Be a Supply Story Soon

• Environmental regulation of mining will damage Appalachian output—estimates vary from tens to hundreds of millions of tons.

— Mine permits extremely difficult to win— Limited effect so far but expected to hit hard soon

• MSHA is squeezing the deep mines.— Protests and law suits but the wind is clearly blowing towards more

regulation and spot inspections— Underground costs expected to rise

• MetCoal qualifications are widening.— Pittsburg seam coals that were once too high in sulphur are being

gobbled up by Asian buyers— US utilities being forced to buy elsewhere

• If the market picks up, where is the supply?

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Monthly US Production (All Coal)

Source: DoE.

80

85

90

95

100

105

110

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

MillionShort Tons

2008 2009

2010 2009 Smoothed

2010 Smoothed

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China, India, and the Rest of Asia Today

• Chinese import growth—40–45 mt banked by midyear, but some of the gains lost second half—2011?

— New arrivals from Colombia and Venezuela complement huge growth in arrivals from Indonesia, Russia and South Africa

— Massive production growth• India—20 mt plus in 2009, same again this year?

— This is happening before ultra-mega power projects have any effect• Malaysia—bad reaction to 2008 prices in 2009, back with a

bang this year (+3 mt)• Korea—still powering on (another 4 mt growth).• Taiwan—recessionary slump in 2009, recovery in 2010 (+4

mt).• More to come from all in 2011.

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China’s Imports: Staying at 5–10 mt per Month?

ThousandTons

Source: IHS CERA. IHS_CERA_GSC_RT_London_101510

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Chinese Raw Coal Production

MillionTons

Source: IHS CERA. IHS_CERA_GSC_RT_London_101510

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China’s Massive Surge in Production

• Explanation 1—the amalgamation of mines.— Low productive small mines have gone— Amalgamations have provided a fleet of large and more efficient

mines— Therefore production has boomed

• Explanation 2—the amalgamation of mines.— In the past only 95 percent of output was counted because so much

illegal/unlicensed mining was going on— Now 100 percent of mining is being counted, so a step-change is

going on

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The Main Chinese Coal Producing Areas: The West Takes over?

dffdsdf

ThousandTons

Source: IHS CERA. IHS_CERA_GSC_RT_London_101510

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China Is a Price Play—but a Permanent Feature?

• China’s emergence was clearly a response to price and infrastructure.

• But quality is important as well now.

• And are the prices enmeshed?

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Source: IHS CERA.NB: Australian prices are for Newcastle quality material. All prices basis 5,500kc NAR.

0

2

4

6

8

10

12

0

50

100

150

200

250

Jan-08 Jan-09 Jan-10

Chinese Domestic versus Australian Prices

Chinese Domestic Price

Australian Delivered Price

Imports

US Dollarsper Ton

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India’s Massive Import Acceleration(million tons)

Source: IHS CERA. IHS_CERA_GSC_RT_London_101510

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The Asian Import Stories(mt)

Importer 2008 2009 2010 2011 2012 2013 2014 2015

China 15 62 97 107 110 114 118 122

India 36 60 75 90 95 100 110 117

Korea 77 83 87 87 87 88 93 94

Taiwan 60 49 53 55 56 56 58 59

Japan 124 108 111 109 107 107 107 107

SE Asia 52 55 59 62 65 69 72 78

Total Asia

369 423 489 517 527 541 567 584

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Source: IHS CERA. IHS_CERA_GSC_RT_London_101510

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Supply Issues for the Next Five Years

• Massive focus on the East—to continue— Everybody investing in Indonesia, China, and Mongolia— Indians investing in South Africa— Indonesia and Australia should be the main trade beneficiaries.

• Falling freights— Oversupply of ships to depress the market through the early 2010s— Makes cross basin trades easier (good for the Colombians if they

can get the CIF differential down)• Costs—going up

— Fuel costs and higher stripping ratios in Indonesia— Labour and transport in South Africa— Transport and taxes in Australia

• Bottlenecks to ease slowly in Queensland and South Africa

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