2. Different types
Hard Coal (energy content above 4,500 kcal/kg and
water content lower than 35%)
– Thermal Coal: used primarily for power generation and
for industrial applications; and
– Coking Coal: used by the iron and steel industry to make
coke
Only Hard coal is traded internationally
Lignite or Brown coal : Mainly used in regional/local
markets and almost exclusively for power generation
May 29, 2013 2
3. So far….
Steam coal trade rose from 304 million tons in 1995 to
985 million tons in 2012, an average annual growth rate
of 7.2%.
Coking coal trade rose from 172 million tons in 1995 to
291 million tons in 2012, an average annual growth rate
of 3.1%.
Total international trade still represents a small share
of coal production.
Only 17% of hard coal production is traded
internationally, whereas this share is above 60% for oil
and 33% for natural gas.
The global coal market remains a thin market dominated
by few players. Small changes are able to shake and
reshape the market.May 29, 2013 3
7. Low Rank Coal Trade
The growth of low rank steam coal is a new trend in global seaborne trade.
Low rank coal also designed as “off-spec” consists of sub-bituminous coal
with a low calorific value (4,900 kcal/kg in the case of Indonesia, 5,500 kcal
for Australia) and a high ash content (up to 24%).
Sold at a discount
An estimated 200 million tons traded in 2011
Australia is now a regular supplier of low rank coal on the spot market.
The suppliers save money as they don’t have to wash the coal.
The buyers get lower prices. In the importing countries, low rank coal is
blended with other coals.
May 29, 2013 7
8. Since 2000, most of coal power plants have been designed with the
possibility to burn coals with a wide range of calorific value.
As more tonnage is needed to produce the same unit of energy, this new
trend explains part of the high growth in steam coal imports by some
countries (China, South Korea).
In Indonesia, low rank coal, accounts for about half of coal reserves in the
country
A ban on exports of low calorific value coal was planned from 2014 so as to
enrich the resource to high value product.
The government however decided in Jan 2013 not to proceed with the
proposed ban as technology required for upgradation of the low rank coal
is currently unavailable
May 29, 2013 8
Low rank coal trade contd…
12. Four countries/regions dominate coal imports
China, India, the grouping Japan/South Korea/Taiwan
which constitutes the traditional Asian buyers, and Europe
Together they account for 84% of total coal imports.
China became the world’s top importer in 2011, taking over
the position that Japan has occupied for three decades.
India became the third largest importer in 2012, overtaking
South Korea
May 29, 2013 12
Coking Coal – A Global Market
13. Concentration of exports in one country, Australia, which accounts
for half of global coking coal trade.
Australia is therefore responsible for supplying customers all
around the world with its high-quality coking coals
The other exporters include the United States, Canada, Mongolia
and Russia
Coking coal exports amounted to 291 million tons in 2012 (254
million tons were seaborne trade)
Whereas steam coal trade accounts for 15% only of steam coal
production, coking coal trade reaches 29% of coking coal
production (2011).
May 29, 2013 13
Coking Coal – A Global Market
17. Coal Exporters
• Six countries dominate coal exports: Indonesia, Australia, Russia, the
United States, Colombia and South Africa
• They account for 84% of total trade.
May 29, 2013 17
21. China-Big Turnaround
China, which was still a net exporter in 2008, became the world’s
first coal importer in 2011(Japan has occupied top slot for three
decades).
China imported 289 million tons of coal in 2012 (+30% over 2011).
China is now responsible for 23% of global coal imports.
China is the world’s largest coal producer.
Chinese imports, even at record levels, account for 7% only of the
Chinese market.
A small change in Chinese consumption or production is able to
transform the status of the country from the number one importing
country to a self-sufficient country.
May 29, 2013 21
33. China is essentially a “cost minimizer”
Chinese coal imports are driven by coal price arbitrage between
domestic and international coal prices.
The high cost of moving coal to the heavily industrialized coastal
area has enabled the entry of import coals to compete with domestic
coal products
“Swing buyer” in the coal market
In early 2011, when Australian coal prices,China was a net exporter,
with Chinese traders reselling their coal cargoes
In 2012, imports grew sharply (up 30%) driven by low international
prices
May 29, 2013 33
39. Consolidation Drive
Push to move small individual mines
into the ownership of the SOE
mining companies
Creation of 14 large coal production
centers
These bases to be operated by 20
companies
Out of which 10 will have an output
above 100 mtpa and others should
have above 50 mtpa
Production growth to continue,
despite the ongoing closures of
smaller mines, albeit cost pressure to
exist
May 29, 2013 39
40. China Infrastructure
Expansion
According to the 12th FYP by 2015 Chinese coal transported via
railways is projected to be 2.6 Bt, which corresponds to an average
annual growth of 5.4%.
Railway capacity dedicated to coal is expected to grow to around 2.8
Gt to 3-3.3 Gt by 2015.
Construction of new power plants closer to the mine site
Construction of ultra high voltage (UHV) grid systems
The current plan is to invest RMB 500B in the roll out of this grid to
2015.
The UHV grid will then extend to some 40,000 km and by 2020 the
target is to reach 300 GW of transmission capacity.
This should also reduce operational transmission losses from 6.6%
to 5.7%.
May 29, 2013 40
41. 12th Five Year Plan –
Production Boost
The plan foresees a huge development of coal production in
western regions (the Xinjiang region mainly), which account for
72% of the new capacity to be added during the five-year plan.
This corresponds to a capacity of an additional capacity of 530
million tons per year.
The government aims to build 17 super-large coal mines in the
region, boosting annual coal output of Xinjiang to 400 million tons
by 2015.
May 29, 2013 41
42. Challenges…
Xinjiang region is located nearly 3,000 km away from major
northeastern ports.
Xinjiang holds 40% of the country's coal resources (2.19 trillion tons),
but produced only 120 million tons in 2011 (an estimated 140 million
tons in 2012).
Water management will be a key issue for coal miners
The railway from the west to the east is still very limited
To tackle this issue, a railway line is under construction between the
Xinjiang region and the Gansu Province which will be able to transport
50 million tons a year by 2015.
Coal by wire is also under consideration
May 29, 2013 42
43. China coal import boom
underway??
Domestic production and consumption to be capped at 3.9 billion tons by 2015.
Most analysts forecast a growth in coal consumption to 4.3 billion tons by 2015,
requiring a large call on imports (almost 400 million tons depending on the actual
level of production)
However, if the government manages to actually cap coal consumption at 3.9 billion
tons, China could regain its self-sufficiency
Imports in that case would be limited to specific coal qualities, mainly coking coal
and high caloric value thermal coal, which are not widely available on the Chinese
market
12th Five-Year Plan foresees a diversification of the electricity mix away from coal.
Share of non-fossil fuels in generating capacity- Expected to increase to 30% by 2015
(up from 20% currently).
Efforts are focused on the development of hydropower (more than 50% of the
increase in non-fossil energy consumption by 2020)
May 29, 2013 43
46. Coal Prices have been
Deregulated
Price liberalization has not
yet led to a rise in
domestic coal prices
Current overcapacity in
the Chinese market
Impact is not yet seen on
the competitiveness of
imported coal relative to
domestic coal
May 29, 2013 46
50. Market Rumours
May 29, 2013 50
China's NEA is framing a policy to curb import of low grade thermal and coking coal
by imposition of import ban
Unconfirmed reports say that thermal coal with low calorific value less than
4,500kcal/kg, ash content of more than 25% and a sulphur content of more than 1%
will be banned.
Possible ban on coking coal import with more than 12% ash content, 1.75% sulphur
and more than 12% total moisture
Timeline for the implementation is not clear
NEA is also proposing to tighten coal import procedures by setting criteria for
Chinese coal importers
a. Registered capital of more than RMB 5000 million
b. Traded volumes of 100 mn tonnes in the past three years
c. Must have adequate stockyards
Market participants are skeptical about implementation of this policy.
Indonesia would be the biggest looser with almost 100 mn tonnes at stake.
The limit on sulphur would also effect US coal miners.
The proposal will get support from Chinese coal miners, who are reeling under
severe cost pressures amid low cost imports
52. India
Although India is the third largest producer of coal
(577 million tons in 2012),
Domestic production is insufficient to cover the
country’s fast-growing needs
Large-scale blackout experienced in July 2012.
In 2012, the country imported a record 134 million
tons (15% over 2011)
Consequently India appears as the next area of
surging coal imports
Ultimately, India could overtake China as the
world's largest importing country.
As 40% of the population still lacks access to electricity
Large power plants, most often located on the coast
and powered by coal, resulting in a high demand for
imported coal.
May 29, 2013 52
54. India’s Coal Imports-200 mts
by 2017??
India is the world’s fourth largest producer of
steel (77 million tons produced in 2012)
Reserves of coking coal are of poor quality (34
million tons imports in 2011).May 29, 2013 54
55. India’s Power(less) Ambition
India has an ambitious electrification program -Initiative for the
construction of 14 coal-based UMPPs each with a capacity of 4 GW.
India’s current power capacity is approx 224 GW, with 58% based
on coal (130 GW)
The new 12th Five-Year Plan (FY2012/13-2016/17) has confirmed
this program, with the aim of adding 64 GW of thermal capacity in
the next five years, almost entirely powered by coal (63 GW).
Coal consumption could reach 980 mn tons v/s production estimate
of approx. 795 mn tons by 2016-2017
Gap would be approx. 185 mn tons
Government has introduced the so-called captive mines policy to
open State mines to private investment.
Out of over 200 coal blocks, containing coal reserves of over 50
billion tons, only 30 mines have started production and contributed
merely 36.3 million tons in FY 2011 against a target of 104 mn tons
May 29, 2013 55
56. India’s Power(less) Ambitions
contd..
Licenses are now auctioned to avoid discretionary allocation.
A fierce battle has developed between the Ministry of Coal and the Ministry of the
Environment.
However a large part of the increase is expected to come from the captive mines,
which contribution to domestic supply is very uncertain.
May 29, 2013 56
57. India’s Overseas Shopping Spree
May 29, 2013 57
• Coal India is ready with a war chest of USD 6.3 bn and
18 investment bankers to identify overseas coal assets to
meet domestic needs
• There have received 32 proposals from Indonesia,
Australia, Mozambique, South Africa,Chile and
Colombia
• India’s second largest power generator Tata Power is
scouting for cheap coal assets in US, Canada and
Colombia
59. JST
Japan, South Korea and Taiwan constitute the traditional
Asian buyers’ group
The three countries, which do not produce coal, rely on
imported coal to fuel coal-based power generation and
to manufacture steel products.
Japan imported around 182 million tons in 2012 (approx
108 mt steam coal)
South Korean imports have increased rapidly from
Indonesia (129 mn tons in 2011)
May 29, 2013 59
61. Taiwan
Majority is steam coal (62 million tons) mostly used in
Taipower’s coal-fired power plants
The country also imported 3.8 million tons of coking
coal.
May 29, 2013 61
62. Europe
European coal imports rose by 14% in 2011 and 11% in
2012
Abundance of US coal at low price and the collapse of
CO2 prices, coal has regained its competitiveness in the
power sector.
U.S. steam coal exports to Europe (including Turkey)
jumped 124% to 18 million tons in 2011 and 90% to 31
million tons in 2012.
Coal gained a larger share of European electricity
generation, at the expense of natural gas
May 29, 2013 62
64. Surge in Atlantic Trade….
In 2012, EU imported around. 210 mts
May 29, 2013 64
65. German Coal Fired Power Stations Due to Open By 2020
Operator Location MW
Date
Due Status
Trianel Lunen 750 2013 In Trial
EnBW Karlsruhe 874 2013 In Construction
GDF Wilhelmshaven 800 2013 In Construction
Steag Duisberg 725 2013 In Construction
E.ON Datteln 1055 2013 In Construction
RWE Hamm 1600 2013 In Construction
Vattenfall Hamburg 1640 2014 In Construction
GKM Mannheim 911 2015 In Construction
MIBRAG Profen 660 2020 A/W Approval
RWE Niederaussem 1100 n/a A/W Approval
GETEC Buttel 800 n/a A/W Approval
Dow Stade 840 n/a A/W Approval
May 29, 2013 65
66. Europe Future
In the future, European coal consumption and imports will mainly
be driven by national policies and are contrasted among countries.
While the United Kingdom and Spain absorbed most of the U.S. and
Colombian tonnages made available on the market in 2012, the
trend may be short-lived as new regulations unfavorable to coal
burning are put in place in both countries.
In Germany, at the opposite, the phase-out of nuclear power, leads
to resurgence in coal consumption. The building of new hard coal-
fired power plants will increase imports.
May 29, 2013 66
68. Indonesia
Massive transformation
The country has significant reserves (Kalimantan and Sumatra) of
bituminous and sub-bituminous coal, well-suited to the needs of
Indian and Chinese power stations, Indonesia’s two main markets.
Enjoys a strategic geographical position, very favorable production
costs and internal transport logistics (mainly by barge).
Coal production reached an estimated 409 million tons in 2012.
The country produces a large quantity of sub-bituminous coal, as
well as “off-spec” coal with a calorific value under 4,100 kcal/kg,
lignite and PCI.
May 29, 2013 68
69. One of the lowest costs of
production
Indonesia enjoyed one of
the lowest costs of
production in the world.
Easiest mines are
depleting and the country
has to turn to more
difficult mines, located
farther from the ports,
and deeper.
The cost of production,
including domestic
transportation cost are
now rising
May 29, 2013 69
71. Indonesia is feeling the
pressure too!!
Coal exports increased by 18 million tons only to 327 million tons in
2012.
Small coal mines, often operated illegally, were shut down in
response to lower prices.
The major producers, such as Bumi and Adaro, which operate some
of the country’s least expensive mines, also saw their margins
squeezed.
All companies have announced costs reductions and cut in coal
output and miners are reconsidering expansion plans.
May 29, 2013 71
72. Challenges ahead
• Indonesian domestic consumption is booming
• The uncontrolled rise in coal exports has led the government to prioritize
the domestic use of coal over its exports and to introduce more regulation
in the sector.
• A ban on exports of low calorific value coal was planned from 2014.
• Government decided in January 2013 not to proceed with the proposed
ban and instead to control coal output by giving each producing region
an annual mining quota
• The government has also mandated producers to set aside part of their
production for domestic consumption (20-25%).
• A tax on the export of unprocessed coal is also under consideration,
although no date has been fixed yet.
• The government plans to raise coal mining royalties
• A new regulation, requires foreign investors in mining companies to divest
51% of their shares by the 10th year of production, but uncertainties remain
over applicability and pricing.
May 29, 2013 72
73. Australia
Largest player until 2011,
overtaken by Indonesia in
that year
Largest exporter of coking
coal
Represents nearly 50% of
the global coal exports
Most of the hard coal
reserves are found in the
states of Queensland and
New South Wales (95% of
Aus hard coal production)
Very sensitive to weather
events…2011 rains
disrupted Queensland
coking coal productionMay 29, 2013 73
75. Australian supply is not all
cheap
Mining companies in Australia have to struggle with high production costs
and a decrease in productivity.
Current production costs are among the highest in the world
The industry has to move to lower quality deposits that are more costly to
exploit
New developments are further away from major rail and port
infrastructure.
Input costs such as labor, machinery, equipment’s hire and diesel fuel have
all increased dramatically.
Margins are further squeezed by the rising cost of infrastructure access, the
appreciation of the Australian dollar against the U.S. dollar and escalation
in capital costs.
Australia introduced a carbon tax in July 2012.The tax applies to the mining
of coal, as opposed to the burning of coal for electricity generation.
The government also introduced a new tax on profit of coal and iron ore
companies in July 2012 (the Minerals Resource Rent Tax).
May 29, 2013 75
76. Australia- port capacity issues
Australia’s coal exports have been plagued by a structural shortage of rail
and port capacity over the past six years.
Australia has started to lose its competitive edge and its share of the world
thermal coal trade has declined since 2006.
Coal exports are serviced by nine major coal ports and export terminals
located in the states of Queensland and New South Wales.
Recent expansions to capacity at Hay Point and Abbot Point ports added
some 50 million tons a year.
Australia is increasing infrastructure capacity to add about 60 million tons a
year to annual coal export capacity by 2015.
An additional capacity of 200 million tons a year is planned in the medium
term.
May 29, 2013 76
77. Sunset industry???
The reduced margins coupled with the recent fall in coal prices have
moderated Australia’s coal industry expansion.
Mining companies have announced reviews of their investment
plans.
BHP Billiton, Xstrata, Rio Tinto, Anglo and Peabody all cut output at
their highest cost mines or even close them.
Workforce reduction amounted to 3,500 jobs from April to September
2012.
The future expansion of Australian coal exports is strongly linked
with gains in productivity and a recovery in international coal prices.
Development in competing countries, Indonesia and the United
States for steam coal, Mongolia, Mozambique, the United States
and Canada for coking coal, will be a determining factor as well as
the evolution of demand in importing countries, China and India
particularlyMay 29, 2013 77
80. US
The collapse of U.S. gas prices, to $4/million Btu in 2011 and even
$2.75/million Btu in 2012, linked with the “shale gas revolution”,
has made coal uncompetitive in the electricity sector (92% of the
total coal demand)
U.S. coal demand dropped 4% in 2011 and 11% in 2012. The
reduction in domestic demand has forced U.S. miners to look for
overseas outlets.
Their exports surged by 31% in 2011 and 16% in 2012. They reached
112 million tons in 2012, more than twice the level of 2009.
May 29, 2013 80
81. Coal use is a taboo in US!!
Stricter environmental standards in terms of coal production and its
consumption in power plants cloud the future of coal in the country.
The expected outcome of the new regulations on air pollution is the
retirement of 27 GW of capacity between 2012 and 2016
Decrease in the coal demand has resulted in a decrease in the coal
production in the country
In 2013/2014,coal is likely to atleast partially gain its lost market share
visa vis gas (as gas prices have bounced back from low levels
unsustainable for shale gas producers)May 29, 2013 81
83. US Competitiveness
No large coal ports on the U.S. West coast, steam coal (as well as
coking coal) has to be exported from the Gulf coast.
Large maritime freight disadvantage compared with Australian or
Indonesian coal.
Steam coal prices therefore have to be sufficiently high to cover
production, internal transportation, handling costs, and maritime
freight(this was the case in 2011). The fall in steam coal prices since
February 2012 makes this new business unprofitable.
Trade to Europe at current prices (US$90/t beginning of December
2012) is not profitable for most mines.
Therefore although exports were at record levels in 2012, they
should decrease in the short term
May 29, 2013 83
84. US – Still a swing supplier??
They enter the international coal market when prices are high and
withdraw when prices come down
Exports have started to decrease compared with their peak level
reached in June and July 2012 and the scale back is expected to
continue in 2013.
The EIA expects that coal exports will decline in 2013 but remain
above 90 million tons for the third straight year
May 29, 2013 84
85. PRB coal exports to Asia???
There are several projects of new ports and railways under the planning
stage. Two large port projects have been proposed in Washington State,
Longview Terminal and Gateway Pacific Terminal.
Along with three smaller projects in Oregon State, the proposals would
add between 115 and 138 million tons a year in total export capacity .
In addition, 10 proposed terminals, although each small in scale, would
together add 86 to 138 million tons a year in port capacity along the Gulf
Coast.
Projects face strong local opposition and challenging permitting issues.
Community and environmental groups are concerned about coal dust from
increased train traffic and the broader climate impacts from the coal being
burned overseas.
Pending construction of new ports on the West coast of the United States,
the port capacity of the West coast of Canada is being used.
May 29, 2013 85
87. Expansion of Panama Canal
Many of Colombia's port expansion projects lie on the Caribbean near the eastward
opening of the Panama Canal.
Slated for completion by 2015, the Panama Canal expansion should enhance
opportunities for coal exports to Asian markets.
The freight cost will be largely reduced as it will then be possible for smaller
Capesize ships (the so-called "Post-Panamax" vessels) to use the canal instead of
having to sail around the Cape of Good Hope
Also, a 220 km railway line between the port of Cartagena (on the Atlantic coast)and
the Pacific Ocean is under consideration by the Chinese Development Bank
China and Colombia are also considering an 800 km railway from central Colombia
to the Pacific and expansion of the port of Buenaventura on the Pacific coast.
The US$2.7 billion project would be funded by the Chinese Development Bank and
would facilitate coking coal exports to China.
In 2012, India’s Aditya Birla Group announced its plan to purchase a US$1 billion
stake in Drummond's Colombian coal mines.
Greater exports of Colombian coal to Asia in the future could be expected
May 29, 2013 87
91. • Overall, expect fairly moderate volume growth (4-5% at best) in coal
trade over the medium term
• Distance travelled is likely to improve going forward as Atlantic basin
exporters overcome infrastructure hurdles to meet rising Asian demand
• Expect bouts of volatility in sync with price arbitrage opportunity
May 29, 2013 91
Moderate Growth Contd...!!
92. • Supply disruptions- Both weather-related (e.g. Queensland
floods) and man-made (e.g. industrial action at mines, rail and
ports)
• Forex risk- USD appreciation against AUD,RMB etc can directly
impact seaborne competitiveness
• Govt Policies- esp Chinese,India,Indonesia
• Power deregulation in India
• Enviromental Policies
May 29, 2013 92
Key risks...!!
93. May 29, 2013 93
Grain & Minor Bulk Trade!!
306
319
321
343
345
367
270
280
290
300
310
320
330
340
350
360
370
380
2007 2008 2009 2010 2011 2012
Seaborne Grain trade
Grains
5 year CAGR of 4.21%
1366 1363
1197
1359
1481
1544
0
200
400
600
800
1000
1200
1400
1600
1800
2007 2008 2009 2010 2011 2012
Seaborne minor bulk trade
Seaborne minor bulk…
5 year CAGR of 2.48%
99. May 29, 2013 99
Overall conclusion
• Iron trade growth to likely outperform coal trade growth
• Capesizes to outperform Panamax in the medium term
• At current NB prices, 10 yr BE for a NB Cape dely (Japan) would we
approx. USD 16,300/day
• Long term Capes to Panamax Spot Earnings ratio has been close to 1.6
• Booking NB Capes at USD 16,300/day BE would be equivalent to
building a NB Panamax with a USD 10,200/day BE
• Overall would suggest
– Build 2 NB Capes dely Q3/Q4 2015
• Atleast book Cal 2015 FFA contract fro 2 Capes @ USD 14,000/day
– Build 2 NB Supramax dely Q3-Q4 2015
– Build 2 NB Kamsarmax dely Q4 2015/ Q1 2016
• Unless S/H market for Panamaxes corrects 15% below current
market levels
