Global Thermal Coal: Long-Term Market Trends Presented to...

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Strategy with substance

Global Thermal Coal:

Long-Term Market Trends

Presented to:

Coal Industry Advisory Board

November 21, 2011

by

Jeff Watkins Chairman of Coal

November 2011

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© Wood Mackenzie 2

World GDP growth is forecast to average 3% annually with top

coal importers averaging 4+%

-5%

-3%

-1%

1%

3%

5%

7%

9%

2000 2003 2006 2009 2012 2015 2018 2021 2024 2027 2030

GD

P %

World GDP grow th

Average w orld grow th 1981 - 2009

Volume Weighted Average GDP grow th - top 15 seaborne thermal coal importers

Source: Wood M ackenzie Coal M arket Service

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© Wood Mackenzie 3

© Wood Mackenzie 3

Coal will overtake oil as the most important fuel source in 2030

Total Final Global Energy Demand by Region

Coal Other Solid Fuels Oil Gas Hydro Nuclear Other Renewables Electricity Heat

0.0

0.2

0.4

0.6

0.8

1.0

2011 2015 2025 2030

Mil

lio

n K

toe

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

2011 2015 2025 2030

Mil

lio

n K

toe

0.0

0.2 0.4

0.6

0.8

1.0 1.2

1.4

2011 2015 2025 2030

Mil

lio

n K

toe

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2011 2015 2025 2030

Mil

lio

n K

toe

0.0

1.0

2.0

3.0

4.0

2011 2015 2025 2030

Mil

lio

n k

toe

0.0

0.2

0.4

0.6

0.8

1.0

1.2

2011 2015 2025 2030

Mil

lio

n K

toe

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© Wood Mackenzie 4

© Wood Mackenzie 4

Generation capacity mix going forward is going to be dominated by coal

and gas

Almost 3 TW of new power capacity is expected to

be commissioned worldwide by 2030

• Over 60% of this will be built in Asia Pacific, notably

in China and India

Coal and gas-fired capacity will account for over

half of all additions but growth is strongest in

renewables

• Coal and gas fired generation are expected to

maintain around 60% of the global power

generation mix

The overwhelming majority of coal additions are in

Asia Pacific (60% of which are in China) whereas

gas additions are more evenly spread across the

regions.

Nuclear additions are also dominated by China

which accounts for 45%. The strong growth in

renewables is being led by the more developed

markets of North America and Europe

Thermal Coal Trade ► Demand

Global power generation capacity

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

9,000,000

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

MW

Coal Other Solid Fuels Oil Gas

Hydro Nuclear Other Renewables

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© Wood Mackenzie 5

0

500

1,000

1,500

2,000

2,500

3,000

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

Mt

Total Thermal Seaborne Total Met Seaborne

Global Trade: Thermal volumes account for nearly 75% of seaborne coal

trade

Source: Wood Mackenzie Coal Market Service

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© Wood Mackenzie 6

Even factoring in a proxy for downside risk, the outlook for

global thermal import requirements is immense

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2011 2013 2015 2017 2019 2021 2023 2025 2027 2029

Pa

cif

ic Im

po

rt D

em

an

d (

Mt)

Hong Kong Japan Malaysia PhilippinesSouth Korea Taiwan Thailand VietnamIndia China

1% annual GDP

reduction starting

in 2020

x x

x

x

x

1,821 Mt

1,357 Mt

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China

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© Wood Mackenzie 8

China Demand Drivers – Factors to Consider

GDP weaker immediately, stronger mid-term (2013-16)

Rates of Maturation of Economy – elasticity softening?

Nuclear build stronger – despite Fukushima

Gas contribution higher – total forecast to reach 11 bcfd

Heat rate vs. coal import quality – competing factors

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© Wood Mackenzie 9

Robust GDP drives China’s power demand – and despite non-coal

initiatives, coal maintains the majority share of generation

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029

TW

h

Non-Coal CoalSource: Wood Mackenzie Coal Market Service

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© Wood Mackenzie 10

China thermal coal demand growth not strictly confined to the power

sector

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029

Mt

Power Cement Fertiliser Heating Residential Conversion Other


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Offsetting factors: power plant efficiency gains vs. degrading

coal quality

8,000

8,200

8,400

8,600

8,800

9,000

9,200

9,400

9,600

9,800

2009 2012 2015 2018 2021 2024 2027 2030

Btu

/kW

h

Rapidly improving heat rate

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

2009 2013 2017 2021 2025 2029M

t

4,000

4,100

4,200

4,300

4,400

4,500

4,600

4,700

4,800

4,900

5,000

Kc

al/k

g (

GA

R)

Coal Use for Power Generation (Mt)

Kcal/kg (GAR)

Declining calorific

value


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And even with growing abundant gas supply nearby, price story is

supportive of China coal demand growth


$3.00

$5.00

$7.00

$9.00

$11.00

$13.00

$15.00

$17.00

$19.00

$21.00

$23.00

2011 2013 2015 2017 2019 2021 2023 2025 2027 2029

US

$/m

mb

tu (

Re

al 2

01

0)

East China WACOG $/mmbtu South China WACOG $/mmbtu North China WACOG $/mmbtu

LNG Price (JCC 14%) $/mmbtu China CFR Coal Price

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Transportation infrastructure is key driver for expansion of domestic supply

Thermal Supply/Demand Balance - 2010 Current and Future Rail Capacity

Tibet

Xinjiang

Qinghai

Inner Mongolia

Sichuan

Gansu

Yunnan

Jilin

Heilongjiang

Hunan

Hebei

Hubei

Guangxi

Shaanxi Henan

Anhui

Jiangxi Guizhou

Fujian

Liaoning

Guangdong

Shanxi Shandong

Jiangsu

Zhejiang Chongqing

Ningxia

Taiwan

Hainan

Beijing Tianjin

Shanghai

Hong Kong

China thermal coal balance 2010

< (100)

(99) - (25)

(24) - 0

1 - 100

> 100

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Domestic production keeps thermal imports in check…for a time

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029

Su

pp

ly &

De

ma

nd

(M

t)

0

200

400

600

800

1,000

1,200

Imp

ort

s &

Ex

po

rts

(M

t)

Coal demand Domestic supplyCoal exports Seaborne coal imports


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India

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India’s fuel mix is also driven by coal…

0

500

1,000

1,500

2,000

2,500

3,0002000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

Tw

h

Coal Fuel oil Other renewable Gas Nuclear Hydro Solid fuels


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And other coal makes up smaller volume than in China

0

200

400

600

800

1000

1200

1400

1600

1800

2000

2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030

Mt

Electricity generation Cement Sponge iron CTL Other industry Exports


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…with UMPs dominant along the coastal region in the next 5-6

years

0

50

100

150

200

250

300

350

2006

2008

2010

2012

2014

2016

2018

2020

2022

2024

2026

2028

2030

Year

GW

Coal-f ired generation capacity Low import - plantsLow import - projects High import - plantsHigh import - projects

Source: Wood M ackenzie Coal M arket Service

Import Potential of Coal-Fired Generation Capacity

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India: Can supply keep up – is that risky given uncertainty of

production forecasts?

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030

Mt

0

50

100

150

200

250

300

350

400

450

Mt

Coal demand Domestic supply Coal imports


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Seaborne Trade

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Major suppliers – great expansion required

Source: Wood Mackenzie Coal Market Service - International Trade

0

200

400

600

800

1,000

1,200

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Mill

ion

to

nn

es

Australia Colombia Indonesia Russia South Africa United States

Source: Wood M ackenzie Coal Supply Service

www.woodmac.com



0

10

20

30

40

50

Galilee Surat South Sumatra

East Kutai

Ex

po

rt t

herm

al (M

t)

2010

2020

New export thermal basins are emerging in traditional supply regions

Exports (Mt) 2010 2020

Galilee Basin 0.0 12.4

Surat Basin 1.7 43.5

South Sumatra 4.5 27.1

East Kutai 0.0 34.0

Total 6.2 117.0

Indonesian and Australian emerging basins - supply growth

Source: Wood Mackenzie Coal Supply Service

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New transport infrastructure is required – even in Indonesia

East Kutai Sumatra

Source: Wood Mackenzie Coal Supply Service

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R.G. Tanna &

Barney Point

Australian export infrastructure is being transformed

200

220

240

260

280

300

320

340

360

380

400

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

20

21

20

22

20

23

20

24

20

25

Mil

lio

n t

on

nes

pe

r ye

ar

WICET 3

AP X80

WICET 2

Dudgeon Point

WICET 1

Hay Point

APCT

Brisbane

Existing

Source: Wood Mackenzie Coal Supply Service Australasia

Abbott Point

Dalrymple Bay &

Hay Point

Fisherman’s

Island

Major port and rail developments in Queensland

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US West Coast Export Potential

Vancouver has provided hope for PRB exporters:

• Montana PRB has seen most benefit

• Approximately 10 Mt to be exported in 2011

Future potential?

• Coalspur -Ridley

• Millennium Bulk Terminal at Longview

• Further possible locations in Puget Sound or

along Columbia River – target 25-30 Mtpa

• Environmental opposition will be strong

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All emerging thermal coal basins are cost competitive into southern China

Fuel cost comparison to coastal southern China (in 2010 terms)

Low High

Mtpa Cash Cost

US$/t

Shipping

US$/t

CIF

US$/t US$M

East Kutai 10.0 18.7 8.4 27.1 270

Surat 5.1 49.3 13.8 63.1 323

Galilee 5.0 50.8 13.8 64.6 323

Sumatra 8.2 34.0 8.4 42.3 349

Shanxi 5.3 59.9 9.6 69.5 370

Shaanxi 6.0 54.1 9.6 63.7 381

Inner Mongolia 6.8 49.5 10.3 59.9 408

Xinjiang 6.7 86.2 9.6 95.8 642

Costs in 2010 terms

US$1 = 6.77 CNY

US$1 = 1.3 AUD

-

100

200

300

400

500

600

700

E K

uta

i

Su

rat

Ga

lile

e

Su

ma

tra

Sh

an

xi

Sh

aa

nxi

Inn

er

Mo

ng

oli

a

Xin

jia

ng

US

$M

-

1,000

2,000

3,000

4,000

5,000

6,000

kc

al/

kg

(n

ar)

Fuel cost Avg Energy

Source: Wood Mackenzie

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Even Chinese coastal supply at high-end of cost curve – driven

by RMB appreciation

2015 energy adjusted thermal cash costs – delivered to southern coastal China (US$/t)

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Summary and conclusions

Summary plus risks and challenges

Emerging basins will be major sources of future global coal supply

Transport infrastructure development is critical - timing and capital cost are key risks

Local challenges surrounding mining, transport and environment/regulatory will impact

New supply sources are very competitive, particularly into China and India

Major upside potential exists in new areas – including US west coast export growth

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Strictly Private & Confidential

This report has been prepared by Wood Mackenzie Limited. The report is intended solely for

the benefit of clients and its contents and conclusions are confidential and may not be

disclosed to any other persons or companies without Wood Mackenzie’s prior written

permission.

The information upon which this report is based has either been supplied to us by 21

November 2011 or comes from our own experience, knowledge and databases. The opinions

expressed in this report are those of Wood Mackenzie. They have been arrived at following

careful consideration and enquiry but we do not guarantee their fairness, completeness or

accuracy. The opinions, as of this date, are subject to change. We do not accept any liability

for your reliance upon them.

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