Chris Urzaa, Director – Commercial Services, HDR/Salva, Market Overview – Outlook for the coal industry

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Chris Urzaa, Director – Commercial Services, HDR/Salva delivered this presentation at the 2013 Longwall Conference.

Longwall Conference is the optimal place for the industry to come together to discuss the latest advances in the industry, swap experiences and learn from the best operators in the business.

For more information, please visit: http://www.longwallconference.com.au/2013

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Chris Urzaa, Director – Commercial Services, HDR/Salva, Market Overview – Outlook for the coal industry

  1. 1. Coal Markets Update Longwall 2013 Conference 14 October 2013
  2. 2. Agenda § Coal Markets – Recent History § Fundamentals of Asian Demand § 2013 and the Immediate Future § Market Outlook Beyond 2015
  3. 3. Thermal Coal Prices 60   70   80   90   100   110   120   130   17-­‐Jun-­‐11   17-­‐Jul-­‐11   17-­‐Aug-­‐11   17-­‐Sep-­‐11   17-­‐Oct-­‐11   17-­‐Nov-­‐11   17-­‐Dec-­‐11   17-­‐Jan-­‐12   17-­‐Feb-­‐12   17-­‐Mar-­‐12   17-­‐Apr-­‐12   17-­‐May-­‐12   17-­‐Jun-­‐12   17-­‐Jul-­‐12   17-­‐Aug-­‐12   17-­‐Sep-­‐12   17-­‐Oct-­‐12   17-­‐Nov-­‐12   17-­‐Dec-­‐12   17-­‐Jan-­‐13   17-­‐Feb-­‐13   17-­‐Mar-­‐13   17-­‐Apr-­‐13   17-­‐May-­‐13   17-­‐Jun-­‐13   17-­‐Jul-­‐13   17-­‐Aug-­‐13   17-­‐Sep-­‐13   Newcastle  FOB  Marker  -­‐  6,000Kcal  NAR  (US$/t)  
  4. 4. Demand Was Strong In 2012 §  Thermal coal import demand growth hit record levels in 2012 of 80Mt which was 12% growth; §  China, India and Japan accounted for an additional 45, 23 and 12 Mt respectively; 4    -­‐      20      40      60      80      100      120      140      160     China   Japan   India   Korea   Taiwan   UK   Germany   Italy   Turkey   Thermal  Coal  Imports  (Mt)   2011   2012  
  5. 5. But Supply was Stronger §  No major supply disruptions – strikes, derailments, storms, floods, port closures; §  US supply was ‘freed up’ due to domestic coal being displaced in the energy mix by the shale gas boom, and looking for a market internationally; §  Along with significant infrastructure upgrades in Australia and South Africa (and minor enhancements in Colombia), this resulted in an unprecedented supply surge. 5    -­‐      50      100      150      200      250      300      350      400      450     Indonesia   Australia   Russia   Colombia   South  Africa   USA   Thermal  Coal  Exports  (Mt)   2011   2012  
  6. 6. 100   150   200   250   300   350   15-­‐Aug-­‐11   15-­‐Sep-­‐11   15-­‐Oct-­‐11   15-­‐Nov-­‐11   15-­‐Dec-­‐11   15-­‐Jan-­‐12   15-­‐Feb-­‐12   15-­‐Mar-­‐12   15-­‐Apr-­‐12   15-­‐May-­‐12   15-­‐Jun-­‐12   15-­‐Jul-­‐12   15-­‐Aug-­‐12   15-­‐Sep-­‐12   15-­‐Oct-­‐12   15-­‐Nov-­‐12   15-­‐Dec-­‐12   15-­‐Jan-­‐13   15-­‐Feb-­‐13   15-­‐Mar-­‐13   15-­‐Apr-­‐13   15-­‐May-­‐13   15-­‐Jun-­‐13   15-­‐Jul-­‐13   15-­‐Aug-­‐13   15-­‐Sep-­‐13   Australian  Prime  Hard  Coking  FOB  (US$/t)  
  7. 7. Coking Coal Demand §  Apart from China, almost all other major end-users were slightly lower in imports for 2012 compared to 2011. Just as more tonnage came on-line from most exporters.
  8. 8. Coking Coal Supply - Up §  The major exporters had a strong year in 2012, moving the market into over- supply as global growth started to falter.
  9. 9. Coal Sector Pain in 2012 9   Causes of the Pain in 2012 §  Thermal coal demand was strong in 2012, but supply was stronger pushing prices lower. §  For coking coal, with only China growing, the increased supply saw prices move lower. §  Faced with lowering margins all producers moved to lower average costs by producing more thereby increasing supply further. §  The US moved more thermal onto the seaborne market due to gas competition at home. §  Cost inflation driven by labour supply shortages (gas and iron ore boom), increased taxes and royalties; §  A stubbornly strong Australian dollar hampered margins of Australian producers; Solutions §  New Chief Executives at 4 of the Top 5 global miners have seen a much greater focus on cost control, capex and opex. §  Greenfield and Brownfield projects are currently on the backburner. All management focus is on maximising production and efficiency from existing operations. §  Australia has seen record exports in the past 2 quarters with utilisation of assets at or close to 100%.
  10. 10. Asian Demand Changing the Coal Industry
  11. 11. China and India Driving Demand §  In a decade, India and China have gone from 5% of seaborne thermal coal imports to 35%, accounting for 61% of the demand growth; §  This has seen a shift in coal procurement mentality from long term contracts (Japan and Korea), to a much larger spot market. 11   China   2%   Japan   29%   India   4%   Korea   14%   Taiwan   15%  Hong  Kong   2%   Thailand   1%   USA   4%   UK   7%   Germany   7%   Spain   6%   France   2%   Italy   4%   Turkey   3%   Thermal  Coal  Imports  -­‐  2002   China   21%   Japan   19%   India   15%   Korea   13%   Taiwan   9%   Hong   Kong   2%   Thailand   2%   USA   1%   UK   5%   Germany   4%   Spain   2%   France   1%   Italy   3%   Turkey   3%   Thermal  Coal  Imports  -­‐  2012  
  12. 12. Indonesia Has Met That Demand §  In a decade, Indonesia has gone from 14% of the seaborne thermal coal market supply to 39%, and accounting for 61% of the supply growth; §  China has exited the market, and South Africa has lost market share. 12   Indo   14%   Aust   21%   Col   9%  SA   16%   USA   6%   China   11%   Russia   15%   Other   8%   Thermal  Coal  Exports  -­‐  2002   Indo   39%   Aust   21%   Col   10%   SA   10%   USA   6%   China   0%   Russia   14%   Thermal  Coal  Exports  -­‐  2012  
  13. 13. Coking Coal – China Muscles In §  In just 5 years, China’s market share has jumped from 4% to 26%, accounting for almost all the demand growth over the period; §  Over the same period, Europe’s share has gone from 24% to 16% and Japan from a dominant 32% down to 23% last year. 13   Market  Size:  155Mt   Market  Size:  215Mt  
  14. 14. And Australia Falters §  Over the past 5 years, Australia has lost coking coal market share to the USA, Mongolia and Russia; §  However Australia had major issues with flooding during 2011 and 2012. 14   Market  Size:  155Mt   Market  Size:  215Mt  
  15. 15. Asian Demographics
  16. 16. Demographics - Today The different shapes of the population pyramid between China and India will lead to a sustained period of growth for India due to its significantly younger population. 16  Source : UN Population Prospects, 2008 revision The Population Pyramid China 2010 The Population Pyramid India 2010
  17. 17. Demographics - Tomorrow The shapes of the population pyramid will remain very different as China becomes an ‘old’ country and India remains “young” with ~60% below 30 years of age. 17  Source : UN Population Prospects, 2008 revision The Population Pyramid China 2030 The Population Pyramid India 2030
  18. 18. Per Capita Steel Usage 0   200   400   600   800   1000   1200   1400   0   5000   10000   15000   20000   25000   30000   35000   40000   45000   Per  Capita  Steel  ConsumpOon  (kg)   Per  Capita  GDP  (US  $)   Steel  Intensity  Curves  of  Different  Countries   Brazil   China   India   Germany   Japan   USA   Korea  
  19. 19. The Rise of the Chinese Consumer
  20. 20. Urbanisation India  will  urbanise  a  further  215  million  people  by  2025.    Although  China  will  exceed  this  total  the     effect  will  see  India  adopYng  some  of  the  key  Chinese  concepts  i.e.  ConstrucYng  taller  buildings   which  will  boost  steel  demand.   Source  :  McKinsey,  BHPBilliton  presenta<on   20  
  21. 21. GDP Growth and Steel Demand §  On measures of population growth, Urbanisation rates and increasing GDP per capita, it is quite clear that steel requirements and therefore coking coal
  22. 22. Emerging Economies Need Power 0   2   4   6   8   10   12   14   16   USA   Japan   Germany   Russia   China   Brazil   India   Electricity  ConsumpOon  Per  Capita  (MWh)  
  23. 23. Coal is Cost Competitive §  As shown below in this Indian specific example, producing Electricity using coal is very cost competitive. §  Hydro is cheaper but usually subject to seasonal weather patterns. §  As Gas reserves in India have been drastically reduced, its cost has risen from that shown below. 23  
  24. 24. 2013 – Looking Up??
  25. 25. Thermal Demand – Continues to be Driven by India and China 25   §  Asian imports have grown strongly in H1 2013, with India leading the charge: §  Indian imports are up nearly 30Mt ytd, driven by poor domestic coal and gas supply and surging new coal-fired capacity; India will be the No. 2 importer this year, displacing Japan. §  Chinese import growth has slowed in recent months but is still positive;
  26. 26. Supply – Indo/Aus Growing 26   §  2013 has seen only Indonesia, Australia and Russia (mainly to Europe) growing –  Indonesia continues to dominate growth with exports rising over 25Mt ytd; –  Australia is also growing as producers seek to offset low prices by producing more in an effort to lower their average costs. –  Colombia, South Africa and the USA have seen strikes, environmental regulations, the lowering price, and rising ocean freights all work against them this year. -­‐10     -­‐5      -­‐      5      10      15      20      25      30     Indonesia   Australia   Colombia   South  Africa   USA   Russia   2013  YTD  Export  Growth  (Mt,  yoy)  
  27. 27. Steel Production Growth 27   -­‐15,000   -­‐10,000   -­‐5,000   0   5,000   10,000   15,000   20,000   25,000   30,000   35,000   40,000   EU   Other   Europe   CIS   North   America   Sth   America   China   India   Japan   Other   Asia   Steel  ProducOon  Growth  (Mt,  yoy)   2012   2013   §  China now accounts for almost half of world steel production and its steel industry continues to grow.
  28. 28. Coking Coal Demand Growth 28   §  China’s GDP growth continues so it continues to import coking coal. §  Japan is up mainly due to the yen depreciation benefitting their exporters. §  10Mt of steel capacity is due to come online in India in 2013/14.
  29. 29. Coking Coal Supply Growth 29   §  Australian Coking Coal supply growth continues as expansions come on-line and efficient utilisation of assets is now the focus to lower average costs §  Canada is still expanding but the drop in price has hurt some of their exporters. §  Low prices and higher freight is pricing the US out of the Asian growth markets.
  30. 30. 2015 and Beyond
  31. 31. Australia is High Cost §  Australia has high cost and low productivity issues to overcome if it wants to be in a position to meet the growing coal demand from Asia -­‐     2  000     4  000     6  000     8  000     10  000     12  000     2006-­‐2007  2007-­‐2008  2008-­‐2009  2009-­‐2010  2010-­‐2011   Average  Yearly  Output  of  Saleable  Coal  Per   Employee  (tonnes)   QLD   NSW  
  32. 32. Op Costs are Reducing §  However it appears costs can be reduced when the focus is on production and efficiency. Source:    BHPBilliton  PresentaYon  of   May  29,  2013.  
  33. 33. Thermal Coal Demand Long Term §  For these 6 countries alone the total imports were 613Mt in 2012. §  In 2020 it is expected to be 990Mt, and rising to 1,547Mt in 2030.
  34. 34. US$/t Thermal Coal Price Forecasts Analyst 2014 2015 2016 2017 2018 Long  Term CIMB  Group 97 110 116 105 100 83 RBC  Capital  Markets 95 91 90 90 99 90 Morgan  Stanley 91 105 105 100 100 97 UBS 89 94 95 95 98 85 Wilson  HTM 89 92 94 96 98 87 Macquarie  Bank 86 90 90 90 95 80 Commonwealth  Bank 86 89 91 93 95 83 Numis 73 69 69 70 72 65 Average 88 93 94 92 95 84
  35. 35. Hard Coking Coal Demand §  In 2012 these 6 countries were responsible for 162Mt of import demand. §  By 2020 we expect these 6 countries to import 246Mt of HCC and this will rise to be 307Mt in 2030.     China   India   Japan   Korea   Brazil   Taiwan   2011   45   34   36   15   13   5   2012  est.   54   39   36   15   13   5   2015  f/c   89   54   36   15   17   9   2020  f/c   93   70   36   17   21   9   2025  f/c   97   88   36   19   24   10   2030  f/c   101   111   36   21   28   10           CAGR  Growth   2012  to  2030   3.5%   6.0%   0.0%   1.9%   4.4%    3.9%  
  36. 36. US$/t Coking Coal Price Forecasts  "  "  "  "  "  " Long Term" Long Term"  "  "  "  " (nominal)" (real)" 2013" 2014" 2015" 2016" 2017" 2018" 2019-2023" 2019-2023" Average" 148.1" 166.8" 176.4" 176.8" 175.0" 171.7" 174.2" 147.8" Scotiabank" 150" 190" 198.8" 190" 190" 180" 180"  " Macquarie Bank" 145" 178.8" 200" 200" 200" 200"  " 155" RBC Capital Markets" 162.5" 180" 180" 180" 180" 176.7" 176.7" 160" CIMB Group" 150" 177.5" 227.5" 222.5" 200" 180" 180" 149.6" Morgan Stanley" 145" 171.3" 185" 190" 185" 180" 173.4" 148.5" ANZ" 145" 166.3" 178.8" 180" 178" 175"  "  " Credit Suisse" 148.5" 162.5" 173" 180" 185"  "  " 165" UBS" 142.5" 155" 150" 150" 146" 149.2"  " 130" Wilson HTM" 148.5" 157.5" 167" 170" 172" 180.3" 194" 159.1" Commonwealth Bank" 142.25" 155.7" 152.1" 155.5" 159" 162.6" 171.5" 143" Numis" 150" 140.6" 128.5" 126.9" 130" 133.3" 144" 120"
  37. 37. Conclusions…Thermal Coal 37   Demand is Strong §  Global thermal coal demand grew by a massive 80Mt (12%) in 2012, a record year, and the rate is continuing in 2013 and expected to continue through the next 2 decades; §  This is being driven primarily by India and China, but the secondary sources of growth remain important such as Korea, Taiwan, Malaysia; §  Coal is a cheap, widely available fuel source §  Nuclear is on the outer, heavily subsidised renewables are starting to become unpopular and cannot provide base load power, and hydro has environmental and social challenges Supply Will Struggle to meet the Challenge §  Australia, while providing for a safe jurisdiction in which to invest is hindered by high operating and capital costs and is slow to get projects operational. §  The Indonesians will therefore continue to capitalise on their strengths of being quick to market, close in proximity to the demand centres, and the ability to utilise their river systems to continue to satisfy the majority of the demand growth.
  38. 38. Conclusions…Coking Coal §  Fundamentally, coking coal remains scarce despite the current oversupply, which will probably take 24 months to work through the system; §  Chinese steel growth continues, but for how long…. §  The growth in steel usage globally is tied to GDP. Consequently it will be the developing economies which will continue to drive steel growth and therefore coking coal demand. §  Australia holds a dominant position in Coking Coal supply. §  The US, Canada, Mongolia and Russia are the current threats to Australian dominance in coking coal supply. The US in particular are aggressively looking for market share in Asia. §  Mozambique is expected to have infrastructure in place by 2016/17 and so will compete. §  Indonesian coking coal shows promise but its deposits are remote. §  Provided it can provide low cost coking coal, Australian dominance will be hard to displace. 38  
  39. 39. Contact Details InternaOonal  Head  Office   Salva  Pty  Ltd   Level  11,  82  Eagle  Street  |  Brisbane,  4000  |  AUSTRALIA   P:  +61  (0)  7  3211  9911  |  E:  info@salvaresources.com   International Head Office Level 11, 82 Eagle Street Brisbane, Queensland, 4000, Australia +61 7 3211 9911 Chris.Urzaa@salva.com.au www.salva.com.au  
  40. 40. HDR | Salva Capabilities Across the Mining Life Cycle
  41. 41. Welcome to HDR | Salva §  HDR | Salva, delivers exploration, mining and commodities consultancy services to some of the world’s largest mining and investment firms. §  From Markets to Exploration to Mining, HDR | Salva has the capabilities to assist in all phases of the mining lifecycle. §  HDR | Salva’s parent company, HDR is a global, employee-owned architecture, engineering, consulting and construction services firm. With more than 8,000 professionals in nearly 200 offices worldwide, we are committed to helping clients manage complex projects and make valued and informed decisions.
  42. 42. HDR | Salva Service Capabilities Our services cover the entire lifecycle of a mine §  A global solution provider from “Conceptual Stage” to “Closure Stage” for mining projects and operations. §  Strategic management processes and optimisation of mining operations §  Covering multiple commodities and located in diverse geographical locations.
  43. 43. HDR | Salva Turn-Key Solutions
  44. 44. HDR | Salva Turn-Key Solutions
  45. 45. Associated Services: ü  Due Diligence & Valuations ü  Commodity Analysis & Forecasting ü  Energy Analysis ü  Infrastructure Reviews ü  Policy & Regulations ü  Economic Modelling Markets & Economics §  Our consulting and analytics team, in conjunction with our flagship publication group, Salva Report, delivers marketing, supply & demand studies, and commodity forecasting. §  Our global expertise is applied across due diligence projects, infrastructure studies and commodity analysis. §  We provide commodity focused publications, consulting, forecasts and analysis across multiple commodities for leading organisations around the globe. §  The Salva Report suite of publications will soon include an Australian focused edition.
  46. 46. Associated Services: ü  Target Generation ü  Exploration Design & Budgeting ü  Land Access, Community & Environment ü  Site Safety ü  Field Geology Management ü  Turnkey Project Delivery Exploration §  At HDR | Salva, we specialise in the exploration phase of resource development and provide individual geologists for field support right through to “turn-key” exploration management solutions for projects of all sizes, geographies and complexities. §  Our project management specialists ensure projects run on time, on budget and to the safest working environment. §  We work to deliver land access agreements on behalf of our clients that result in workable outcomes for all parties.
  47. 47. §  Beginning at target generation through to feasibility studies, we manage and coordinate a wide variety of projects. §  Utilising our in-house technical services and supplementing with specialist disciplines as required, HDR | Salva provides seamless project assessments, studies and permitting delivery for our clients. §  HDR | Salva also works closely with HDR’s environmental and permitting practice, which is focused on streamlining and managing the regulatory process for our clients throughout a project’s life cycle. Associated Services: ü  Mine Planning & Economic Analysis ü  Study Management ü  Marketing Studies ü  Environmental & Permitting ü  Rail, Port, Power & Waste Treatment ü  Site Infrastructure Studies Feasibility & Permitting
  48. 48. Associated Services: ü  Site Safety & Training ü  Project Management ü  Rail Port & Power ü  Water Treatment ü  Mine Operations Review Development §  Our technical and operational services extend across the mining development phase. HDR | Salva’s capabilities in rail, port and power are critical inputs to successful mine and infrastructure development. §  We also supply experienced personnel to provide operational and project support during the construction period. §  A safe and skilled workforce is critical during major construction and development projects. HDR | Salva’s safety team can provide bespoke safety management and training solutions for each project as required by our clients.
  49. 49. Associated Services: ü  Site Safety & Training ü  Project Management ü  Mine Operations Review ü  Site Operation Support Operations §  HDR | Salva can provide integrated services to assist our clients in maximising the value of their projects through efficient mining techniques. §  Our team of geologists, engineers and analysts specialise in identifying process bottlenecks in the entire pit to port value chain. §  HDR | Salva’s commitment to safety is recognised through key roles on a number of global mining projects. §  Post mine operations, we also provide mine closure and site rehabilitation services.
  50. 50. §  HDR | Salva have been actively involved in closure and rehabilitation planning for a large number of mining operations. §  HDR | Salva can provide conceptual and detailed mine closure plans including design and implementation of rehabilitation monitoring and assessment programs, development of post-closure groundwater management strategies, operational support and environmental management supervision of multi-disciplinary closure and rehabilitation activities. Associated Services: ü  Mine Reclamation ü  Remediation ü  Water Treatment ü  Environment Compliance & Monitoring Closure
  51. 51. §  Proactive, collaborative and responsive stakeholder and public outreach is utilised throughout a project in order to minimise risk and costly development delays or cancellations. §  Those taking a more holistic, strategic and continuous approach to stakeholder engagement are finding it easier to foster and maintain project understanding, acceptance and support among affected communities. §  At HDR | Salva, we work to understand what motivates public resistance and use proven and emerging best practices for outreach, throughout all stages of planning and development. Associated Services: ü  Sustainability Management ü  Community Consultation ü  Corporate Communications ü  Strategic Planning Strategic Services
  52. 52. §  HDR | Salva’s consulting team is comprised of skilled geological and mining professionals that provide the necessary technical services across the resource life cycle. §  Our team of geologists utilise their technical expertise and up-to- date geo-statistical and resource modeling software to deliver our client’s resource modeling requirements to the relevant international reporting standard. §  For project evaluation, we utilise our global data base of mine operating and capital costs, and our techno-commercial expertise, to build financial models to evaluate mine economics. §  In addition, HDR | Salva can assist our clients with public equity raising on major global stock exchanges. Associated Services: ü  Due Diligence & Valuations ü  Resource Geology ü  Mine Planning ü  Geo-Technical ü  Water & Natural Resources Management ü  Environmental Services Technical Services

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