The document discusses challenges facing the coal industry over the medium term, including: - Global coal demand growth is slowing as China's imports decline due to policy changes and efficiency gains. Other countries may not compensate for China's losses. - Supply is decreasing from high-cost producers like Indonesia as low-cost countries like Russia, Australia, and Colombia increase market share. - International thermal coal prices are expected to remain depressed for 3-5 years as the market works to rebalance slower demand and competitive supply. Industry consolidation may be needed for some high-cost producers.

1. Challenging Times for Coal
Impacts on medium-term pricing
Rodrigo Echeverri, Research Fellow
with
Berenice Garcia Tellez, Senior Research Analyst
April 14, 2015

2. 2
KAPSARC in Brief…
KAPSARC
King Abdullah Petroleum Studies and Research
Center
 Independent, non-profit, research institution
 Focuses on energy economics, policy,
technology, and the environment
 Located in Riyadh
Mission
 Advance understanding of energy challenges
and opportunities
 Both domestically and globally
 Through high caliber research
 Build a platform for constructive dialogue
between stakeholders
To create future value and prosperity
to maximize societal benefit

3. 3
Is there a future for coal?
 Most forecasts
agree that coal
will remain a
major part of the
mix over the next
two decades
 There seems to
be a future for
coal…
 It seems that the
relevant
questions
become: How,
where and when
should coal be
used?
Source: NERA analysis from IEA (WEO 2014), EIA (IEO 2013), BP (2014 Outlook to 2035),
ExxonMobil (2015 Outlook for Energy)

4. 4
A transition, or a repeat of the past?
Policies are exacerbating against coal – can the coal industry cope with the pressure?

5. Part 1: Demand Drivers

6. 6
Has the coal market run out of steam?
Coal market recovery not likely before 2017 - Even then, improvement might only be marginal…
Source: McCloskey, Salva, Argus Consulting, KAPSARC Analysis
(40)
(20)
-
20
40
60
80
100
120
140
160
0
200
400
600
800
1000
1200
2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E
Year-on-YearChange[Mt]/Newcastle
[$/t]
CoalDemand[Mt]
Seaborne Thermal Coal Market Demand
Year-on-Year Change Seaborne Coal Demand Newcastle price

7. 7
Can India and ASEAN compensate
for the losses in China?
India and ASEAN show promise but have their own challenges…
Source: McCloskey, Salva, Argus Consulting, KAPSARC Analysis
-60
-50
-40
-30
-20
-10
0
10
20
30
40
2013 2014 2015E 2016E 2017E 2018E 2019E
Year-on-yearchange[Mt]
China
India
ASEAN

8. 8
Sources: KAPSARC Analysis, NBS, IHS McCloskey
Drivers of fading import demand in China: Policy
Public support for coal in China is shrinking and the economy is changing

9. 9
412 409
417 417 415
373
378
364
342 347
327
316 318
250
270
290
310
330
350
370
390
410
430
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
gramsofcoalequivalent/
kWh
Subcritical
Supercritical
Ultra-Supercritical
Sources: IHS Cera, NBS and CEC data
Drivers of fading import demand in China: Efficiency
 Efficiency
improvements
are making a big
difference…
 But further
improvement
implies sunk
costs in the form
of subcritical
power stations
0
200
400
600
800
1,000
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Coal-firedOperating
CapacityGW
Coal-fired Capacity by Technology
Ultrasupercritical
Supercritical
Subcritical
Sources: Platts world electric power plant database

10. 10
-15
-10
-5
0
5
10
15
2013 2014 2015E 2016E 2017E 2018E 2019E
Year-on-yearchange[Mt]
Taiwan and HK
Japan/S.Korea
Europe
MENA
Americas
Demand: Japan, Korea, MENA and Europe
 Europe making
further attempts to
improve its ETS will
likely result in coal
being displaced in
the merit order
 Coal is still a good
alternative for Korea
and Japan due to
shortage of power
and challenges with
other sources of
energy
 Egypt and UAE
moving to build new
coal-fired capacity
Source: McCloskey, Salva, Argus Consulting, KAPSARC Analysis

11. 11
India: Incredible for potential and challenges
Electricity Generation
 Plant load factor of IPPs has dipped to
50% - urgent need to revise tariffs
 21GW of stranded capacity due to lack of
fuel supply
 Distribution companies have
accumulated losses of US$50 Billion and
are effectively bankrupt
Coal Supply
 Modi’s administration has mandated Coal
India to increase production to 1,000
MTPA by 2019 – a very challenging
target by all accounts
 Government inviting private sector
participation, including partnerships with
the major international mining companies
Logistics
 Coal competes with passengers on
railways, but the latter get political
priority
 Need to build three critical railway lines
at Jharkhand, Odisha and Chhattisgarh
to help increase output by 60 MTPA by
2017-18
Coal Imports
 Short-term growth in coal imports likely
to remain solid
 The important question is whether the
current initiatives will change
dependence on coal imports in the long
term

12. 12
ASEAN: A stronghold for coal?
0
5
10
15
20
25
30
35
40
0
5
10
15
20
25
30
2014 2015 2016 2017 2018 2019
CoalDemand[Mt]
GenerationCapacity[GW] Malaysian fuel mix and coal demand
Coal Gas Hydro Coal demand
Source: Tanaga Nasional Berhad (TNB)
Philippines, Vietnam, Indonesia are also expanding their coal-fired capacity…

13. 13
MENA: Coal seems to be getting a lot of attention
Hassyan – UAE
 Planned new power generation in the
emirates includes 12% of total energy
mix from coal
 First phase of coal-fired portion would
be 1200 MW expected by 2020.
Approximately 5 Mt of 6000 NAR
steam coal.
 Two additional, similar coal-fired
power plants planned by 2030, which
could boost total coal imports to 16
Mt.
 Additional demand could come from
independent power plants (IPPs)
subject to approval by DEWA
Egypt
 MOU signed for the construction of the
world’s largest single site coal-fired
station – 6GW
 Total coal demand: 11-13 million tonnes
– potentially Russian and South African
coal
Kuwait
 Cement producers have started to use
dual burners and have become more
inclined towards coal usage whilst
planning cement unit expansions
 Tharwa Investment has partnered with
the Egyptian government for the
construction of new coal-fired generation
capacity

14. Part 2: Supply Drivers

15. 15
Supply: Who wins and who loses?
Indonesia has probably peaked, and the US is already retreating from the export
market. Colombia, Russia and Australia holding better than the rest.
Source: McCloskey, Salva, Argus Consulting, KAPSARC Analysis
0
50
100
150
200
250
300
0
50
100
150
200
250
300
350
400
450
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Other–[Mt]
Indonesia–[Mt]
Indonesia (LHS) Australia Steam (RHS) USA (RHS) Russia (RHS) Colombia (RHS)

16. 16
Source: IEA (WEO,2014), Macquarie Bank ; KAPSARC Analysis
0
20
40
60
80
100
Indonesia South Africa Colombia Australia Russia
DollarspertonneFOB(nominal)
Cash cost for main exporting countries
2012 (IEA)
2014 (IEA)
2015 (Macquarie)
Compressing production costs
Currency depreciations and lower oil prices have benefited some origins more than others

17. 17
Source: Macquarie Bank
The result: Low-CV producers losing the game
The current cost structure leaves little room for further price drops…

18. 18
 International Thermal Coal Prices likely to remain depressed over
the next three to five years
 China imports seem to have peaked, for now
 Fresh demand likely to benefit producers – but it will take time to
balance the market again
 Cash costs have benefited from currency depreciation and fuel
prices, but further improvement will be difficult
 Industry consolidation seems to be a necessity for some origins
Conclusions