Lara Smith Outlook & Review - Coal


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Lara Smith Outlook & Review - Coal

  1. 1. A Fundamental Analysis Overview of Coal 29th-31st October 2012Asian Mining Indaba, Singapore, Contact: +27 79 504 6770 / +44 203 004 9683 Email: Website:
  2. 2. Core Consultants’ Service Offerings1 Consultancy •Corporate Culture Consulting •Due Diligence & Economic Consulting2 Modelling •Customised Excel Model Building •Model Reviews & Assurance3 Research •Bespoke Research •Commodity Subscription Research4 Customer Satisfaction Surveys5 Corporate Training 2
  3. 3. Upcoming Core Consultants’ Report Titles Quarterly Analysis of Trends in the Ferrochrome & Stainless Steel Industry Authored and Published by Core Consultants, reviewed by Andrew Jones Resource-Net Monthly Rare Earths Review Authored by Core Consultants, Published by Metal-Pages Monthly Trends in the Iron Ore MarketAuthored and Published by Core Consultants, Published in Chinese by SteelhomeSino African Relations -An in-depth review of recent Chinese commodity deals and future strategy in Africa A joint venture between Core Consultants & Beijing Axis-Available 2012 3
  4. 4. Structure1 Overview of key Asian coal producers2 Outlook for thermal coal3 Outlook for metallurgical coal
  5. 5. China’s Coal Industry
  6. 6. China’s coal demand has increased by 251% to 3.24G tonnes in 2010•Surpassed the US in 1986 as top consumer by volume•Making an effort to diversify energy supply, but nuclearprogramme slowed since Fuskishima•Population growth and economic development should see coalconsumption doubling•Generation installation capacity increasing at more than 6%annually Coal power units increasing by 5% annually 6
  7. 7. Coal generation to remain the main energy source 3.5 Electricity generation capacity mixture in China by 2030 3 2.5 Capacity (TW) 2 1.5 1 0.5 0 2010 2015 2020 2025 2030 Coal Oil Hyrdo Gas Nuclear Wind Other 7
  8. 8. Indonesia
  9. 9. 2000-2006 coal production more than double to 153m tonnesIndonesia produces a high-grade thermal coal with low ashFrom 2000-2006 coal production increased to 153m tonnesfrom 77m tonnes2008- Government set target production rate of 261m tonnesper annum2010- produced over 300m tonnes Indonesian coal accounts for 50% of India’s imports 9
  10. 10. 2000-2006 coal production more than double to 153m tonnesIndonesia produces a high-grade thermal coal with low ashFrom 2000-2006 coal production increased to 153m tonnesfrom 77m tonnes2008- Government set target production rate of 261m tonnesper annum2010- produced over 300m tonnes Indonesian coal accounts for 50% of India’s imports 10
  11. 11. Consumption to increase 5 times by 2025Decision by Indonesian gov. to benchmark its coal againstinternational prices prompted political interventionGov. mandated 24% of all coal production to be useddomestically caused India power projects to be put on holdOutput expected to reach 485mt (2015), 680mt (2020), 955mt(2025)Consumption to rise to 300mt (2025) from 60mt (2012) Gov. legislations to reduce coal exports and increase prices has impacted Indian power projects 11
  12. 12. Mongolia
  13. 13. Mongolia the fastest growing economy in the worldMongolia holds ~ $1.3trn in mineral depositsFDI increased to $4.4bn (50% of the country’s GDP) in 2011- Mongoliaconsidered the fastest growing economy in the worldMongolian coal is eating into Australia’s export marketProven reserves of 12.2bn tonnes including 2bn tonnes of coking coalYtd until August- country produced 681m tonnes of coal, up 11.5% y.oy. Huge potential to take diversify away from reliance on Australian production 13
  14. 14. Today there are numerous active coal projects in MongoliaNumber of active coal projects as well as ongoing explorationErdene Xstrata coal are exploring a 400,000 ha site in South Western MongolioTavan Tolgoin (6.5m tonnes with LOM of 30 years)Mark Group has two producing minesSouth Gobi- 176m tonnes of proven and probable reservesUlaan Ovoo- 190,000 tonnes of thermal coal being sold to Russia from this minesince 2011Shivee Ovoo is a producing mine with capacity of 2m tpa and is presentlyproducing 1.2m tonnes Mongolian coal is growing as government fast tracks projects for use in domestic power stations 14
  15. 15. Thermal Coal
  16. 16. Prices been exceptionally weak despite high demand forecasts 180Chinese prices bottomed at 160 140RMB 610/ t ($102/t) in July 120 100now trading $5-6/t below 80 60Newcastle coal delivered to 40 20South East China 0Global stocks are adequate Ave 90% 100% FOB Priceso countries are needing tooff-load2010- produced over 300mtonnes Prices unsustainable and we expect rally by 1Q13 16
  17. 17. Predictions of production cuts coming to lightIndonesia expect output decline by 30% PT Pesona Khatulistiwa Nusantara reduced output target by 30% Bumi Resources posted net loss Adaro cut production forecast by 4% Berau planning 1m t production cut Banpu announced 3m tonnes reductionAustralian projects scaled backUS producer Alpha Natural Resources planning to cut 9% of itsworkforce which should reduce output by 16m tonnes Global production cuts should result in thermal coal 17 price rally
  18. 18. Unseasonal rains resulted in prolonged use of hydropower Chinas monthly hydro power utilisation hours Chinas monthly coal-fired power utilisation 500 hours 450 550 400 350 500 300 450 250 400 200 350 150 100 300 50 250 0 200 May Nov May Nov May Nov Jan Jan Jan Sep Sep Sep Jul Jul Jul Mar Mar Mar Nov Nov Nov Jan May Jan May Jan May Sep Sep Sep Jul Jul Jul Mar Mar Mar 2010 2011 2012 2010 2011 2012 End of monsoon season should see power stations 18 restocking
  19. 19. Maintenance of Daqin railway led to decline in inventory 45 Daqin Railway monthly transportation volume 40 35 m tonnes 30 25 20 Sep Sep Sep Jul Jul Jul Mar Mar Mar Jan Jan Jan May Nov May Nov May Nov 2010 2011 2012 South East China should begin restocking 19
  20. 20. Prices should improve by the end of the fourth quarter 160 Thermal coal forecast 140 140 125 118 120 110 105 100 99 100 90 $/t 80 60 40 20 0 2012 2013 2014 2015 Forecast Forward curve (July 31st) Expect prices to reach $105/tonne by end of 1Q13 20
  21. 21. Metallurgical Coal
  22. 22. 4Q12 benchmark prices fell $55/t from 3Q12 to $170/ tonneDistressed cargoesBMA announced that they returned to full capacityLimited port and rail capacity constraintsNew supply expected to come from Anglo/Rio’s Benga mine inMozambique as well as added output from Mongolia Anticipation of increased output resulted in severe fall in benchmark prices over 4Q12 22
  23. 23. Strikes and poor weather impacted Australian production in 1H12Strikes and wet weather caused exports to decline3Q12 BHP announced that they would lift force majeureCoking coal output should increase to 1.8m t in 2H125.3m tonnes expected to be delivered by the big threePrices unsustainable when compared with costs somecurtailments expected Operating costs average $190/t therefore prices unsustainable 23
  24. 24. 1.4 1.6 2.2 1.2 1.8 1 2 Jan-09 Apr-09 1.51 1.39 Jul-09 Oct-09 1.69 1.56 Jan-10 Apr-10 1.88 1.64 Jul-10 Oct-10 1.55 1.79 Jan-11 Apr-11 1.71 2.02 Jul-11 Oct-11 1.96 1.63 Jan-12 Apr-12 2.05 Jul-12 1.87 days 10 13 14 11 12 8 9 Chinese steel mills reducing production Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Inventory days (coking coal) Nov-11 Jan-12 Mar-12 May-12 Jul-1224
  25. 25. Chinese imports rose 36% in the first 7 months 8 8 Japanese imports of coking coal (m tonnes) 60% Chinese coking coal import by country 7 7 50% 6 40% 6 5 30% m tonnes 5 m tonnes 4 20% % ch 4 3 10% 2 3 0% 1 2 -10% 0 1 -20% Apr-08 Sep-08 Feb-09 Jun-07 Jul-09 Jun-12 Mar-11 Dec-09 Oct-10 Aug-11 Jan-07 Jan-12 Nov-07 May-10 0 -30% Australia Mongolia Others 25
  26. 26. 1Q13 negotiations will be higher than now Low stock levels in China Current prices in Australia on a par with producers’ costs Japan reconstruction efforts These factors will drive higher prices Average if $228/tonne in 2013 compared to $223/tonne in 2012 26
  27. 27. Disclaimer• This document is for information purposes only. The information contained in this document has been compiled from sources believed to be reliable. Whilst every effort has been made to ensure that the information is correct and that the views are sound, Core Consultants cannot be made liable for any loss, no matter how it may arise.• Certain statements contained in this presentation constitute forward-looking statements. Such forward- looking statements involve a number of known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements to be materially different from actual future forecasts. Investors are cautioned not to place undue reliance on these forward-looking statements• Copyright Notice © Core Consultants, 2011. All rights reserved. No part of this publication (text, data or graphic) may be reproduced, stored in a data retrieval system or transmitted, in any form whatsoever or by any means (electronic, mechanical, photocopying, recording or otherwise) without obtaining Core Consultants’ prior written consent. Unauthorised and/or unlicensed copying in any part of this publication is in violation of the copyright law.• Violators may be subject to legal proceedings and liable for substantial monetary damages per infringement as well as costs and legal fees. Brief extracts may be used for the purpose of publishing commentary or review only provided that the source is acknowledged. 27
  28. 28. Contact Details 28