Abdul Hadhi, Argus Media - Energy and Commodity Price Benchmarking and Market Insights

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illuminating the markets

Energy and commodity price benchmarking and market insights

Global coal demand and supply - implications for prices and miners Balikpapan

Abdul Hadhi, Editor, Coal & Petcoke, Asia Pacific 3 September 2013

Presentation summary

•  US coal exports grow •  Poorer Europe switching from South Africa •  Indonesia and Australia grapple with higher costs •  Chinese demand growth dependent on price, hydro •  Indian buyers hit by weakening rupee •  Should we be worried? •  Amid volatility, indexation grows

Argus: quick facts


Argus is a leading energy price reporting agency

•  World’s largest independently held energy price reporting agency

•  Price indexation, news, data and analysis for energy and commodity markets

•  Founded 1970, more than 500 full time staff.

•  19 offices globally, including London, Houston, Washington, New York, Calgary, Rio de Janeiro, Singapore, Dubai, Beijing, Tokyo, Sydney, Moscow, Astana and other key centres of the energy industry.

•  8000 price assessments a day across 80 energy publications

Copyright © 2013 Argus Media Ltd. All rights reserved.


•  Coal: principal provider of price

indexation for physical and derivatives

markets in Europe, South Africa and Asia–

Pacific

•  Natural gas: important UK and NWE index

in gas-to-gas pricing, used by Gazprom in

Russian gas exports to Europe, used by

French energy regulator CRE

Argus and generation fuels



•  Largest team of coal reporters of any publisher

•  Coal correspondents in Australia, Singapore,

Beijing, Tokyo, Moscow, London, South Africa,

Washington DC and Colombia

•  Publisher of: Coal Daily International, Argus/

McCloskey Coal Price Index Report, Argus/

Coalindo Indonesian Coal Report,

Argus Steel Feedstocks, Argus Russian Coal,

Coal Daily (US market), Coal Transportation

report (US market)

Argus and coal



•  Cif ARA /API 2

•  Fob Richards Bay/API 4

•  Fob Newcastle 5500/API 5

•  Fob Newcastle/API 6

•  Cfr south China/API 8

•  Fob Indonesia/ICI/HBA

•  Fob Puerto Bolivar/API 10

Thermal coal indices



•  Fob Australia/API C1

•  Cfr north China

•  North China domestic

•  Cfr east coast India

•  Fob Hampton Roads (mid vol/high vol)

•  Fob Colombia

Coking coal indices


Coal market – enough demand to match supply?


717

311

4

788

284

5

861

276

5

0

100

200

300

400

500

600

700

800

900

1000

Steam Coking Lignite

Mn t

2009

2010

2011

Growth of global physical coal trade

Source: WCA



Indonesia, Australia lead top ten coal exporters

Source: WCA


309

284

124

97

75 72

34

309

144

110

34

75 72

33

0

140

14

63

0 0 1 0

50

100

150

200

250

300

350

Indonesia Australia Russia USA Colombia S. Africa Kazakhstan

Mn t

Total

Steam

Coking


Shale-induced rise in US exports was a game changer

Source: EIA

-‐10

0

10

20

30

40

Jan 07 Oct 07 Jul 08 Apr 09 Jan 10 Oct 10 Jul 11 Apr 12 Jan 13

Mn t

Exports Imports Net exports



US coal production steady to higher

-60

-40

-20

0

20

40

60

2011 2012 2013 2014 0

20

40

60

80

100

Mn t

Western region (right axis) Appalachian region (right axis) Interior region (right axis) Total production (left axis)

Year-‐on-‐year change (mn t)

Source: EIA



•  US domestic consumption off 2012 lows on reverse coal-to-gas

switching by US generators

•  But mostly stockpiles being drawn down rather than new deals

•  Coal exports expected to be 102mnt in 2013 compared to 114mnt

in 2012 – lower but still big volumes Previous annual record was

102mn t in 1981

•  In Q1, Europe took up 53pc, Asia 28pc. Coking vs thermal split

60:40

US exports continue but consumption recovers



US coal consumption increasing

Source: EIA

-120

-90

-60

-30

0

30

60

90

120

150

180

2011 2012 2013 2014 0

10

20

30

40

50

60

70

80

90

100

Mn t

Electric power (right axis) Retail and general industry (right axis) Coke plants (right axis) Total consumption (left axis) Consumption forecast (left axis)

Year-‐on-‐year change (mn t)



US electric power coal stocks drawn down

Forecast

0

25

50

75

100

125

150

175

200

225

250

Jan 2005 Jan 2007 Jan 2009 Jan 2011 Jan 2013

Mn t

Note: Colored band around stock levels represents the range between the minimum and maximum from Jan. 2005 - Dec. 2012.

Source: EIA



•  Unlike US, Europe uses more “dirty” coal instead of “cleaner”

natural gas

•  Coal is cheaper than natural gas in Europe

•  More coal is used due to backlash against nuclear energy after

Fukushima

•  But this is cheaper coal coming mostly from the US. Colombia is

also a source.

•  South Africa unable to get the price it needs from Europe. Asia

overtakes Europe as main buyer of South African coal

Europe buys coal but cheaper product



South Africa coal exports less stable

3.00

4.00

5.00

6.00

7.00

8.00

Jan 12 May 12 Sep 12 Jan 13 Jun 13

Mn t



API 2 falls below API 4 often

60

80

100

120

140

Jan 10 Aug 10 Mar 11 Oct 11 May 12 Dec 12 Jul 13

$/t API2 API4



South Africa coal now looks east

India, 22.6, 33%

China, 12.4, 18% Europe, 11.7, 17%

Others, 21.6, 32%

India

China

Europe

Others

Mn t



•  More tonnages headed to Asia from non-traditional sources

(South Africa, Russia, Colombia, US)

•  Traditional Australian and Indonesian miners grapple with

higher costs. $70 for Australia, super profits tax , $55 for indo,

higher IUP royalties

•  Weaker prices don’t help

•  Australian producers resort to cutting jobs but not production

•  Indonesia producers not looking to cut output either

Asia-Pacific miners face more challenges



•  Indonesia exported around 200mn t of coal in 1H 2013, or more

than two thirds of 2012 total exports

•  With producers not cutting output, exports could be around

400mn t in 2013 barring any shocks

•  Indians may overtake China as biggest buyer but will remain

price sensitive due to weak rupee

•  Factors to watch include Presidential elections next year, higher

DMO

Indonesian exports to increase



190

175

129

105

66

41 33

146

121

97

86

62

32 27

38

54

32

19

4 9 6

0

20

40

60

80

100

120

140

160

180

200

China Japan S. Korea India CN Taipei Germany UK

Mn t

Total

Steam

Coking

Asia dominates top coal importers list

Source: WCA



Top three coal producers include China, India

Source: WCA, mn t



Averages/month Full year

TRADE SUMMARY 2012 2011 YoY % ± 2012 2011

China thermal net coal imports (mn t/m) 15.1 10.7 41% 180.8 128.4

Imports of Australian bituminous (5,500 kcal/kg) 3.24 1.4 131% 38.9 16.38

Imports of Australian sub-bituminous (4500 kcal/kg) 0.38 0.28 36% 4.59 2.24

Imports of Indonesian lignite (3500 kcal/kg) 4.22 2.78 52% 50.6 33.32

Imports of Indonesian sub-bit (4500kcal/kg) 2.62 3.42 23% 31.46 40.99

Chinese demand is still growing (mn/t)

Source: China customs data



•  Chinese thermal coal imports increase

•  Net imports in first 6 months was 100mn t – 11pc increase

•  But power plants also using more hydropower

•  Fear of coal prices in deflationary spiral – buyers deferring or

defaulting expecting price weakness – repeat of 3Q 2012?

•  Proposed import ban on low cv coal creates uncertainty

While Chinese imports increase, prices don’t



API 8 vs China domestic

60

80

100

120

140

May 12 Aug 12 Dec 12 Apr 13 Jul 13

$/t API 8 China domesYc China domesYc (less 17%)



•  Indian domestic output increases

•  But fails to keep pace with demand

•  Demand from power, cement, paper and other textiles

•  Bulk of imports from Indonesia

•  Weak rupee makes India price conscious

India buys more but weak rupee a concern



Key Asian prices – stable to weak

20

40

60

80

100

120

May 12 Aug 12 Dec 12 Apr 13 Jul 13

$/t API5 API8 ICI2 ICI4



•  Talk of Chinese defaults again

•  Coal stockpiles at Indian power plants higher than last year

•  Miners suffering from high costs

•  Growing output puts pressure on prices

•  Australian producers report losses

•  More favour indexation against fixed price

Should we be worried?



•  Buyers in China and India look for low prices and value, and focus

less on quality

◦  Less focused on relationships and security of supply

◦  Will swing to where ever coal is cheapest

•  This forces producers to be more responsive to the market

•  This means the Asian market will be more exposed to shifting prices

•  Use of indices and market-based mechanisms will grow

Indexation reduces price risk



•  Reflects cfr South China 5500 kcal

•  Launched May 2012, publishing weekly price with IHS McCloskey

•  Comprising market survey of 15-20 key participants

•  Deals done by international producers/traders

•  Methodology is same as other API indices

◦  50% volume weighted average of confirmed deals

◦  50% average of bids and offers divided by market position

•  Derivatives deals around 5 mn t mark

•  CME, ICE and SGX offer clearing

API 8 represents south China import market



•  Reflects fob Australia for high ash 5500 kcal

•  Launched May 2012, publishing weekly price with IHS McCloskey

•  First API 5-linked physical deal in Dec 2012

•  OTC derivative deal done Jan 2013

•  Cleared by CME from June and cleared trades done

•  Key buyers are Chinese but also relevant to Korea and Taiwan, which

are already using API 8 as reference

API 5 – index for Australian off-spec coal



Development of the derivatives market

Source: Marex Spectron

‘000 t



•  China and India continue to import more

•  US slowly restarting to consume coal

•  Japan using more coal after Fukushima

•  Europe using more coal as its cheaper than natural gas

•  But this is not yet enough

•  Supply still exceeds demand

•  More cutbacks needed

•  Amid more uncertainty, market turns to indexes

Famous last words …


Thank you Abdul Hadhi Editor, Coal and Petcoke, Asia-Pacific, Argus Media Email: [email protected] Phone: +65 6496 9966 URL: www.argusmedia.com

Copyright notice Copyright © 2013 Argus Media Ltd. All rights reserved. All intellectual property rights in this presentation and the information herein are the exclusive property of Argus and and/or its licensors and may only be used under licence from Argus. Without limiting the foregoing, by reading this presentation you agree that you will not copy or reproduce any part of its contents (including, but not limited to, single prices or any other individual items of data) in any form or for any purpose whatsoever without the prior written consent of Argus. Trademark notice ARGUS, ARGUS MEDIA, the ARGUS logo, DEWITT, FMB, FUNDALYTICS, ARGUS publication titles and ARGUS index names are trademarks of Argus Media Limited. Visit www.argusmedia.com/trademarks for more information. Disclaimer All data and other information presented (the “Data”) are provided on an “as is” basis. Argus makes no warranties, express or implied, as to the accuracy, adequacy, timeliness, or completeness of the Data or fitness for any particular purpose. Argus shall not be liable for any loss or damage arising from any party’s reliance on the Data and disclaims any and all liability related to or arising out of use of the Data to the full extent permissible by law.

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