The International coal market in 2016-2017Indian coal imports – have they scaled their peak yet ?Girish Koulgi – Director, Noble Resources, India

March 2016

Coal Demand Outlook

March 2016

MAR 20163

What to expect from China in 2016-2017The same, but less of it

• The Chinese market will remain weak in 2016, but some signs of stabilization have started to emerge

• Chinese domestic prices have started to level off, as the government makes efforts to cut over-supply

• Old mines have been shut in several provinces, and the government is managing the transition to control impact on employment

• As a result, cost structures have improved as a result of better infrastructure (rail de-bottlenecking)Source: CCR

MAR 20164

What to expect from China in 2016-2017The same, but less of it

• Imports are expected to drop slightly YOY, reaching approximately 100 million tonnes (-20 to -30 million tonnes from 2015)

• We expect monthly imports will remain in the 8-10 million tonnes per month range

Slowing decline

Source: CCR

MAR 20165

What to expect from China in 2016-2017The same, but less of it

• Demand pressure on coals with similar CV to the Chinese domestic material (i.e. 5500 NAR)

• Preference for 4200 GAR Indonesian material to remain firm, as an ideal (and cheap) blend for high-sulphur Chinese

coals• The sub-bituminous market is

expected to decline to limited demand in a few coastal plants that cannot blend lignite

2014 Δ 2015 Δ 2016 Δ 2017

Coal GradeBituminous 111 -45 66 -25 41 -7 34Sub-bituminous 23 -6 18 -3 15 -2 13Lignite 64 -16 48 -2 46 -2 44

Total 198 (66) 132 (30) 102 (11) 91Source: Noble Research

MAR 20166

Northeast Asia (Ex-China)Fresh capacity coming

• Japan: Capacity additions - plants below 150MW, which do not need environmental approval

• Korea: New plants in 2016- Yeosu #1, Samcheok, Taean #9, #10, New Boryung

• Taiwan: Linkou #1, Talin #1• Hong Kong: Slight reduction in

coal demand as a result of government policy on the energy mix

2014 Δ 2015 Δ 2016 Δ 2017

CountryJapan 130 3 133 0 133 2 135Korea 102 3 105 9 114 4 118Taiwan 60 0 60 3 63 2 65Hong Kong 14 -2 12 0 12 -1 11

Total 305 4 310 12 322 7 329Source: Noble Research

MAR 20167

Southeast AsiaBecoming a major player

• Malaysia: Manjung 4 and Tanjung Bin 4 (2000 MW)

• Thailand: NPS Chachoengsao plant

• Philippines: Therma South (150 MW), San Rafael (300 MW), Pampanga (82 MW)

• Vietnam: Lower domestic supply – increasing use of imports for blending.

Strong pipeline of new coal-fired power plants in the Longer term.

• Indonesia: domestic demand also increasing – 10-12 million tonnes growth in 2015

2014 Δ 2015 Δ 2016 Δ 2017Country

Malaysia 21 0 21 3 24 4 28Thailand 20 0 20 2 22 2 24Philippines 15 0 15 2 17 1 18Vietnam 2 1 4 1 5 2 6Other Pacific 6 1 7 2 9 2 10

Total 64 2 67 9 76 10 86Source: Noble Research

MAR 20168

Atlantic MarketBig losses in Europe

• UK: coal imports collapse due to the increase in the carbon price floor to £18.08 per tonne of CO2; switching to gas

• Continental Europe: Low prices for oil-linked Russian gas will increase pressure on coal in the mix

• North America: Market supported by Mexico as a result of the expansion of the Petacalco power plant

• Turkey: Commissioning of Ayas and Eren Enerji plants (1825 MW) in 2017

• Latin America: Growth from new power plants in Brazil and Chile

2014 Δ 2015 Δ 2016 Δ 2017Region

Europe 126 -8 118 -12 106 -7 100Turkey and Med. 42 3 45 0 45 3 48North America 16 2 18 1 19 2 21Latin America 19 1 20 1 21 2 23

Total 203 (2) 201 (9) 192 0 192

Source: Noble Research

Will coal prices recover in the near future?How many mines in the money – 2012 v/s 2016 ? March 2016

MAR 201610

Cost Compression and MarginsThe proportion of producers making losses is not significantly different from 2012

Newcastle 2012 = $97

Seaborne Cash Costs 2012

Source: CRU, Noble Analysis

MAR 201611

Cost Compression and MarginsUnder current oil prices and FX, most high-CV origins can still make profits

Newcastle spot = $50

Seaborne Cash Costs 2016

Source: CRU, Noble Analysis

Seaborne cash costs have nearly halved between 2012 and Q1 2016Australia, Russia and Colombia have been the big winners in the costs race

Supply – What is available at current levels?

March 2016

MAR 201613

SupplyHow much coal is available at current prices?

2014 Δ 2015 Δ 2016 Δ 2017Australia 198 2 200 2 202 2 204Indonesia 422 -49 373 -18 355 -11 344South Africa 71 4 75 1 76 0 76Russia 97 1 98 0 98 2 100Colombia 75 7 82 4 86 3 89USA 32 -8 24 -8 16 -6 10Other 80 -12 68 -7 61 -1 60

Total 943 (55) 896 (26) 878 (11) 873

• Australia: Pressure in the metallurgical market increases availability of thermal coal

• Indonesia: Losing cost competitiveness as mines age and CV declines. A growing domestic market brings some relief to producers.

• South Africa: Remains competitive and well placed –availability of RB1 becoming tighter, but RB2 and RB3 will remain robust

• Colombia: Aggressive growth as coal chains are debottlenecked – costs are among the lowest in the seaborne market

Source: Noble Research

The impact of India in the Supply/Demand Balance

March 2016

MAR 201615

Imported Coal in India: HistoricalFairy Tale – has it been fair enough ?

• Rise coincided with industrial/economic growth

• Domestic Production could not catch up entirely

• Port infrastructure has grown the most in last 7-8 years

• Complemented growth in Fe Ore exports as well

• 2016 - domestic production up, demand slow and global oversupply

2008 2009 2010 2011 2012 2013 2014 2015 2016 (e)

2017 (e)

-

20

40

60

80

100

120

140

160

180

Sector Wise Import Growth – Base case

PSU/SEB Cement IPP/CPP Retail

Mill

ion

MT

Source: Noble Research

MAR 201616

Energy v/s VolumeThe effect of freight on energy on volume

• From 2011 to 2015, volumes grew @15-20% pa

• In a low-freight market, cost of carrying is low

• Delivered cost per heat value is low

• Several medium to high CV users stepped down their CV

requirements

• Period coincided with massive growth in low CV production in

Indonesia

• Imports in MT grew @20%; but after energy adjustment, maybe

only 10-12%

• In 2014, imports from RSA grew ~40% Y-o-Y; but major

contributor was non-RB1 product flow

Import Volume

Energy in Coal (NAR)

MAR 201617

Reversal or Plateau: Imported CoalIs it here to stay ?

• With prices below 2008 (GFC), the trend is reversing

• Global oversupply and slowing China demand

• Power demand remains subdued

• Power tariffs have weakened all over India

• Power sector in India still reeling under accumulated

losses at DISCOM level

• Domestic coal availability at historic high

• Investment climate in Power Sector not the same as few

years ago

• Serious competition from Renewable Energy

Energy in Coal (NAR)

Import Volume

MAR 201618

Question of BandwidthThinner is Better – really ?

Market for Imported Coal – Structural Change ?

MAR 201619

Conclusion: Supply & DemandThe effect of India on coal prices • Increasing probability of

a weak Indian coal market in 2016 and 2017

• We estimate a drop in demand of -3 to -19 million tonnes in three demand cases to assess the potential impact of lost demand in India

• In all cases the global coal market remains heavily oversupplied in 2016 (weak India just makes a bad situation worse)

• In our two higher India cases, the market rebalances in 2017

• In our low India case, oversupply carries forward to 2018

India2014 Δ 2015 Δ 2016 Δ 2017

Base 163 1 164 -16 148 -8 140High 163 1 164 -9 155 -5 150Low 163 1 164 -24 140 -10 130

Seaborne Demand2014 Δ 2015 Δ 2016 Δ 2017

Base 933 -61 873 -34 839 -1 838High 933 -61 873 -27 846 2 848Low 933 -61 873 -42 831 -3 828

Supply 933 (60) 873 5 878 (5) 873

+ = Oversupply 2014 Δ 2015 Δ 2016 Δ 2017Base 0 1 0 39 39 -4 35High 0 1 0 32 32 -7 25Low 0 1 0 47 47 -2 45

Source: Noble Research

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