Challenging Times for CoalImpacts on medium-term pricing

Rodrigo Echeverri, Research Fellowwith Berenice Garcia Tellez, Senior Research Analyst

April 14, 2015

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

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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

A transition, or a repeat of the past?

Policies are exacerbating against coal – can the coal industry cope with the pressure?

Part 1: Demand Drivers

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

2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E

(40) (20) - 20 40 60 80 100 120 140 160

0

200

400

600

800

1000

1200

Seaborne Thermal Coal Market Demand

Year-on-Year Change Newcastle price Seaborne Coal Demand

Year

-on-

Year

Cha

nge

[Mt]

/ N

ewca

stle

[$

/t]

Coal

Dem

and

[Mt]

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

2013 2014 2015E 2016E 2017E 2018E 2019E

-60

-50

-40

-30

-20

-10

0

10

20

30

40

China

India

ASEAN

Year

-on-

year

cha

nge

[Mt]

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

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012250

270

290

310

330

350

370

390

410

430412 409

417 417 415

373 378364

342 347

327316 318

gram

s of c

oal e

quiv

alen

t /

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

19901992

19941996

19982000

20022004

20062008

20102012

20140

100,000200,000300,000400,000500,000600,000700,000800,000900,000 Coal-fired Capacity by Technology

UltrasupercriticalSupercriticalSubcritical

Coal

-fire

d O

pera

ting

Capa

c-ity

GW

Sources: Platts world electric power plant database

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2013 2014 2015E 2016E 2017E 2018E 2019E

-15

-10

-5

0

5

10

15Taiwan and HKJapan/S.KoreaEuropeMENAAmericas

Year

-on-

year

cha

nge

[Mt]

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

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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

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ASEAN: A stronghold for coal?

20190

5000

10000

15000

20000

25000

30000

0

5000

10000

15000

20000

25000

30000

35000

40000Malaysian fuel mix and coal demand

Coal Gas Hydro Coal demand

Gene

ratio

n Ca

paci

ty [G

W]

Coal

Dem

and

[Mt]

Source: Tanaga Nasional Berhad (TNB)

Philippines, Vietnam, Indonesia are also expanding their coal-fired capacity…

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MENA: Coal seems to be getting a lot of attentionHassyan – 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

Part 2: Supply Drivers

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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

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 20190

50

100

150

200

250

300

350

400

450

0

50

100

150

200

250

300

Indonesia (LHS) Australia Steam (RHS) USA (RHS) Russia (RHS)Colombia (RHS)

Indo

nesi

a –

[Mt]

Oth

er –

[Mt]

16

Source: IEA (WEO,2014), Macquarie Bank ; KAPSARC Analysis

Indonesia South Africa

Colombia Australia Russia0

20

40

60

80

100

Cash cost for main exporting countries

2012 (IEA)2014 (IEA)2015 (Macquarie)

Dolla

rs p

er to

nne

FOB

(nom

inal

)

Compressing production costs

Currency depreciations and lower oil prices have benefited some origins more than others

17

Source: Macquarie Bank

The result: Low-CV producers losing the game

The current cost structure leaves little room for further price drops…

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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