Coal Market Outlook

Manish Garg & Tim Crossley

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This presentation is intended to provide general information purpose only. Given that

forecasts change on a daily basis, it is not intended to be completely accurate and should

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the information contained in this paper.

Recent Trend in Thermal Coal Price

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Mid CV Newcastle FOB- 5500kcal/kg NAR

• Prices for Newcastle benchmark coal has risen by 60% in US$ terms since January 2016. Price for

Sept was US$72/t while spot price is US$83/t now. In A$ terms, prices have gone up from $66/t to the

current level of $94/t in Sept.

• Medium CV power grade coal has also shown a similar trend with a 55% growth.

• The current spike in thermal coal price can be largely attributed to planned production cuts in China,

after Chinese government imposed restriction on operations to only 276 days in a year.

Thermal Seaborne Coal Demand

• Thermal Coal demand in Asia is the real driver of coal price as Asian economies are the most populous nation of

world and still developing.

• Asian trade in the thermal coal market has increased significantly in the last five years, growing from 528Mt in

2010 to 685 Mt in 2015, registering an impressive compound average growth rate (CAGR) of 7.21% while the rest

of the world has grown at 2.15% CAGR from 194 Mt to 216 Mt.

16%

10%

47%

27%

2010

China India Other Asian Countries Rest of World

Total -720 Mt

15%

19%

42%

24%

2015

China India Other Asian Countries Rest of World

Total- 901 Mt

Asian Power Growth & Coal Demand

• Per capital electricity consumption across the entire

region is relatively low in comparison to the

developed economy.

• India, World’s 7th largest economy has capita

consumption is 1/3rd of the world average and is just

10% of that of Australia. Other Southeast Asian

economy has similar per capita electricity trend -

offering a significant potential for upside growth.

• Moving Forward, Coal being by far the cheapest

source of energy will continue to fuel growth of key

economics.

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Power Capacity Addition (GW)

China India North Asia South East Asia

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Coal Demand (Imports)

China India North Asia South East Asia

Japan - Imports expected is remain flat

7

• Imports for the H1 2016 has slipped by 2% y-o-y

to 64 Mt

• Coal consumption by 10 major Japanese utilities

increased by 15% in April–June 2016, to 13 Mt,

compared with 11.3 Mt a year earlier

• Japan’s nuclear power plants are slowing coming

back online although with a cautious pace,

Shikoku is planning to restart one of its reactor

while two units of Takahama units have taken

offline because of safety issue.

• As per our assessment around only 3GW of coal

fired plant is in construction while 17.5 GW of

planned coal fired plants are in different stage of

feasibility.

• Imports is expected to remain lacklustre in 2016,

and will grow at a modest pace from 2017

onwards.

Japan’s Import Trend

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2014 2015 2016

Indian Imports – Set to remain weaken for another year

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• Indian coal-fired capacity at the end of the first half was

186.2 GW, accounting for 61% of the total, and grew by

11%, compared with the level of 167.2 GW a year earlier.

• The power consumption has not grown as financially

struggling distribution companies across India are not

buying power, resulting in frequent and heavy power cuts.

• On supply side, CIL is projecting that output will rise by 62

Mt (11.5%) in FY 2016/17, to 599 Mt. CIL will likely miss its

target but that production will still grow around 8%.

• With the current government’s ambitious project “UDAY’ set

to take off to for the financial turnaround and revival package

for electricity distribution companies, demand for the coal

fired electricity will rise.

• Imports are expected to remain subdued this year, however

India will continue to rely on the international market to help

meet its coal requirements as long term fundamental for

Indian demand is still robust

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Mt

2014 2015 2016

Indian Import Trend

Chinese import demand has gone up after two years of consecutive fall

• Years of overexpansion in capacity and a dramatic

slowdown in coal demand meant a third of the

nation’s coal mining capacity is in surplus.

• China’s coal market is showing signs of recovery,

with demand increasing as the government cuts

domestic production.

• Domestic coal production has registered a drop of

10.2% until to ~1.8 billion tonne, after falling by

3.5% in 2015.

• Imports of steam coal and lignite have returned to

growth in 2016, increasing by 3% in the first half, to

68.1 Mt.

• Domestic prices have risen rapidly; the

Qinhuangdao FOB price, basis 5,500 kcal/kg-

NAR, increased by 23%, from $56 per metric ton at

the start of 2016 to $69 in early August.

• Imports have become more attractive with the rise

in domestic prices, and shipments are likely to

remain relatively high in the third quarter as china

prepares for winter.

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2014 2015 2016

Overall SE Asian Outlook is Bullish

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• In Malaysia, Coal consumption has been boosted by Tenaga Nasional Berhad’s (TNB) 1 GW Manjung

plant, which began operations in April 2015, and Malakoff’s 1 GW Tanjung Bin 4 plant, which entered

into operation at the end of March 2016.

• In Thailand, Imports grew by 4%, to reach 11.1 Mt during first half 2016, compared with 10.7 Mt in 2015.

A number of coal-fired projects are in the pipeline, but progress with development has been slow.

• In Indonesia, domestic demand of coal fired power has risen at a very rapid pace in with PLN’s fast

track-1 program is almost complete. As per PLN’s Annual Report 2015, around 7.5 GW of coal fired

plants are in construction phase while PLN and Indonesian government is planning to add 35GW of

additional capacity by end of year 2019.

• In Philippines, Coal-fired generation increased to 4.4 TWh in the first two months of 2016, up from 4.1

TWh in the same period of 2015, as power demand in the Philippines increased by 1.1 TWh, to 10.4

TWh. Thermal coal demand is expected to remain robust with another 2 GW of coal-fired capacity

scheduled to commission next year.

• In Vietnam, coal demand is expected to remain robust, as construction is under way on some 11 GW of

capacity, and around 13 GW of capacity are in the approval process.

Emerging Asian countries are going to burn more and more coal !!!

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Incremental coal fired capacity (GW)

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Axis Title

Incremental Coal Requirement (Mt)

Incremental Coal Requirement (Mt)

• As per our own estimate, around 50GW

of new import based coal fired plant, is

under various stage of development,

which will increase coal demand by

approximately 160 Mt to 180 Mt of coal.

• These number do not includes – two key

economies (India and China).

Thermal Coal Supply

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• Indonesia, Australia, South Africa, Russia and the USA are the major thermal coal suppliers

globally with Indonesia being the largest among these.

• The recent downturn in the coal market has impacted every one including low cost producers like

Indonesia whose exports fell in 2015 for the first time in a decade and expected to remain

lacklustre in 2016.

• Biggest private coal miner, Peabody Energy, has filed for bankruptcy protection in the United

States amid the slump in coal prices.

• China’s leading state-owned miner, Shenhua Group, appears to have shelved the development

of its largest overseas coal mine, the 10 Mtpa Watermark thermal coal project in New South

Wales, Australia.

• As per Chinese National Coal Association, China has cut almost 560Mt of coal production

capacity by closing 7,250 mines in last 5 years. However, the country still had around 10,000

coal mines in operation by the end of 2016, with a total capacity of 5.3 billion tonnes.

• China plans to close about 4,300 coal mines, remove outdated production capacity of 700 million

tonnes and redeploy around 1 million workers over the next three years.

• Excluding China, approximately 98 Mt of reportable supply output has been cut in last 3 years.

Indonesian domestic demand offsets decline in exports

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• Indonesian exports in 2015 fell for the first time in over

a decade, down to 362Mt and expected to be flat in

2016. The decline in exports was led by shipments of

thermal coal to India, which fell by 14.7 Mt, to 42.3 Mt.

• The Indonesian subbituminous FOB price, on a 4,700

kcal basis, remained at or near its nine-year low of

$36/t for much of the first half but recovered to $45/t

by early August, on account of renewed Chinese

demand.

• Contrary to Indonesian government’s focus and driven

by recent rise in prices, several of the larger miners

are targeting steady growth in output in Q4,2016, with

some pushing for further growth.

• Adaro is targeting 52–54 Mt of production this year,

up from 51.5 Mt in 2015.

• PT Bukit Asam is aiming to produce 28.3 Mt in 2016,

up from 20.7 Mt.

• Bayan Resources expects to increase production to

12–14 Mt in 2016, up from 11.3 Mt.

• Indonesian President has announced an additional

35GW of power generation capacity will be developed,

over and above the Fast Track -1 and 2 programs,

which together will add around 25GW.

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2014 2015 2016

Indonesia's seaborne exports

Date source: MEMR, Trademap. Siecap

Australian Exports

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• Thermal coal production in Australia is relatively

flat. Glencore and Rio Tinto is growing steady

while output from BHP fell by 20% in H1 on

account of heavy rain and higher strip ratio

• Exports from Australia fell 2% during first half

2016, to 96.4 Mt, compared with 98.2 Mt in the

same period of 2015.

• Moving forwards, in 2016, Thermal coal exports

from Australia is expected to remain flat while

exports are expected to increase from 2017

onwards mainly driven by coal demand growth.

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2014 2015 2016

Australia's seaborne export

Source: IHS Energy, Australian Bureau of Statistics

Australian Coal M&A activity heats up

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• Going forward, the Australian coal sector may look very different as current corporate seeks to cash-in by

divesting assets. Several Asset sales have been announced in last 18 months but yet to be completed.

Company Asset Current Status

Anglo American Moranbah North &

Grosvenor Project

• Potentially 2 players are still in the foray including private

equity Apollo Global, BHP and US based Coronado group.

• Price Range ……

Foxleigh Coal Mine • Closure of deal with Taurus Fund Management is yet to close

apparently because of operational changes including closure of

mine and future mine plan, in which Nippon steel, the largest

off taker has key role to play.

Dawson • 51% stake sale in Dawson is going slow may be because of

rehabilitation liabilities and take or pay agreements

Callide • Sale of Callide to Batchfire is likely to be delayed after a legal

dispute over coal supply agreement to Callide power station.

Dartbrook • Sale of Dartbrook to Australian Pacific coal is expected to be

dragged a bit longer as APC is still securing fund to finance

acquisition.

Rio Tinto Mount Pleasant

Project

• Rio completed the sale of $220.7m this month with MACH

Energy. The includes a 2% Royalty payment to Rio if prices are

over $72.50/t.

M&A….

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Company Asset

Vale Carborough

Downs

• Sales close to be announced.

Eagle Downs • Under negotiations.

Mozambique • 15% Stake to Mitsui for $450M.

Itoschu/Sumitomo Newlands and

Collinsville

• Two Japanese company had announced sale of 45% stake

and access to Abbot point coal terminal

QCoal Byerwen • Qcoal is in the process of second stage divestment of a

minority stake in Byerwen project to a potential end user

company.

Cuesta Moorlands

and others

• A$8.73m off market take over bid from Beijing Guoli

Energy, who already hold 53.4% stake in Cuesta

TerraCom Blair Athol • It received a capital through bond.

• Plan to commence production at 2 Mtpa soon.

Sojitz Moorlarben • A potential sale of 10% minority stake

Price Outlook

17

• In short term, Thermal coal price is expected to be driven by import demand

from China as it wants to keep a tight balance between eliminating inefficient

coal mining capacity and at the same time keeping price under control.

• In Siecap’s opinion, thermal coal price is expected to be stabilised at $75/t

(500 Yuan/t)

• Significant M&A activity and recommissioning of latent capacity is anticipated.

• In medium to long term, thermal coal prices is expected to be driven by

fundamentals which clearly favours a better price environment.

Metallurgical Coal

Tim Crossley

18

Recent Trend in Metallurgical Coal Price

• Current price rally is mostly driven by supply insecurities causing “panic buying”.

• Chinese logistical bottlenecks from weather events appeared to be triggering factor, but eventually

spread to the global market on account of Mozambique supply outage and South 32’s “Force Majeure”.

• The volume in the spot market has been good (9.8Mt) spread over diverse buyers(~75% end users) and

dominated by Asian players (~81%).

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Australian Prime Hard Coking Coal

142% Growth

from July to

September

Date source: IHS, Platts, Siecap

Current Price Rally in Metallurgical Coal

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Triggers behind the current Rally

Date Events Significance

Jul 4-18 • Major rains and floods south and

east China

• Vale’s Carborough Downs roof

collapse

• South and East Chinese steel mills

came out in force to buy imported

cargoes

• Force majeure declared by Vale

causing supply to tighten for the

second-tier market

July 18-22 • Flash floods in north China

(Shanxi) causing logistics

disruptions (rail and truck)

• Creating Chinese supply insecurities

• Stoked domestic coke prices upwards

for the 2nd time

July 25-29

• Mozambique coal supply risk on

railway outage

• Creating supply anxieties for global

steelmakers prompting them to enter

the spot market

Aug 8-22

• Chinese end-users actively

procuring on the spot market

• Rest of the world holding back,

thinking that the Chinese bubble

will burst

• Mostly a China-led rally

• Chinese steelmakers start pre-winter

re-stocking

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Triggers behind the current Rally

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Date Events Significance

August 29-September 2 • International steelmakers join

the foray in the scramble to

secure spot cargoes

• Price rally becomes truly global

• Surge in met coal prices puts costs

equal or higher than iron ore in the

blast furnace composition

September 5 onwards • South32 declares force majeure

on roof issues

• China’s NDRC meeting

maintains that coal production

will not be meaningfully

loosened

• 2nd trigger: Rest of the world

comes into the market to cover

short positions caused by the

production problems

• Spot liquidity shifts in favour of

global, rather than China centric

• Strengthen the view that downside

pressure in China in the short-term

will be minimal

Buyer Profile –Current Rally

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2%

Buyer’s Profile

Miner to End-user Miner to Trader Trader to End-user

Trader to Trader End-user to Trader

72% of the deals were

done by End-users

56%

25%

19%

Buyer's profile by Geography

China Other Asian Countries Rest of World

81% of the deals were

done by Asian countries

Date source :Platts, Siecap

Global Steel Scenario

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683 709 775 823 804 804

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2011 2012 2013 2014 2015 2016Annualised

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Global Steel production by Country

China Rest of Asia EU Rest of World

• Crude steel production in 2016 is

expected to remain flat after it fell by

2.8% in 2015.

• In 2015 all countries except India,

(shown in green bar in the bottom right

chart), steel production from all major

economies has registered a fall.

However, in 2016 Indian mills posted

slow growth rate of 0.2% mainly

because of higher Chinese imports.

• Production from Chinese steel mills is

expected to remain flat mainly because

of lower raw material cost and increased

focus in export market.

• EU, Japan and South Korean steel mills

has been contracting since 2015, mainly

because of poor domestic demand and

increased imports of cheaper steel from

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2012 2013 2014 2015 2016Annualised

Growth Rate, Steel production, Major Economics

Growth Rate World Growth Rate China

Growth Rate India Growth Rate EU

Growth Rate Japan Growth Rate South KoreaDate source: World Steel Association

Apparent Steel Use Per Capita

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World

EU

USA

China

Japan

Taiwan

South Korea

Apparant Steel Use Per Capita (Kg)

Steel Production in China

• Crude steel production rose to 68.57 Mt in August,

up 3 percent from a year earlier and 2.6 percent

higher than July, according to the National

Statistics Bureau.

• In the first eight months, output of 536.32 million

tons was just 0.1 percent less than that of last

year.

• Apparent Domestic demand for crude steel in

China is lacklustre as result if this exports have

grown up by 20% CAGR during 2011-2015.

Exports are expected to reached to ~115 Mt by

2016.

• The domestic demand in china is expected to

contract to 690Mt in 2016 from a peak of 712Mt in

2013.

• Chinese steel plant utilisation in 2015 was around

67%, well below the 85% or above it achieved

between 2000 and 2008;

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Crude Steel Output Change-y-o-y

Source: National Bureau of Statistics, PRC

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Mill

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Chinese steel demand and exports

Apparent Demand Chinese Exports

Source: National Bureau of Statistics, PRC

Metallurgical Coal Demand

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Metallurgical Coal Demand

China Rest of Asia EU Rest of World

• Based on 670 kg of coking coal needed to produce 1 tonne of steel, the

apparent demand for metallurgical coal is expected to around 1Bt

• China produces more than 60% of world’s metallurgical coal

Seaborne Metallurgical Coal Supply

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• Australia is the largest supplier into the seaborne metallurgical

coal market, accounting for around 60% of the global supply.

• Other major suppliers are the USA and Canada with market

share of 15% and 9% respectively.

• Very high prices over the period 2008-12 incentivised a

number of new supply sources, notably Mozambique and

Mongolia.

• In response to the low price environment, coking coal

producers cut high cost supply, resulting in a massive drop of

29% and 19% of production from high cost jurisdictions like

Russia and USA.

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Australia USA Canada Others Mongolia Russia

Supply Cuts 2015 (%)

Australia USA Canada Others Mongolia Russia

60%15%

9%

9%

4% 3%

Australia

USA

Canada

Others

Mongolia

Russia

Coking coal suppliers

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Met Coal Exports

Australia USA Canada

Others Mongolia Russia

Data source: Siecap

Data source: Siecap

Seaborne Coking coal

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Seaborne market for coking coal increased from estimated ~130 Mt in 2005 to ~190 Mt to 2015, A

compound annual growth rate of 3.87%

More than half of the seaborne coking coal have been supplied by Australia, ranging from 51% to 65%.

More than 2/3 of growth in exports came from Australia

Coking coal production / Exports by Suppliers

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7%

6%

5%

5%

1%

17%

Metallurgical Coal Production Share 2015 (%)

BHP/BMA/ South32

Anglo American

Peabody

Jelinbah

Rio Tinto

Glencore

Westfarmers

Vale

Others

• BMA/BHP/BMC is by far the largest producer of

metallurgical coal in Australia. The total

production for CY2015 of BHP group (including

South 32) stood at 78Mt (almost 40%).

• Anglo American is the second largest producer

which produced 21.1Mt of coking coal form its

Queensland mines. Jellinbah, Peabody,

Glencore, Wesfarmers, Whitehaven are the

other key producers of coking coal in Australia.

• The extended period of adverse coal-market

conditions has forced coal producers to cut

costs. Big Players such as BHP, Rio, Anglo,

Peabody, Glencore - all have registered a

decline in their profits.

• Metallurgical coal producers have done well to

reduce costs by approximately 30% in the last

two years - resulting in mine closures in Australia

being slower than anticipated.

Steel Production and Coking coal Demand outlook

• In the short term, driven by government’s stimulus and better profitability owing to lower raw material prices,

Chinese steel mills are expected to keep producing. This means demand for imported coal is expected to be

strong.

• However, in the medium term, Chinese government is expected to cut capacity as much as 150Mt as global

steel industry is suffering because of cheap influx of Chinese steel.

• The Group of 20 leaders wrapped up their two-day summit in Hangzhou, China with a pledge to establish a

global forum on steel overcapacity.

• Chinese policymakers have indicated they will tackle overcapacity to cut as much as 150 million tons, or

about 13 percent of its total, by 2020.

• China is expected to enforce stricter environmental safety and energy efficiency standards as well as

tougher credit controls to reduce overcapacity.

• If this happens, Chinese demand for coking coal is expected to fall by 120Mt by 2020.

• At the same time, China is also targeting to close approximately 150 -180Mt of smaller size metallurgical

coal mines in the next five years.

• As a result of this, in the medium term, the demand supply balance is expected to still be in the suppliers

favour.

31

Coking coal price outlook

32

• Q4 contract settlement price is expected to double from previous quarter (around $190-$200/t)

• However, under medium term, coking coal price is expected to ease out, but its highly unlikely to fall below

$100/t threshold.

33

Tim Crossley

Advisory Board Member

t.crossley@siecap.com.au +61 448 848 680

Tim is the former President and Chief Operating Officer with BHP Billiton’s West

Australian Iron Ore business. He was COO of ASX-listed Gloucester Coal and most

recently Executive Chairman of Trans Tasman Resources in New Zealand. Tim has

extensive experience in managing large complex operations with a focus on

identifying innovation and improvement opportunities.

Manish Garg

Director Advisory

m.garg@siecap.com.au +61 407 771 528

Having worked for some of the largest global resource companies like BHP Billiton and

Rio Tinto, Manish has demonstrated experience in the various disciplines of the mining

industry, including mining, mineral processing, marketing, feasibility studies, project

management, business planning, business improvement and as corporate consulting

in valuation, due diligence, M&A and stock market listings on ASX, SGX and TSX..

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