Coal Markets Overview, trends Domestic and Export Markets

Junior Coal Mining Ventures X

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Coal Markets Overview, trends - Domestic and Export Markets

• Global Overview

• Financing Coal Mines

• South Africa’s Markets

• Exports

• Local Industry2

The Coal Markets 2015

Over the coming decade, coal demand will, hopefully, continue to rise.

The International Energy Agency’s (IEA) World Energy Outlook 2014 suggests that while coal will undergo a relative decline in the energy mix, global coal demand by 2040 will rise 15%. However, coal consumption will vary dramatically from region to region.

In coming decades, coal demand will originate from non-OECD states, primarily Southeast Asia, Middle East, India, Africa and Brazil.

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The Coal Markets 2015

In Europe’s declining economy, the access to cheap gasand renewable policy incentives have promoted theweakening of coal. Nevertheless, scope does exist forgrowth, in cases like the phase out of nuclear power inFrance – WCA.

Undeniably in the coming decades, coal production andpricing trends will be led by Asia. By 2040, China, India,Indonesia and Australia will be responsible for 70% ofglobal production.

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The Coal Markets 2015

In China, despite the recent trend, demand for coal willcontinue because attempts to expand the role of gas at theexpense of coal will not succeed. Gas, as well as renewablesand nuclear energy, will grow over the coming decades,however, the coal use for electricity generation is fundamental.A more likely scenario for reductions in coal demand will comefrom industrial shifts from coal to gas and structural changesto the Chinese economy.India’s economic development, as China’s before, is founded incoal. As the world’s third largest producer, coal accounts for68% of electricity generation. India’s Planning Commissionprojects that 2 billion tons of coal will be required by 2031-2032 to meet their energy demands.

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Global Coal Latest News

• Global coal is declining. It has become unwanted because of competition and air pollution.

• China's coal industry has been changed drastically by new regulations and the imperative to cut emissions.

• India's coal imports will be affected by its planned new production increase. • Indonesia coal output and exports are declining because of low prices. • US coal is unable to compete economically with gas.• The US’s coal industry has to consolidate to survive.• In Europe’s declining economy, cheap gas and renewable energy have

produced a drop in coal use.• Implementation of carbon tax will hurt growth, and intensify unemployment

in South Africa.• Japan is gearing for more coal-fired power. It will become a larger consumer. • In Australia; majors are becoming less involved in coal and small companies

are forced into consolidation and closures.

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Thermal Coal

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Thermal coal prices increased marginally as result of some suppliers, like Glencore production cuts.But after February the small price increases showed to be short-lived. Since the world's top user and importer of coal, China, has had a sharp fall in imports this year, the prices could not be maintained. Chinese imports might drop by 38Mt in 2015, and there is no importer able to take such a tonnages of coal that prices should remain high.In Europe coal imports have reduced and Colombia and Russia exports have replaced the other producers. Colombia's Drummond, is maintaining regular exports despite new low coal prices.

The Chinese Syndrome

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The decline of coal imports into China, has been a shock, and a huge impact.Low coal prices initiated China’s imports of coal. China became the largest importer of coal globally, and steam and coking coal imports reached 260Mt in 2013.

In 2014, China’s monthly imports had attained 30Mt, supplying 10% of its coal needs. Then signs appeared, as China focused on air pollution in their cities. Soon, they started to change their link with coal. Import taxes and quality limits were publicised, and power plants had to reduce dependence on imported coal.

For the first time, China’s coal imports fell by 10% in 2014.

India’s Quest

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India, only second to China in their coal usage and production, is aiming to produce 700Mt of coal in the next fiscal year, its biggest annual output, as it boosts production.India’s output has been always slower than demand because of Coal India's (CIL) could not expand its mines. Despite the recent rise in output, imports are still high as power supply adds capacity. But the new government aims for India to be self-sufficient and has accelerated clearances for Coal India to open new mines. Private companies are to produce 90Mtpa from 42 mines.CIL will also raise its output.The result of these will be less coal imports and what is imported will be from Australia and Indonesia, their biggest suppliers.Where does that leave us, SA as supplier to India, with our current, 2015 exports a 38% of the total?

Australia’s Blues

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It is a bad time for coal miners with prices for thermal and metallurgical coal at their lowest in years. The promised reduction of major miners have not managed to cap oversupply. The outlook for coal prices is likely to remain weak in the foreseeable future. Thermal coal prices have decreased more than 20% in the past year, creating painful hammerings for producers.With boldness and careful cost regulation, now is the right time for juniors to do coal projects before of the next prices increase, if there is one. Despite of renewables, coal is not disappearing soon. The world needs coal’s cheap, reliable energy. BP’s annual review says that coal’s share of energy demand is the highest since 1970, making it the world’s fastest growing fuel.

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Indonesia’s Conundrum

Indonesia's coal production weakened 3.4% last year below total output from the previous year. Exports slid 5% in 2014, down from 2013.The decline in coal production, the first in 30 years for Indonesia, is the result of low global prices, which have led some producers to cut output and also of Indonesia's new export rules. A coal producer said it is more difficult to sell low rank coal in the global market. Now, he is aiming for the inland market where he is fetching better prices. “He says; “I’m hopeful for our mines. We are hardly covering costs.” Indonesia will revise its expected coal production for 2015 to around 460Mt.Indonesia is the world's top producer of thermal coal and the biggest exporter to China and India, both now cutting imports.

Asia’s Analysis

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Demand will continue to rise. As with thermal coal, India is likely to overtake China as the biggest importer of metallurgical and thermal coal.

India potential increase of coal imports, will probably be sourced from Australia. There are still difficult times ahead, mainly for thermal prices at their current levels. As with so many investments, the best is to invest on the down cycle. For those prepared to work cleverly on small budgets, the rewards will come.

Markets – What Happened Since Last Year?

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Developing Countries

Yvo de Boer says that coal is a vital part of the energy mix for years to come. The WCA has long been supporting the important role of coal in bringing people out of poverty.

China is an example. On the past three decades China has connected 99% of its people to the grid, increasing steel production by 18%, and cement production by 14% and developing their economy rapidly. de Boer, said “you have to be able to offer these countries a viable alternative, before you begin to reject coal.”

Markets – What Happened Since Last Year?

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Coal Mining Finances

Financiers are not happy about funding coal because of environmental issues.

This decision is praised by environmental groups who want banks to halt loans to coal miners.

It has already been announced that lending to coal companies is reduced, because of the risk that future regulation and competition from natural gas pose on the coal industry.

Here in South Africa it has become almost impossible to find funds to develop new projects

SA Exports 2014by Region

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Region Mass (Mt) %

Far East 40.5 54.39

Europe 18.1 24.38

Middle East 9.4 12.64

Africa 5.0 6.68

America (N + S) 1.4 3.38

SA Exports 2014by Country

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Country 2014 Country 2014Argentina 367 499 Malaysia 1 606 446Bangladesh 79 034 Mauritius 590 753Benin 69 737 Morocco 1 338 387Brazil 133 644 Mozambique 844 265Canada 182 650 Netherlands 9 690 484China 3 175 604 Nigeria 134 741Croatia 135 000 Pakistan 3 366 568Denmark 685 605 Portugal 155 000Djibouti 319 317 Romania 43 460Egypt 157 000 Senegal 552 462Ethiopia 48 537 Spain 2 937 183France 835 979 Switzerland 64 300Germany 304 300 Taiwan 1 344 000Ghana 40 000 Tanzania 46 000Guyana 75 000 Togo 94 404India 30 454 391 Tunisia 65 000Irish Republic 126 821 Turkey 3 580 693Israel 2 503 247 UAE 2 284 810Italy 1 515 990 Uganda 10 000Japan 145 000 UK 1 128 218Kenya 445 567 Ukraine 520 875Republic of Korea 305 300 Uruguay 33 000Kuwait 336 446 USA 574 345Madagascar 531 806 Yemen 382 626

RBCT Coal Index 2004 – 2015

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180.00

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US$/ton

US$

SA’s Inland Coal MarketTonnages

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User Mass (Mt)ELECTRICITY 117.3SYNFUELS 39.6MERCHANTS AND DOMESTIC 10.1INDUSTRIES 5.2STEEL 3.2CHEMICAL 2.2METALLURGICAL 1.7CEMENT 1.0BRICK AND TILE 0.2AGRICULTURE 0.02TRANSPORT 0.01MINES 0.01Total 180.8

SA’s Inland Coal MarketPrices

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User Mass (Mt) Price (R/t)ELECTRICITY 117 .3 258SYNFUELS 39 .6 297MERCHANTS AND DOMESTIC 10 .1 381INDUSTRIES 5 .2 502STEEL 3 .2 588CHEMICAL 2 .2 237METALLURGICAL 1 .7 969CEMENT 1 .0 456BRICK AND TILE 0.2 143AGRICULTURE 0.02 734TRANSPORT 0.01 777MINES 0.01 742Total 180 .8 294

Markets – What Happened Since Last Year?

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SACRM – Eskom’s Future Needs

Markets – What Happened Since Last Year?

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SACRM – Eskom’s Future Coal Prices

Markets – What Happened Since Last Year?

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SACRM – Eskom’s Future Coal Demand

303.6 MtDiscards51.8 Mt

Electricity120.8 Mt

Exports64.0 Mt

SA Coal Industry – Future Trends

• Despite a rapid but small increase in renewable energy sources to 1.6% of the total, fossil fuels still provide the major share of power generation with coal accounting for 85.6% of South Africa’s electricity, a situation that will not change in the near term.

• As a result of the current lack of incentives and capital to implement new projects, coal production has remained static for some years. Because some of the old big mines reserves are almost exhausted, production will soon will drop drastically.

• Inland prices have increased continuously and some better grades fetch now higher prices that similar grades in the seaborne market.

• Exports are constrained by lack of demand and extremely low prices.

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Year Mass (Mt) 2002 220.22003 239.32004 242.82005 245.02006 244.72007 247.72008 252.72009 250.62010 254.72011 257.72012 258.42013 256.02014 260.5

303.6 MtDiscards51.8 Mt

Electricity120.8 Mt

Exports64.0 Mt

Conclusions

• Coal production has stagnated since 2002. If new mines, of sizable production are not implemented, production will soon drop.

• Exports are not the revenue makers anymore. Some export quality coal finds inland buyers paying more than FOB RBCT prices.

• Eskom future plans depend on increased production, which can be obtained by Eskom’s investment on new projects.

• Coal will always be king in South Africa, if total economic collapse is to be avoided.

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Coal in the Global and Southern African Context

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