Coal Mining Conference 2019

Information Classification: General

Coal Mining Conference 2019Discussion Material

18th September, 2019

Strictly Private & Confidential

Information Classification: General1

Table of Contents

Implications of US-China trade overhaul, and disruption in supply chains 3~6

How will coal trade evolve? 8~12

DMO Evolution 14~16

Local operational issues for the industry 18


Table of Contents



DMO Evolution 14~16



Current seaborne coal trade status (in 2018)

❑ Coal market fundamentals

➢ The largest coal resources are found in

China, USA, Australia & Indonesia. Most

of coal (82%) is used domestically.

➢ 17% of global coal production is traded

on the seaborne market. The remaining

1% represents land borne trade.

❑ Coal trading fundamentals

➢ Markets for thermal & metallurgical coal

operate independently of one another.

➢ Seaborne market is divided 2 segregated

markets based around Atlantic & Pacific

Basins, due to the shipping cost.

➢ Pacific Basin trade currently accounts for

81% of seaborne market, with Indonesia

& Australia being the largest suppliers.

➢ The developed Asian economies of Japan,

S.Korea & Taiwan (JKT) have traditionally

been the principal Pacific basin importers,

however growth has limited recently.

➢ Growth has instead been concentrated in

developing economics of China, India &

South East Asia (SEA)

I. Coal market & trading fundamentals


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Jan-18 Apr-18 Jul-18 Oct-18 Jan-19 Apr-19 Jul-19

RMB ICI 4

Chinese RMB and Euro Vs. USD RMB Vs ICI 4 after US-China Trade war

Trade war

II. US-China trade war impact on coal market

❑ US-China trade war impact on coal market

➢ US-China tariff-based trade war was announced May 2018. This conflict’s impact was basically restricted to Metals.

➢ Currency risks have changed USD has strengthened broadly, more specifically Chinese RMB. The managed depreciation against

USD rose above 7, increases credit risk in China. Chinese RMB cannot be weakened too much. This weak RMB weakened China’s

purchase power, which dampened seaborne coal price by lifting domestic production.

➢ Since Nov. 2018, China’s import restriction for the remainder of the year kept seaborne restocking interest muted and resulted

in seaborne coal prices sliding. Australian coal imports are increasingly being impacted by customs clearance delays, in

north China.

➢ Restrictions are expected to remain in the near-term to support domestic prices amidst high inventories, weakened demand

since Jan. 2018. Chinese government will continue to stabilize domestic prices by controlling supply.

➢ The impact of weaker Euro and other key producer currencies, like Australian dollar, are other factors shifting the currency

risks facing the thermal coal markets have been influence factor for the further reduction in prices in 2019~2020

➢ At the end of Aug. 2019, RMB is ¥7.09/USD and ICI 4 price is USD31.2/ton

(Source: Macquaries)


Chinese electricity capacity outlook by fuel type China seaborne coal imports by type

III. Long term outlook of China’s power demand & coal imports

❑ Chinese Power demand (Long term)

➢ The portion of coal in China’s power generation mix is to reduce from 64% in 2018 to 44% in 2030, despite increase of

electricity capacity. Renewables are a large part of China’s initiative for fuel diversification for environmental protection, by

reducing carbon emissions by increasing use of non-fossil fuels to 15% of the primary energy mix by 2020 and 20% by 2030.

❑ Chinese Seaborne coal imports by type (Long term)

➢ Despite high domestic production, China requires significant tonnages of Seaborne imports to satisfy total thermal coal

demand due to domestic supply issues on mine cost inflation, insufficient infrastructure and barriers in the state-controlled power

market. China’s total thermal coal import demand is sourced from inter regional flow originating in the north land borne imports

from Mongolia (18Mt in 2018) and seaborne imports (192Mt in 2018).

➢ The construction of ultra-high voltage transmission line is expected to reduce coastal demand & competition with domestic

supply in the coastal market will reduce China’s coal imports over the forecast from 192Mt in 2018 to 104Mt in 2030. However the

import will be required due to the as quality requirements, especially higher ranked coal.

(Source: Wood Mackenzie) (Source: Wood Mackenzie)


Table of Contents



DMO Evolution 14~16



I. Recent changes in coal market

Description 2016 2017 2018 2019 2020Seaborne Exporters (Mt) 923 942 999 995 985

Australia 204 199 208 208 210China 8 6 4 5 5Columbia 90 84 80 74 76Indonesia 364 383 426 443 439North Korea 22 4 0 0 0Russia 116 131 138 137 133South Africa 76 79 76 76 75US 23 38 49 36 30Others 21 17 18 16 18

Seaborne Importers (Mt) 924 945 981 1,002 991China 180 175 194 191 180India 153 150 167 180 181Japan 130 133 129 128 130South Korea 97 112 113 106 108Taiwan 56 61 59 58 59Other Asia 101 117 136 160 172Germany 39 31 28 27 27UK 5 5 6 4 4Other Non Asia 163 161 149 146 131

Demand - Supply (Mt) 0 3 -18 7 6

❑ Atlantic Basin

➢ US led oversupply in 2018. Due to swamped Atlantic market, US, Colombia & South Africa coal exported to Pacific basin, resulted from price falls. US exports remained high, split btw. Atlantic & Pacific markets

➢ Russian coal has been flooded to European market as well as North Asian market in Pacific basin

➢ Low gas prices, below U$3 /MMBtu through the year, have effected to European market, which resulted in increase use in gas-fired power in Europe.

➢ European imports with the steep decline in coal-fired power generation, will repeatedly decline

❑ Pacific Basin

➢ China & India have driven the seaborne thermal coal demand in the past years, while both are coal producer who can adjust the domestic demand & production

➢ China’s policy remains unpredictable as import ban in Nov. 2018 & unofficial ban on Australian imports by the customs restrictions, which imply China is going to enforce the import quotas, which will keep importin 2019 to be no more than 2018

➢ Indian coal fired generation has been stronger more recently, and this has kept power plant stock at steady level, despite the current slow down since July 2019

➢ Japan, Korea & Taiwan’s demand has been maintained due to government policies for alternative power

➢ Demand strength continues in South East Asia

(Source: Argus)


Power generation by fuel type Coal usage in power generation, by region

II. Long term outlook of global power generation & APAC power demand

❑ Global Power generation

➢ It will increase by 27% over the period 2018 to 2030, from 25,018TWh to 31,855TWh. All fuels, with the greatest

percentage increase in solar power & wind generation, will increase over the period except for oil.

➢ Coal powered generation increases by 2% overall but loses 7% of generation share in 2030. The changing usage of

coal in power generation defers around the world for the period. The largest declines in coal consumption for power generation

are in North America by 278Mtce, China by 89Mtce & Europe by 128Mtce. Overall, global coal consumption for power may

increase slightly, from 2,847Mtce to 2,906Mtce. The declines above are offset by growth in South East Asia by 122Mtce and

India by 240Mtce

❑ Asia Pacific (APAC) Power demand

➢ In line with recent growth trend, power demand in APAC will grow from 11,647TWh in 2018 to 16,204TWh in 2030. Demand

in Japan, S.Korea & Taiwan (JKT) will increase moderately due to declining populations & strategic energy demand profiles.

South East Asia (SEA) has significant capacity for energy growth. India is under industrialization, with large increase in

power demand. Power demand in China is expected to be significant, despite rebalancing of power.

➢ Coal will remain the cheapest way to fuel power demand growth throughout the region, with only piped natural gas, scarce

throughout the region, despite growth in renewables.

(Source: Wood Mackenzie)(Source: Wood Mackenzie)


Global seaborne thermal coal demand Seaborne coal demand by country

III. Long term outlook of global & APAC seaborne coal demand

❑ Global seaborne thermal coal demand

➢ It is expected to decline, dropping from 983Mt in 2018 to 979Mt in 2030 with the largest declines from Europe & China. The

largest increase in seaborne thermal coal demand comes from SEA, from 105Mt in 2018 to 216Mt in 2030, making it the second

largest importing region after JKT. India has the second largest growth in seaborne import demand, from 164Mt to 197Mt in 2030.

❑ Asia Pacific (APAC) seaborne thermal coal demand

➢ Within APAC, overall seaborne thermal coal demand is expected to moderately grow, largely driven by growth in SEA & India.

It is expected APAC seaborne imports to fall in 2021 to 796Mt from 818Mt in 2020, mostly due to policy-driven declines in China.

➢ Subsequent growth will take demand to 837Mt in 2025, remaining relatively stable until 2030, due to regional economic growth &

resultant large power demand growth. Demand growth over the next ten years will be led by SEA & India, and India will

overtake China as the largest demand center for seaborne thermal coal in 2020. The developed economy of JKT are

expected to transition to new power generation technologies.

➢ Increased availability of low cost, high quality coal notably supplied by Australia, and a push for energy efficiency has increased

demand for high rank coal at the expense of lower ranked coals from Indonesia, recently. This trend is likely to continue into long

term, driven by environmental policies. Low-rank coal demand growth in SEA & India will offset falling demand from China



Table of Contents



DMO Evolution 14~16



Indonesian seaborne thermal coal export supply Indonesia power generation by fuel type

I. Long term outlook of Indonesia’s seaborne supply & power generation

❑ Indonesia’s seaborne thermal coal supply

➢ Indonesian penetration of seaborne thermal coal markets is expected to be peaked until 2020, with export from Indonesia fall

from 415Mt in 2018 to 393Mt in 2021. Some growth will be seen beyond this, but exports will not re-attain the previous highs

➢ It will face increasing competition from higher rank coal from Australia post-2020 as environmental regulations on CO2

emissions to be increasingly stringent, which result in Indonesia’s share decrease in global export coal market from 66%

in 2018 to around 60% post-2020. However, Indonesia does remain best placed geographically to service growing Indian

& SEA demand center, which will support Indonesia’s position as the largest seaborne exporter in the long term.

❑ Indonesia power generation

➢ Due to the highly dispersed population with more than 255million people spread over 17,500 islands, the power shortage are

common due to insufficient generation capacity. Additional generation capacity will be required to mitigate power supply issues.

➢ The policy support for this increase in mostly coal basis power generation capacity is on going 2015 35GW power program, which

call for boosting of the Indonesia’s installed capacity, while reducing fuel oil consumption, to meet electricity demand.



Indonesia domestic coal demand Indonesia Recent DMO

II. Long term outlook of Indonesia’s domestic coal demand & DMO

❑ Indonesia’s domestic coal demand

➢ As the country develops its domestic power sector, much of the future growth in coal production will be aimed at the growing

domestic market, with the demand growth of 6.2% CAGR between 2018 & 2030. Coal demand from power sector to grow to

176Mt, 91% of total domestic consumption, by 2030. The newer plants are being designed for lower energy coals.

❑ DMO evolution

➢ The law stipulates that 25% of a company’s total production should be allocated to domestic market, which was 121Mt in 2018.

➢ The Domestic demand is projected to reach 176Mt in 2030.

1. Permen ESDM No.25 Year 2018, Article 32 (2): ESDM determines the amount & type of coal for domestic fulfillment

2. Kepmen ESDM No.1395 K/30/MEM/2018

➢ Selling price of coal for electricity should be USD 70 (HBA)

➢ USD 70 HBA is valid for 2018 & 2019 with a maximum vol. of coal sales of 100 million metric tons per year

3. Kepmen ESDM No.23K/30/MEM/2018

➢ The min. DMO percentage is 25% of the total production

➢ Sanctions for production cuts in 2019 for the companies, who cannot meet the DMO

4. Letter of the Minister of ESDM Number 2783/32 / MEM.B / 2018 dated 19 April 2018

➢ PKP2B/IUP OP company, every month must sell & supply to PLN with 1/12 of the DMO obligations or agreement of PLN

➢ Companies who do not have contracts with PLN, still have to meet DMO obligations through a transfer quota

(Source: Wood Mackenzie)


Table of Contents



DMO Evolution 14~16



Indonesia domestic coal demand Coal Price forecast: enter into another down turn

Local operational issues for the industry

❑ Marketable reserves are mostly located in Kalimantan region

➢ Indonesia has vast quantities of coal, with marketable reserves estimated at over 19Bt. Thermal coal comprises the majority at 96

% of total reserves. Three quarters of Indonesia’s marketable thermal coal reserves are on Kalimantan and of that, 61% are in

East Kalimantan. While Sumatera has abundant resources, a lack of infrastructure has limited their conversion to reserves.

❑ Depletion of higher energy reserves

➢ Lignite currently accounts for 34% of production but makes up 64% of marketable reserves, suggesting that over time

Indonesia’s coal quality will reduce as higher energy reserves are depleted.

❑ Downturn of coal price and unlikelihood to return 2018 level for low rank coal price

➢ The global thermal coal price is expected to fall, which is unlikely to increase in the near future

➢ Many mining companies are struggling with cost reduction to maintain certain profit level

State / Coal Type Reserves (Mt)

East Kalimantan 8,697

South Sumatra 3,920

South Kalimantan 3,463

North Kalimantan 1,355

Central Kalimantan 710

Riau 467

Aceh / Jambi / Bengkulu 363

West Sumatra 10

West Kalimantan 3

Total 18,988

Bituminous (5400-6900kcal/kg) 2,707

Sub-bituminous (4500-5400kcal/kg) 4,078

Lignite (<4500kcal/kg) 12,203

Total 18,988

(Source: Mckinsey)

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Coal Mining Conference 2019