The Coal Market Awakes
Colin Gubbins
McCloskey Group
Houston
19th July
The Lessons of History
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Will History Repeat Itself ?
High Coal Prices Encourage Over Development
New Entrants are attracted to the coal business
New production hits at the bottom of the
commodity cycle
Prices tumble to levels that just cover marginal
cost
How Did We Get Here?
China
China
China
But That Isn’t The Whole Story
Atlantic
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US Coal Coal Imports Continue to Grow
Scandinavian Hydro Low
UK Gas Prices High
UK Air Conditioning Demand Grows
Polish Exports Decline
But That Isn’t The Whole Story
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Asia
The Tiger Economies Reawake
China looks after itself
Australia struggles to get the coal through the
ports
The Impact of Steel
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Coking Coal Prices Surge to unprecedented
levels sucking steam coal into export and
domestic coking coal markets in US
Strong Semi Soft and PCI prices add to the
pressure on steam coal prices in Australia
Shortage of coke forces steel industry to look at
use of anthracite in substitution wherever
possible
Why Didn’t We See It Coming
•
Always a new boy on the block
1st
South America
2nd
South Africa freed of sanctions
3rd
Indonesia
4th
China rapidly expands exports
•
Buyers lulled into false sense of security
Can the buyers anticipate relief ?
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Answer – Not yet awhile
Demand for coal still increasing
Development other than in Indonesia extremely
disciplined
Little evidence of China increasing exports
Poland in decline
Russia held back by port constraints
Asia the first to Crack ?
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Coal flowing back from Atlantic could ease
supply tightness.
Utilities will want to rebuild stocks
Prices could ease in the last quarter
China the wild card. Development of power
plants in Southern China may need imports to
sustain them
Evidence of China investing overseas in advance
of domestic supply constraints
Consolidation Begins to Bite
Anglo
BHP Billiton
Xstrata/ Glencore
Rio Tinto
Control 50% of South American Exports
85% of South African Exports
60% of Australian Exports
30% of Indonesian Exports
80% of Russian Exports
Can they keep it to themselves ?
Will they strengthen their grip ?
Where Will New Coal Come From
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Australia
Indonesia
Colombia
Russia
South Africa
Venezuela
China
High Potential
High Potential
High Potential
Infrastructure Constraints
Limited to 80 mt ?
Infrastructure Constraints
??????
Major Importers
ATLANTIC
 Europe
 USA
PACIFIC
 Japan
 S.Korea
 Taiwan
 India
133mt
20mt
95mt
53mt
46mt
13mt
Consolidation
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85% of South African exports controlled by three companies
50% of South American exports controlled by same three
companies
60% of Australian steam coal exports controlled by these three
companies plus Rio Tinto
Indonesia emergence of Bumi Resources
Development of new reserves becoming more considered
Companies quicker to respond to downturns in the market
Peabody with RAG Purchase potentially a new boy on the block
Long Run Price Series
European Steam Coal
$/t
80
70
60
50
40
30
20
10
0
2003
2000
1997
1994
1991
1988
1985
1982
1978
European
Steam Coal
Coal Price History
McCloskey Index $/t
MCIS ARA marker
75
65
$/t
55
45
35
25
15
MCIS ARA
Coal v. Pet Coke Relativity
80
70
60
McCloskey Index
50
40
Pet Coke 4% US
Gulf
30
Freight Gulf ARA
20
10
Au
g
-0
De 1
c01
Ap
r0
Au 2
g0
De 2
c0
Ap 2
r0
Au 3
g0
De 3
c03
Ap
r04
0
Determinant factors for 2004
SUPPLY
• South Africa looks East
• South Africa constrained by rail system
• Colombia , 25mt growth from 2003-2005can it
continue?
• Even more consolidation of ownership (Caribe
falling to Drummond or Glencore)
• Australia port constrained
• Russia does its best
• Poland decline arrested ?
• China exports at standstill !!!?
Determinant factors for 2004
DEMAND
• Oil Prices High – Gas Prices High giving coal a
lot of headroom.
• Scandinavia running into hydro problems
• UK imports at record levels
• US coal imports strong
• Traders long – Buyers trying to hold back
Headline tonnage changes –
seaborne steam coal (mt)
2002
2003
2004
2005
Demand
398.7
441.1
464.2
480.6
Of Which,
Atlantic
168.4
190.6
196.5
200.9
22.2
5.9
4.40
158.8
159.4
160.0
13.4
0.6
0.6
y-o-y
change
Of Which,
Europe /
Med
y-o-y
change
145.4
Major Steam Coal Flows
Tonnage flows between market
sectors
2001
2002
2003
change
%
change
Australia-Atlantic
8.5
10.5
11.0
+0.4
+4
Indonesia-Atlantic
10.8
11.6
14.6e
+3.0
+26
China-Atlantic
3.3
1.2
4.9
+3.7
+309
Total westbound
22.6
23.3
30.5
+7.2
+31
Colombia-Pacific
0.4
1.1
0.8
-0.3
-27
South Africa-Pacific
6.7
6.1
3.0
-3.1
-49
Total eastbound
7.1
7.2
3.8
-3.4
-47
Net westbound swing 2003
+10.6
How supply withdrawals are tightening
the Atlantic market in 2004: mt
Demand growth
Low case switch
Mid case switch
High case switch
Europe / Med
+0.6
0.6
0.6
Americas
+5.3
+5.3
+5.3
Total demand
+5.9
+5.9
+5.9
Pacific supply withdrawals
-3.0
-7.0
-10.0
Polish supply cuts
-4.0
-5.0
-7.0
South African sales East
-2.0
-3.0
-4.0
Steam Coal into met
market
-0.5
-1.0
-1.0
Total supply withdrawals
-9.5
-16.0
-22.0
Net increase in market
+15.4
+20.5
+26.5
Implications of tonnage switch
• 2005 starts with even more tonnage switch into
Asia (=2004 high case)
• Tightness remains in Europe
• Germination of seeds of oversupply into Asian
sector
Price outlook – our views
Forecaster's spot price projections: $/t
End
Q2 03 Q3 03 Q4 03 Q1 04 Q2 2004 Q3 04
CIF NW Europe
37.10 49.40 61.15 63.80
FOB RBCT
28.45 36.45 42.75
45.15
FOB Newcastle
CIF Japan
FOB Vostochniy
FOB Baltic
24.25
34.55
25.95
31.30
43.10
76.05
55.93
52.75
27.20
37.70
28.55
37.25
40.65
57.15
35.25
46.50
Key:
Flat price expectation
Strong price increase
Moderate price increase
Moderate price decline
Strong price decline to collapse
Freights – Riding the Chinese
demand boom
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Freights were driven to fantasy levels from the middle of last
year.
Signs of softening but still well above historical levels.
Temporary ?
Ship demand has been driven to record levels by surging Chinese
raw material demand. Indications that the Chinese are coming
back.
The supply of new dry bulk ships has not been able to grow to
meet this demand because shipyards are already busy building
the new generation of container ships and rebuilding the oil
tanker fleet
Queues are shortening – Temporary ?
Long Term
McCloskey Assumptions
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The world cannot expand without utilising coal as a primary energy source
Coal will lose out in percentage terms to gas and re-newables
World growth will mean that use of coal does not decrease and at worst
stabilises
New coal fired technology will start to come on stream in second decade
Growth in coal demand increases in the medium term
Medium Term growth means that new reserve areas will have to be opened
up with higher infrastructure costs – some real price increases will result
In the long term stable demand combined with continued improvement in
mining technology will result in stable real prices