European Power Workshop David Goldsack Principal Coal Consultant, Global Energy Group
Today s Presentation Upstream Coal Industry Transport Issues Contracting for Supplies Price Outlook Copyright 2007 Global Insight, Inc. 2
Operation of the Steam Coal Market Trade Patterns in 2005 In this price setting, international ocean sea freight rates play a significant role. Since 2003 the market has failed to operate correctly due to high freight. South Africa sets the price in the Atlantic in the first instance but price is capped by competition from the Pacific. Australia is the price driver in the Pacific and so ultimately becomes the World price driver. Copyright 2007 Global Insight, Inc. 3
Coal as an Energy Source Coal as an energy source is a merging of two businesses MINING INDUSTRY SHIPPING INDUSTRY Copyright 2007 Global Insight, Inc. 4
Becoming an Energy Industry at the Point of Usage Mining Sector Dominated by mining groups with a portfolio of diverse extractive operations Few describe themselves as energy companies Happy to let market forces set pricing structures Shipping Sector Diverse ownership where biggest operator has less than 10% of capacity Little interest in its influence on energy markets Consequently little market discipline and a volatile pricing mechanism 100% supply/demand driven Copyright 2007 Global Insight, Inc. 5
Agenda Upstream Coal Industry Transport Issues Contracting for Supplies Price Outlook Copyright 2007 Global Insight, Inc. 6
Supply Side Consolidation a Dying Threat? In recent years consolidation of production was considered a risk 600 The emergence of Indonesia, Russia & China (50% of 2005 supply) changed this But is this changing again? 500 400 Russia China Indonesia Total Seaborne Trade MT 300 200 100 0 1990 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Copyright 2007 Global Insight, Inc. 7
Or is it? Power is returning to Australia, South Africa & Colombia where consolidation is established 700 Role of the three newcomers is declining except in Russia But there are other issues 600 500 400 Russia China Indonesia Total Seaborne Trade MT 300 200 100 0 2005 2010 2015 2020 2025 2030 Copyright 2007 Global Insight, Inc. 8
Another Issue that Will Tighten Supply Some of these major producers require more of their own coal China moving quicker than thought to being a net importer Indonesia 10 GWe coal plant under construction with more to come Russia - 41 GWe planned for 2011. Coal % uncertain but high minimum 50 Mt burn South Africa 6 GWe refurbished coal coming out of mothball with new builds TBA Copyright 2007 Global Insight, Inc. 9
Production Cost Pressures Building Capital costs rising Energy costs rising Productivity static Washing losses rising Stripping ratios rising US Dollar remaining weak Copyright 2007 Global Insight, Inc. 10
Comparative Cash Costs Fob - 2006 50 Australia US Dollars/Tonne Fob Basis 6000 Nec 40 30 20 Venezuela Russia China Colombia South Africa Indonesia 10 0 20 40 60 80 100 120 140 Million Metric Tonnes of Export Copyright 2007 Global Insight, Inc. 11
How fob Costs have Changed Nominal U.S. Dollars/tonne 50 45 40 35 30 25 20 15 10 Capital Cost Royalties Transport & Port Mine Costs 5 0 Australia South Africa Russia Australia South Africa Russia 2003 2006 Copyright 2007 Global Insight, Inc. 12
Agenda Upstream Coal Industry Transport Issues An influence on price that is too often underestimated Contracting for Supplies Price Outlook Copyright 2007 Global Insight, Inc. 13
Freight Steam Coal s Role Forest Products 7% Cement & Petroleum Coke 5% Fertilisers/ Phosrock & Potash/Sulphur 5% Gypsum & Salt 2% Other Bulks 2% Grain/ Other Meals & Foodstuffs 13% Iron Ore 26% Steam Coal 20% Coking Coal 7% Coke & Scrap 2% Steel Products 7% Other Steel Related Cargo 4% Copyright 2007 Global Insight, Inc. 14
History of Freight Market Baltic Dry Index 7000 Average 85-06 Plus 25% 6000 Average Jan 85 - Jul 06 Average 85-06 Minus 25% 5000 Baltic Dry Index Baltic Dry Index 4000 3000 2000 1000 0 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 Copyright 2007 Global Insight, Inc. 15
Long-run Voyage Rates 40 35 30 Monthly Rate- RBCT to Rotterdam Long-run S.A. Average Rate $9.90/t Monthly Rate- Australia to Rotterdam Long-run Aus Average Rate $13.25/t 25 US $/t 20 15 10 5 0 Jan-93 Jan-95 Jan-97 Jan-99 Jan-01 Jan-03 Jan-05 Jan-07 Copyright 2007 Global Insight, Inc. 16
Cost Structure U.S. Dollars/tonne 80 70 60 50 40 30 20 Deliveries to ARA All basis 6000 nec January 2007 Freight Ocean Freight Average 2006 ROC + Profit Inland Transport & Handling Average Mine Cash Cost 2006 10 0 Colombia S. Africa Indonesia Russia Australia Australia (Jan 2007) Copyright 2007 Global Insight, Inc. 17
The Dry Bulk Fleet as at January 2006 Total Number of Vessels - 6127 Total Deadweight - 345 Mdwt 657 74 2769 66 10-40 kt Handysize 40-60 kt Handymax 60-100 kt Panamax > 100 kt Capesize 111 1299 Inner Ring = # of Vessels Outer Ring = Mdwt 1402 94 Copyright 2007 Global Insight, Inc. 18
Fleet changes since 2000-1.9 Mdwt scrapped in 2006 25.0 20.0 Net Change in Bulk Fleet Size by Sector Handysize (10-40) Handymax (40-60) Panamax (60-80) Capesize (+80) Fleet +19 +23 +23 15.0 +13 MDwt 10.0 +8 +8 +8 5.0 0.0 2006 year-todate figures -5.0 2000 2001 2002 2003 2004 2005 2006 Copyright 2007 Global Insight, Inc. 19
Fleet order book as at January 2007 82 Mdwt Bulk Carrier Orderbook at 1-Jan-07 11 35% 10 9 Delivered 2007 No. For Delivery 2007 Dwt Delivery 2008 Dwt Delivery 2009 Dwt Delivery 2010+ Dwt NB as % of Fleet Dwt 30.9% 30% 8 25% Million Dwt 7 6 5 4 3 10.9% 23.4% 20.0% 20% 15% 10% NB as % of Fleet MDwt 2 5% 1 0 0% 10-40 Handysize 40-60 Handymax 60-100 Panamax 100+ Capesize Copyright 2007 Global Insight, Inc. 20
Agenda Upstream Coal Industry Transport Issues Contracting for Supplies Dramatically changing a liquid markets offer risk management opportunities Price Outlook Copyright 2007 Global Insight, Inc. 21
Development of Coal Supply Contracts - Europe Early Days (1970s) Long-term deals mostly with annual negotiation few with fixed escalation Annual Contracts First Developments Mostly annual contracts with some spot and options 1990s Supply surpluses and move to spot dominance with some annual contract Today Liquid markets offer potential for most spot or contract business to be performed against robust indices Asian markets less well developed as security of supply issues dominate thinking Copyright 2007 Global Insight, Inc. 22
Agenda Upstream Coal Industry Transport Issues Contracting for Supplies Price Outlook Copyright 2007 Global Insight, Inc. 23
Price Development Nominal $/toe 450 400 350 300 250 200 150 Coal Rotterdam HSFO Rotterdam Gas Bacton Gas Waidhaus Competition or coal doing its own thing? 100 50 0 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 Copyright 2007 Global Insight, Inc. 24
Forecast to 2025 160 140 120 Nominal History Nominal Forecast Real History Real Forecast 2005 US Dollars/tce 100 80 60 40 20 0 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 Copyright 2007 Global Insight, Inc. 25
Thank You David Goldsack Principal Coal Consultant, Global Energy Group david.goldsack@globalinsight.com