Global Thermal Coal Markets : Putting India into context

1. Global Thermal Coal Markets:
Putting India into context
12th Annual Coal Markets (IBC Asia)
Singapore, 25-26 February 2014
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2. Global Thermal Coal Markets: Putting India into context
1. What is driving India’s thermal coal import demand?
2. Power sector liberalization and fuel risk management
3. Domestic coal production: will reforms accelerate now?
4. Seaborne thermal coal pricing outlook
5. Summary and conclusions
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3. Pacific basin thermal coal seaborne demand has been outpacing
Atlantic basin demand… use of low rank coals is increasing
What drives India’s thermal coal import demand?
Seaborne thermal demand by basin
Pacific demand by country
Pacific demand by rank
800
80%
700
700
70%
600
600
60%
500
500
90%
700
600
400
40%
Mt
Mt
50%
Pacific %
500
Mt
800
800
400
400
300
300
200
300
200
100
100
0
0
30%
200
20%
100
10%
0
0%
Pacific
Source: Wood Mackenzie Coal Market Service
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Pacific %
Other Pacific
Japan
China
India
Australia high ash
Australia bituminous
Sub-bit/lignite
Atlantic
Bituminous others

4. High ash domestic coal supply in India is a major constraint
(1/3)
~50% of thermal production is >35% ash levels. Domestic coal has difficult washing
characteristics
2013 domestic thermal ash curve
50
45
40
Ash content %
35
30
25
20
15
10
5
0
0
50
100
150
Domestic thermal coal production (Mt)
Source: Wood Mackenzie Coal Market Service
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200
250
300
Ash limit for power utilities
350
400
450
Average ash - seaborne markets

5. Domestic thermal coal price ex-mine is low but delivered cost to
distant power plants increases significantly due to high transportation
costs
(2/3)
Domestic Thermal Coal Prices (Delivered West India)
Domestic thermal coal cost component (Delivered West India)
80
70
Value, US$/t
60
50
54%
40
30
20
33%
10
0
Ex-mine
Washing & Royalty
processing and taxes
Road
freight
9%
Rail freight Delivered
cost
Coal cost
5%
Royalty and taxes
Road freight
Rail freight
Note: The analysis here shows domestic washed thermal coal. As per government regulation, raw coal needs to be washed to reduce ash up to 34% (max) for supply to power plants located 1000
km or more away from the source.
Source: Wood Mackenzie Coal Market Service
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6. Domestic production struggling to meet demand; imports are rising
rapidly
(3/3)
But there are challenges…
Domestic coal supply flat, demand rising rapidly
Affecting utilization levels (especially for newly commissioned projects)
600
160
500
140
78%
76%
Capacity, GW
300
200
74%
100
72%
70%
80
68%
60
66%
100
40
64%
0
20
62%
2008
2009
2010
2011
2012
60%
2013
0
58%
Coal demand for power
2008
Domestic supply for power
Coal-fired capacity
Source: Wood Mackenzie Coal Market Service
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2009
2010
2011
2012
2013
Capacity factors
Capacity factor, %
120
400
Mt
80%

7. Weak economic growth is the biggest challenge; pressuring trade
deficit and the local currency
(1/3)
GDP growth down from > 10% in 2010 to < 5% last year; affecting power demand growth
India’s foreign trade position in USD Billion
India’s foreign trade position in Indian Rupee Billion
50
3000
40
2500
2000
30
INR Billion
USD Billion
1500
20
10
0
1000
500
0
-10
-500
-20
-1000
-30
April 2011
Net trade
Sept 2013
Exports
Source: Reserve Bank of India
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Imports
-1500
April 2011
Net trade
Sept 2013
Exports
Imports

8. Thermal coal import volumes risen rapidly in the past five years –
Rupee depreciation inflated the import bill
(2/3)
India’s thermal coal import volume and value
3000%
Rupee
depreciation
has increased
the cost of coal
imports despite
declining prices
in the seaborne
market
Index = 100% in 2004
2500%
2000%
1500%
1000%
500%
0%
2004
2005
2006
Volume
Source: GTIS, Wood Mackenzie Coal Market Service
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2007
2008
2009
Value - Million USD
2010
2011
Value - Million INR
2012
2013

9. Slow pace of reforms cause of power sector woes
(3/3)
Poor financial health of power distribution utilities a deterrent to implement reforms
Rising electricity sales, rising losses
Gap widening between cost of supply and revenue received
14
700
500
500
8
400
6
300
4
400
300
Paisa/kwh
10
Sales, TWh
600
Electricity
Utilities
Losses, US$ Bn
12
200
100
200
0
2
Cost of supply
100
Revenue
Gap
-100
0
0
2008
2009
2010
2011
2012
Gap
-200
State Power Utilities' Losses
Electricity Sales
Source: CEA, Wood Mackenzie Coal Market Service
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2010
2011
2012

10. ~ 40 GW capacity added in past three but running at low utilization
levels. Another 23 GW coming soon…
Coal-fired generation capacity, MW
18000
70 GW
contracted and
regulated tariff
– FUEL PASS
THROUGH
FY 2010 Onwards
 Rapid capacity expansion.
 Domestic coal production and power demand
declined.
 Aggressive tariff bids worsened the situation.
 Merchant power market failed to take off.
16000
14000
12000
10000
8000
6000
4000
2000
0
Pre - 2010
2010
Contracted, regulated tariff
Source: CEA, Wood Mackenzie Coal Market Service
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2011
2012
2013
Contracted, competitive tariff
2014
Uncontracted
2015

11. India thermal coal demand components – the big picture
Strong growth in both coal- and non-coal power generation capacity. Total thermal coal
demand to reach 920 Mt by 2020 and 1,818 Mt by 2035, respectively, from 685 Mt in 2013
Overwhelming contribution from power sector (TWh)
Installed capacity is not disappearing (GW)
700
4,000
3,500
600
3,000
500
2,500
GW
TWh
400
2,000
300
1,500
200
1,000
100
500
0
0
2008
Coal
2011
2014
Natural Gas
2017
2020
Nuclear
Source: Wood Mackenzie Coal Market Service
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2023
Hydro
2026
2029
Renewable
2032
Oil
2035
Other
2008
Coal
2011
2014
Natural Gas
2017
2020
Nuclear
2023
Hydro
2026
2029
Renewable
Oil
2032
2035
Other

12. India’s coal market to bifurcate; coastal and inland, but domestic
coal reforms hold the key
India will build more power plants designed
for import coal
Import share will increase despite growth
in domestic output
1,600
2012
28%
1,400
24%
0 - 5 GW
5 - 10 GW
2030
20%
1,000
16%
800
12%
600
0 - 5 GW
5 - 10 GW
10 - 15 GW
15 - 20 GW
> 20 GW
Source: Wood Mackenzie Coal Market Service
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8%
200
0 GW
400
4%
0
0%
2008
2012
2016
2020
2024
2028
2032
Domestic coal production, left axis
Thermal coal imports, of total demand, right axis
Imports, of total demand
0 GW
Domestic production, Mt
1,200

13. What is the outlook of seaborne thermal coal prices?
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14. Extended period of weak coal pricing due to chronic oversupply
conditions in the seaborne thermal market
Supply by mine status versus seaborne demand (Mt)
Thermal coal price forecast (Real US$/t 2013)
$160
2,500
2013-2022: nearly flat
prices due to
abundance of supply
meeting growing, but
slowing, thermal
demand
$140
US$/t, Real 2013
(Original energy values)
2,000
Mt
1,500
1,000
500
2023-2035: steadily rising
prices as new supply and
infrastructure development
required to satisfy demand
$120
$100
$80
$60
$40
$20
0
$0
Probable & Possible Capacity
Highly Probable Capacity
Operating Capacity
Seaborne Demand
Source: Wood Mackenzie Coal Market Service
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2008
2012
2016
2020 2024
2028
2032
FOB Newcastle @ 6,300 kcal/kg GAR, Market
FOB HA Newcastle@ 5,500 kcal/kg NAR
FOB Indonesia EnviroCoal @ 5,000 kcal/kg GAR
FOB Indonesia EcoCoal @ 4,200 kcal/kg GAR

15. Summary and Conclusions
• Globally, thermal coal import demand will be driven by power generation
needs in Asia, in particular by China and India.
• Indonesia and Australia will continue to dominate the export markets.
• Export thermal supply, if not rationalized, will continue to weigh in on
prices. Longer-term, the price will need to rise to incentivise new
production (project development).
• India has both near-term and long-term implications:
Near-Term Implications
Longer-Term Implications
•
Weak economic situation, if continued, will adversely
affect power demand growth.
•
We remain positive about India’s long-term potential
as a large thermal coal importer (second to China).
•
Fuel risk has become a pass-through but doesn’t not
provide major upside to coal imports as power
demand is sensitive to tariffs.
•
Domestic coal sector reforms will accelerate coal
production.
•
Low utilization levels of new power projects will create
M&A opportunities.
•
Reduction in transmission and distribution losses will
reduce power tariffs and help demand growth.
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16. Disclaimer
Strictly Private & Confidential

This presentation has been prepared for delivery at the 12th Annual Coal Markets
conference (IBC Asia) in Singapore on 25 February 2014, by Wood Mackenzie Limited.
The report is intended solely for the benefit of attendees and its contents and
conclusions are confidential and may not be disclosed to any other persons or
companies without Wood Mackenzie’s prior written permission.

The information upon which this presentation comes from our own experience,
knowledge and databases. The opinions expressed in this report are those of Wood
Mackenzie. They have been arrived at following careful consideration and enquiry but
we do not guarantee their fairness, completeness or accuracy. The opinions, as of this
date, are subject to change. We do not accept any liability for your reliance upon them.
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