india thermal coal_markets

Trusted commercial intelligence www.woodmac.com

Global Thermal Coal Markets:

Putting India into context

12th Annual Coal Markets (IBC Asia)

Singapore, 25-26 February 2014

Trusted commercial intelligence © Wood Mackenzie

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


3

Pacific basin thermal coal seaborne demand has been outpacing

Atlantic basin demand… use of low rank coals is increasing

0

100

200

300

400

500

600

700

800

Mt

Other Pacific Japan China India

0

100

200

300

400

500

600

700

800

Mt

Australia high ash Australia bituminous

Sub-bit/lignite Bituminous others

Seaborne thermal demand by basin Pacific demand by country Pacific demand by rank

Source: Wood Mackenzie Coal Market Service

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0

100

200

300

400

500

600

700

800

Pacif

ic %

Mt

Atlantic Pacific Pacific %

What drives India’s thermal coal import demand?


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

0

5

10

15

20

25

30

35

40

45

50

0 50 100 150 200 250 300 350 400 450

Ash

co

nte

nt

%

Domestic thermal coal production (Mt) Ash limit for power utilities Average ash - seaborne markets


2013 domestic thermal ash curve


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)

33%

5% 9%

54%

Coal cost Royalty and taxes Road freight Rail freight

0

10

20

30

40

50

60

70

80

Ex-mine Washing &processing

Royaltyand taxes

Roadfreight

Rail freight Deliveredcost

Valu

e, U

S$/t


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.


6

Domestic production struggling to meet demand; imports are rising

rapidly (3/3)

Affecting utilization levels (especially for newly commissioned projects) Domestic coal supply flat, demand rising rapidly


0

100

200

300

400

500

600

2008 2009 2010 2011 2012 2013

Mt

Coal demand for power

Domestic supply for power

58%

60%

62%

64%

66%

68%

70%

72%

74%

76%

78%

80%

0

20

40

60

80

100

120

140

160

2008 2009 2010 2011 2012 2013

Cap

ac

ity f

ac

tor,

%

Cap

ac

ity,

GW

Coal-fired capacity Capacity factors

But there are challenges…


7

Weak economic growth is the biggest challenge; pressuring trade

deficit and the local currency (1/3)

India’s foreign trade position in Indian Rupee Billion India’s foreign trade position in USD Billion

-30

-20

-10

0

10

20

30

40

50

US

D B

illi

on

Net trade Exports Imports

April 2011 -1500

-1000

-500

0

500

1000

1500

2000

2500

3000

INR

Bil

lio

n

Net trade Exports Imports

Sept 2013 April 2011 Sept 2013

Source: Reserve Bank of India

GDP growth down from > 10% in 2010 to < 5% last year; affecting power demand growth


8

Thermal coal import volumes risen rapidly in the past five years –

Rupee depreciation inflated the import bill (2/3)

0%

500%

1000%

1500%

2000%

2500%

3000%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Ind

ex

= 1

00

% i

n 2

00

4

Volume Value - Million USD Value - Million INR

India’s thermal coal import volume and value

Source: GTIS, Wood Mackenzie Coal Market Service

Rupee depreciation

has increased the cost of coal imports despite declining prices in the seaborne

market


9

Slow pace of reforms cause of power sector woes (3/3)

Gap widening between cost of supply and revenue received Rising electricity sales, rising losses

Source: CEA, Wood Mackenzie Coal Market Service

-200

-100

0

100

200

300

400

500

Cost of supply Revenue Gap

Pais

a/k

wh

2010 2011 2012

Gap

Poor financial health of power distribution utilities a deterrent to implement reforms

0

100

200

300

400

500

600

700

0

2

4

6

8

10

12

14

2008 2009 2010 2011 2012

Ele

ctr

icit

y S

ale

s, T

Wh

Utilit

ies L

osses, U

S$ B

n

State Power Utilities' Losses

Electricity Sales


10

~ 40 GW capacity added in past three but running at low utilization

levels. Another 23 GW coming soon…

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

Pre - 2010 2010 2011 2012 2013 2014 2015

Co

al-

fire

d g

en

era

tio

n c

ap

acit

y, M

W

Contracted, regulated tariff Contracted, competitive tariff Uncontracted

Source: CEA, Wood Mackenzie Coal Market Service

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.


11

India thermal coal demand components – the big picture

Installed capacity is not disappearing (GW) Overwhelming contribution from power sector (TWh)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2008 2011 2014 2017 2020 2023 2026 2029 2032 2035

TW

h

Coal Natural Gas Nuclear Hydro Renewable Oil Other

0

100

200

300

400

500

600

700

2008 2011 2014 2017 2020 2023 2026 2029 2032 2035G

W

Coal Natural Gas Nuclear Hydro Renewable Oil Other


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


12

India’s coal market to bifurcate; coastal and inland, but domestic

coal reforms hold the key

0 GW

0 - 5 GW

5 - 10 GW

10 - 15 GW

15 - 20 GW

> 20 GW


2012

2030

India will build more power plants designed for import coal

Import share will increase despite growth in domestic output

0 GW

0 - 5 GW

5 - 10 GW

0%

4%

8%

12%

16%

20%

24%

28%

0

200

400

600

800

1,000

1,200

1,400

1,600

2008 2012 2016 2020 2024 2028 2032

Imp

ort

s, o

f to

tal d

em

an

d

Do

mesti

c p

rod

ucti

on

, M

t

Domestic coal production, left axis

Thermal coal imports, of total demand, right axis


13

What is the outlook of seaborne thermal coal prices?


14

Extended period of weak coal pricing due to chronic oversupply

conditions in the seaborne thermal market


0

500

1,000

1,500

2,000

2,500

Mt

Probable & Possible Capacity

Highly Probable Capacity

Operating Capacity

Seaborne Demand

Supply by mine status versus seaborne demand (Mt) Thermal coal price forecast (Real US$/t 2013)

$0

$20

$40

$60

$80

$100

$120

$140

$160

2008 2012 2016 2020 2024 2028 2032U

S$

/t,

Rea

l 2

01

3

(Ori

gin

al e

ne

rgy v

alu

es

) 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

2013-2022: nearly flat

prices due to

abundance of supply

meeting growing, but

slowing, thermal

demand

2023-2035: steadily rising

prices as new supply and

infrastructure development

required to satisfy demand


15

Summary and Conclusions

Near-Term Implications

• Weak economic situation, if continued, will adversely

affect power demand growth.

• Fuel risk has become a pass-through but doesn’t not

provide major upside to coal imports as power

demand is sensitive to tariffs.

• Low utilization levels of new power projects will create

M&A opportunities.

• 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:

Longer-Term Implications

• We remain positive about India’s long-term potential

as a large thermal coal importer (second to China).

• Domestic coal sector reforms will accelerate coal

production.

• Reduction in transmission and distribution losses will

reduce power tariffs and help demand growth.


16

Disclaimer

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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