Australian Coal Conference 25&26 July 2017 RESTRUCTURING OF AUSTRALIAN EXPORT COAL INDUSTRY IMPACT OF CHINA AND INDIA Bede Boyle and George Edwards Coal Ventures Limited
Contents Restructuring of Australian Export Coal Industry Impact of China and India Coal Trade Dynamics 1. Demand for Australian High Quality Coals 2. Coal Market Volatility is Driven by China 3. India is now Largest Importer of Australian Metallurgical Coal 4. Convergence of Three Trends is boosting Coal Industry Profits 5. Restructuring of Australian Coal Industry 6. Capital Expenditure in Mining will be Further Constrained in 2017 7. Timing of NSW Brownfield and New Projects is Uncertain 8. Timing of QLD New Projects is Uncertain 9. China One-belt One-road 10.About Coal Ventures Limited 11.The New Industrialist Free Industrial Leadership Resources
1 Demand for Australian High Quality Coals Over half the worlds population is in Asia Asia demand pull for Australian high quality coals for energy security and to drive economic development
1. Demand for Australian High Quality Coals Australian Coal Exports by Ports 2016 27Mt 28Mt 117Mt 70Mt 6Mt 162Mt 10Mt 393Mt Source: Australian Department of Industry, Tourism and Resources
2. Coal Market Volatility is Driven by China China coal imports are small margin on very large domestic base China 2016-2020 plan will lift production from 3.7billion t in 2016 to 3.9billion t in 2020. [Australia exported 393Mt ~ 10% China Production] In 2016 China imported 57Mt of metallurgical coal and 156Mt thermal coal which totals only 5.7% of China production of 3.7billion t. In 2017 the Chinese government has conflicting objectives: Firstly to close unsafe coal mines which will decrease production and Secondly to lower prices to domestic users by increasing production. China Domestic Prices will determine the Competitive Price threshold for Imports. The government s targeted range for China coal mine sales is RMB500 to 570/t (US$72.67 to 82.85/t) FOB, basis 5,500 kc NAR. At which price Australian Coal Exports have a Competitive Advantage.
3. India is now Australia s Largest Market for Metallurgical Coal Metallurgical Coal India is dependent on 50Mtpa imported coking coal to meet its needs. Domestic coking coal is poor quality with 15%-18% Ash and poor coking properties Imports will reach 90Mtpa to increase steel capacity for Make in India Campaign Thermal Coal Indian production in 2015/16 was +600Mt with Target of 1btpa. Main producer is Coal India Limited with 540Mtpa. However, Steaming coal quality is poor, 4,000 kcal/kg (gad) average and 40% Ash India imported 160Mt Thermal Coal in 2016, mainly from Indonesia Make in India Campaign is supported by 100 new coal fired power plants currently under construction and scheduled to come online by the end of 2018 which will require imports of high quality coals
4. The Convergence of Three Trends is Boosting Coal Industry Profitability 1. 2016 saw the upswing for both Thermal and Metallurgical Coals from the bottom of the price cycle which is continuing in 2017 Newcastle 6,300kcal Thermal Coal US$50 to US$99.50/t FOB Semi Soft Coking Coal US$55 to US$104.85/t FOB Premium Metallurgical Coal US$80 to US$175/t FOB [source Platts 21 July 2017] 2. By 2016 the Australian coal industry had successfully reduced its structural cost base by about 30% to A$60-A$70/t from 2012 levels. 3. Reduction in the AUD/USD exchange rate from 1.05 in 2012 to 0.75 0.79 @ 21 July 2017 is boosting A$ earnings for Producers Newcastle 6,300kcal Thermal Coal US$99.50/t = A$126/t FOB Semi Soft Coking Coal US$104.85/t = A$132/t FOB Premium Metallurgical Coal US$175/t = A$221/t FOB
5. Restructuring of Australian Coal Industry Divestment of ownership from multinational resource corporations, Anglo American, BHP Billiton, Peabody, Rio Tinto and Vale is creating a new disaggregated industry dynamic with emerging new players: Stanmore Coal - Isaac Plains QLD Tarus Funds Management Foxleigh QLD Australian Pacific Coal Dartbrook NSW MACH Energy [Indonesia Salim Group] Mt Pleasant NSW South 32 Illawarra Metallurgical Coal NSW
5. Restructuring of Australian Coal Industry However there are emerging Investment Risks with both mining companies and mining service contractors entering administration. 1. China state owned Caledon Coal is in administration following closure of Cook Colliery with large inflow of water into longwall. 2. Failure of Caledon Coal has exacerbated the failure of Bandanna Energy with around 11Mt of 27Mt WICET capacity entitlements defaulted on to potentially require Restructuring of $4.3bn debt. 3. India owned Wollongong Coal has stopped production with its mining services provider Delta SBD entering administration.
5. Restructuring of Australian Coal Industry The costly and torturous path with community and political impediments to exploration and development of new coal mines in NSW and QLD is creating uncertainty for investors. BHP Caroona The NSW Government made the unprecedented move in 2016 to buyback Caroona licence from BHP for $220 million, after strident community and political opposition to the project. The concession had been acquired by BHP from the state government in 2006 for $100m, with the company having invested over a decade in exploration and development approval processes.
5. Restructuring of Australian Coal Industry Shenhua Watermark Shenhua acquired the Watermark exploration license for A$300m in 2008 through a NSW Government tender. In July 2017 the Government reached agreement with Shenhua to refund Shenhua A$262m from the original amount of A$300m in return for 51.4% of the land area within the license which overlapped prime agricultural land in the Liverpool Plains. Chairman of Shenhua Australia Liu Xiang said Shenhua will continue to progress its Watermark Coal Mine on the remainder of EL7223 in line with the planning approvals from both the State of NSW and Commonwealth Government respectively in 2015. [ source Australian Coal Report 12 July 2017] These impediments are stimulating interest in the comparative economic advantages in acquisition of existing producing mines with Development and Environmental Approvals in place.
5. Restructuring of Australian Coal Industry Yancoal acquired Rio Tinto's Coal & Allied Hunter Valley 17Mtpa thermal coal business on 1 September 2017 and positioned itself with Glencore holding 49% to dominate exports of Australian thermal coal. The US$2.69billion acquisition included: 67.6% of Hunter Valley Operations (HVO), 80% of Mount Thorley mine, 55.6% of Warkworth mine, 36.5% of Port Waratah Coal Services terminal at Port of Newcastle together with other undeveloped coal assets and property holdings Yancoal will have marketing rights for China, Taiwan, Thailand and Malaysia and Glencore will have marketing rights for Japan and South Korea and all other countries. Yancoal major shareholder is Yanzhou Coal Mining Company Limited (78%) in the People s Republic of China. Yanzhou is publicly listed on the Shanghai, Hong Kong and New York stock exchanges.
6. Capital Investment Spending in mining will be further constrained in 2017/18 Firms in mining expect a further dive in investment spending in 2017-18 (down nearly 30%) as projects are moving into the production phase. AICD Chief Economist 23 February 2017
7. Timing of NSW Brownfield and New Projects is Uncertain Latent Hunter Valley Coal Chain Capacity The key factor is Unused Take or Pay Rail and Port Commitments There is an economic imperative to use Take or Pay Commitments Name Plate [installed]port Capacity 211Mt [PWCS + NCIG] 2016 Contracted Export Coal Volume 190Mt [ARTC] 2016 Port of Newcastle Exports 161Mt Actual Exports Latent HVCC Capacity ~30Mt Unused This is within Brownfield capacity expansion projects with Development Approval in place including Hunter Valley Operations, Narrabri and Moolarben. [Bede Boyle client study 2015/16]
7. Timing of NSW Brownfield and New Projects is Uncertain Brownfield expansion projects will precede any financial commitment to new projects which will require the coal price to strengthen in 2017. In the Hunter Gloucester Coal Basins some producers can beneficiate coal to capture the ~ A$12 price margin for Semi Soft Coking Coal and may commit to CHPP upgrading projects in 2017. Also the A$30/tonne price differential between Newcastle Thermal 6,300kcal GAR and High Ash 5,500kcal NAR may be the trigger for upgrading coal washing circuits in 2017 to capture higher prices for 6,300kcal GAR Specifications. A$10/t washspread benefit calculated as $3.50/t washing cost, 20% yield loss and $20/t port and rail costs. [IHS washspread calculation]
8. Timing of QLD New Projects is Uncertain Queensland Metallurgical Coal Queensland is the largest global exporter of metallurgical coal, shipping more than 162 million tonnes in 2015-16. The strong long term demand fundamentals for metallurgical coal means a number of projects are in the planning / construction / ramping up production pipeline. Construction Byerwen and Eagle Downs are in construction / early stages of production adding 14Mt of output together. Planning Several other large projects including Anglo s Moranbah South mine and BMA s Red Hill are planned to produce approximately 14Mtpa. Feasibility studies are progressing on a further 10 metallurgical coal projects, but few are likely to proceed to production. A lack of access to capital is the major hurdle faced by would-be developers.
8. Timing of QLD New Projects is Uncertain Queensland Thermal Coal The most advanced project is Adani Enterprise Limited Carmichael project in Queensland s Galilee Basin. Adani is pushing ahead with government approvals for the A$22billion project which will be Australia s largest coal mine with six open-cut pits and five underground mines. Jeyakumar Janakaraj, Adani CEO & Country Head confirmed on 8 June 2017 that the Adani Board had agreed to develop the project. Adani is hoping to start work on the mine towards end 2017 with the 25Mtpa Stage 1 to begin production in late 2022.
9. China One-belt One Road Strategy Inter-port Global Inland Rail Project to Gladstone Port positions Gladstone as Australian logistics Hub aligned with China One-belt One-road Strategy and has potential for Galilee Basin Mines www.inter-portglobal.com.au Bede Boyle Principal Consultant
10. About Coal Ventures Limited Expert Advice and Support for Coal Acquisitions and Divestments in Australia and Internationally George Edwards has been involved with coal for some 50 years and has part owned and operated three export coal mines since starting up his own companies 30 years ago. He has over 100 clients worldwide and is involved in JORC evaluations, valuations (VALMIN), feasibility studies, project / mine sales and purchases as well as coal sales and purchases. George was Director Marketing with Coal & Allied, Chief Executive in Australia for Consolidation Coal Company of USA and Chairman and General Manager of Gollin Wallsend Coal Company Limited.
10. About Coal Ventures Limited George Edwards was Member of First Australian Coal Mission to China in October 1976 George Edwards Appointment as first senior foreign advisor to China Mining Association in November 2012
10. About Coal Ventures Limited Bede Boyle is a corporate and strategic advisor with 20 years experience in coal divestments, acquisitions, and mine, rail and port developments and operational strategies in NSW and Queensland. Powercoal FreightCorp
11. Free Industrial Leadership Resources www.thenewindustrialist.com.au Boosting Coal Productivity and Maintenance Performance PART A - THE STRATEGIC CONTEXT [Our CVL Presentation Today] PART B - BOOSTING PRODUCTIVITY AND MAINTENANCE PERFORMANCE PART C - METS COLLABORATION AND INNOVATION SOLVES INDUSTRY PROBLEMS Leveraging METS Capability to Boost Performance For free Executive Briefing Paper contact Bede Boyle Chairman Manufacturship Group bede@manufacturship.com
Thank You George Edwards gee1941@gmail.com Bede Boyle boyle.bede@bigpond.com