Long-term Coal Market Outlook - Q1 2016 FINAL

The seaborne coal market in 2016-2020Noble’s view of Energy Coal

May 2016

MAY 20162

• The international coal market is starting to show signs of rebalancing

• The domestic Chinese market will also rebalance as a result of government actions to cut excess capacity

• Indonesia and the USA will continue to cut exports, leading to a potential increasing tightening over 2016-2020

• Indian imports will become weaker in the short term, but ramping up domestic production will become increasingly difficult in the long term, leading to a second wave of imports growth

• The Southeast Asian market will deliver solid growth over the next couple of decades, as a result of multiple factors aligning to support coal demand

• The market will enter a new cycle in 2016-2017, as supply tightens and mining costs provide price upside

Lower for longer?How much lower, and how long?...

General considerations on coal demand

May 2016

Paris: What does COP21 mean for coal?

• The ultimate target of the Agreement (limiting global warming to not more than 2C) is an aspirational equivalent to the IEA 450 scenario

• However, the qualitative commitments included the Agreement resemble an ambitious version of the New Policies Scenario, and implementation details are yet to be agreed (post-ratification) which makes it difficult to assess the actual achievability of the targets

• Most countries have not yet committed beyond New Policies, and it is acknowledged that peaking will take longer for developing countries

• In reality, developed (OECD) countries might converge faster towards a low-carbon scenario, but developing countries will not reach “450 mode” until after 2030

• COP21 is not likely to produce short-term effects in the seaborne coal Market, as most of the new demand will come from developing countries in the Asia Pacific Region

4 MAY 2016

5

IEA’s coal demand outlook

IEA’s total global coal demand scenarios

IEA Scenarios Definitions

» The Current Policies Scenario only takes account of the mitigation policies that were enacted as of mid-2015.(Global coal demand increases by 2.4Bt by 2040)

» The New Policies Scenario takes into account the policies and implementing measures affecting energy markets that had been adopted as of mid-2015 (as well as the energy-related components of climate pledges in the run-up to COP21, submitted by 1 October), together with relevant declared policy intentions, even though specific measures needed to put them into effect may not have been adopted(Global coal demand increases by 700Mt by 2040)

» The 450 Scenario illustrates what it would take to achieve an energy trajectory consistent with limiting the long-term increase in average global temperature to 2 °C, primarily by by fostering technologies that are close to becoming available at commercial scale .(Global coal demand decreases by 2.0Bt by 2040)

Source: IEA WEO’15

MAY 2016

Global power generation fuel mixCoal’s share set to decline; absolute volume starts to decline post-2020 in the 450 Scenario

6Source: Noble Research; IEA WEO 2015

41% 37% 35%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2013 2020 2025

Power generation fuel mix shares

9.6 10.2 10.4

0

5

10

15

20

25

30

35

2013 2020 2025

PW

h

Other

Hydro

Nuclear

Gas

Oil

Coal

Absolute power generation fuel mix

41% 35% 31%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2013 2020 2025

9.6 9.2 7.5

0

5

10

15

20

25

30

2013 2020 2025

PW

h

Other

Hydro

Nuclear

Gas

Oil

Coal

Ne

w P

oli

cie

s S

ce

na

rio

45

0 S

ce

na

rio

MAY 2016

7

Coal price in a bear cycle, but demand still high

Maintaining coal prices low prices is harder now that the market is four times the size in the 1990’s!

MAY 2016

Global Coal demand in 2015-2030Focus on the Asian market

May 2016

Country View: ChinaDrivers of long-term coal demand

9

• China faces many challenges in terms of phasing coal out of the mix.

• The view for imports, however, depends to a great extent on domestic production in the long term. Cuts, and rationalization can result in support for imports in the long term.

Source: Noble research

Bearish coal imports Bullish coal

Impact on Coal -2 -1 0 1 2

Demand drivers Weight 2020 2025 2030 Comment

Energy/power Demand 20% 2 1 1 Slowing GDP growth

Electricity market structure 10% 0 0 0 Limited scope for deregulation

Coal-fired PP pipeline 15% 1 0 0 Still strong, but declining

Competing fuels (Gas , Nuclear, Hydro) 15% 0 -1 -1 Nuclear to play an important role

Domestic coal supply 20% -2 1 2 Supply cuts in 2016-2020

Renewables 10% -1 -2 -2 Aggressive development

CO2 Price/Tax 10% 0 -1 -1 Uncertain, still experimental

Country Coal Index 0.3 -0.3 0.8

MAY 2016

MAY 201610

China: What to expect from in 2016-2017Declining, but rate is slowing down

Source: Reuters

• The Chinese coal market

has been weak since

2012, but some signs of

stabilization have started

to emerge

• Chinese domestic prices

have rallied, as the

government makes

efforts to cut over-supply

• Old mines have been

shut in several provinces,

and the government is

managing the transition

to control impact on

employment

Country View: ChinaTrying to phase coal out, but inertia is still strong

11

• Our view of electricity

generation growth in China

conservatively assumes the

middle-point between IEA’s

New Policies and the 450

Scenarios

• The resulting energy mix

shows coal use peaking in

2020 – but requires massive

developments in Nuclear,

Hydro and other sources

• We assume the Chinese

Government will have the

political will to deflect the

growth of coal, but will have to

pay a price for it

• The question then becomes

the level where domestic coal

supply can be sustained at...


MAY 2016

Country View: ChinaThe detail behind out estimates

12

• Coal demand in China is about

to peak, or perhaps it has

already done so

• In order to displace coal in the

mix, China will have to

undergo aggressive

expansions in almost every

source of power – especially

nuclear and renewables

• On the other hand, production

cuts in the coal industry are a

high priority in the 13th five-

year plan (2016-2020) and will

support domestic prices

• Demand for coal imports is

starting to stabilize, and will

find support as the Chinese

domestic market rebalances

Electricity Generation [TWh] 2010 2015 2020 2025 2030

Total Generation 4,247 5,565 6,967 7,782 8,589

Coal 3,297 3,944 4,200 4,102 3,920

Oil 13 10 6 6 5

Gas 83 200 303 502 693

Nuclear 74 170 400 731 1,040

Hydro 722 988 1,193 1,322 1,449

Other 58 253 739 1,120 1,482

% Coal in the mix 78% 71% 60% 53% 46%

Coal demand - electricity [mt] 1,580 1,851 1,883 1,805 1,742

PP Efficiency [%] 35% 37% 39% 40% 40%

Average coal quality [kcal/kg NAR] 5300 5120 5150 5050 5000

Million Tonnes coal/TWh 0.48 0.47 0.45 0.44 0.44

Industrial Coal Demand 1250 1323 1196 1105 1038

Total coal demand 2,830 3,174 3,079 2,910 2,780

Domestic Production [Mt] 2,700 3,040 2,950 2,750 2,600

Imports [Mt] 130 134 129 160 180

Sources: IHS, IEA WEO 2015, Noble

MAY 2016

Country View: IndiaDrivers of long-term coal demand

13

Coal will continue to be the main choice in India, with strong fundamentals to 2025. The tide might only start to change by 2030.


Bearish coal imports Bullish



Energy/power Demand 20% 2 1 1 To remain strong over next decade

Electricity market structure 10% 0 1 1 Tough for IPPs, with some upside

Coal-fired PP pipeline 15% 1 1 0 Strong in underdeveloped areas

Competing fuels (Gas , Nuclear, Hydro) 15% 0 -1 -1 Limited scope

Domestic coal supply 20% -2 0 0 Taking the low-hanging fruit

Renewables 10% -1 -1 -2 Solar, at a price

CO2 Price/Tax 10% 0 0 0 Not likely

Country Coal Index 0.3 1.0 -0.3

MAY 2016

MAY 201614

India: Coal Demand in 2010 - 2030Strong, even under the most moderate scenarios

• The main driver for

increasing Indian

demand will continue to

be the electricity sector

• However, Industrial

demand, mainly cement

and sponge iron will

remain strong markets

for coal – especially

imported grades

• The stock-and-sale

sector will also remain a

strong niche for imports


MAY 201615

India: Domestic production in 2015-2030How long can the domestic coal boom last? – many factors at play

Noble agrees with other

forecasts that coal production

in India will continue to

increase in the short term

However, we see a series of

factors limiting the upside in

domestic production:

• Physical limits to the

expansion of Coal India,

which we see reaching

700 million tonnes in 2020

• Limited success in the

development of private

mining (coal blocks)

• Growth pains in

infrastructure

• Declining domestic coal

quality


Country View: IndiaThe detail behind out estimates

16

• In spite of a potential decline

in participation in the energy

mix, coal demand in India will

continue to grow in absolute

terms in 2015-2030

• We estimate demand growth

of approximately 200 million

tonnes in 2015-2020

• Imports will decline in the

short term as a result of

increasing domestic supply

• However, imports will return to

growth post 2020, as domestic

production in India struggles

with bottlenecks at mines and

supply chains


Total Generation 960 1,245 1,766 2,251 2,848

Coal 653 980 1,224 1,412 1,698

Oil 26 3 26 29 32

Gas 118 51 96 185 262

Nuclear 26 44 66 109 165

Hydro 114 128 174 215 253

Other 22 38 180 301 439

% Coal in the mix 68% 79% 69% 63% 60%

Coal demand - electricity [mt] 463 666 840 892 1,103

PP Efficiency [%] 33% 34% 35% 38% 38%

Average coal quality [kcal/kg NAR] 3,800 3,800 3,700 3,700 3,600



Cement 20 26 38 52 50

Sponge Iron 22 24 27 37 40

Other 70 80 92 127 150

Total coal demand @ Average kCal/kg NAR 575 796 997 1,108 1,343

Domestic Supply 471 583 825 905 1,045

Coal India (CIL) 402 499 700 750 850

Singareni (SCCL) 39 53 75 75 75

Captive + Other 30 31 50 80 120

Imported coal quality kCal/kg NAR 4,800 4,800 4,800 4,800 4,800

Imports @ 5000 kCal/kg NAR 82 169 132 157 224

Sources: IHS, IEA WEO 2015, Goldman Sachs, Noble

MAY 2016

Country View: JapanDrivers of long-term coal demand

17

Similar to all mature coal markets, Japan will take some steps towards lower emissions, but the rate of change will be much slower than Europe or the USA


Against coal In favour of coal



Energy/power Demand 20% 0 0 0 Flat: 0% CAGR

Electricity market structure 10% 0 -1 -1 Increasingly liberalised

Coal-fired PP pipeline 15% 1 1 0 Limited, small capacity

Competing fuels (Gas , Nuclear, Hydro) 15% -1 0 1 Some competition from LNG

Domestic coal supply 20% 0 0 0 None

Renewables 10% 0 -1 -1 Slowly increasing capacity

CO2 Price/Tax 10% 0 0 -1 After market is liberalised

Country Coal Index 0.0 -0.3 -0.8

MAY 2016

Country View: JapanCoal to remain baseload, even if nuclear restarts go ahead

18

• Increasing numbers of coal-

fired power plants are being

built. During 2015, more than

40 plants were reported to be

planned for construction.

• However, some of these new

builds will be replacement

capacity

• The biggest uncertainty is the

view on nuclear restarts.

• But nuclear would replace gas

in the stack, not coal

• Our view also includes a

ramp-up in renewables

(especially solar) and other

low-carbon electricity sourcesSource: Noble research

MAY 2016

Country View: JapanThe detail behind out estimates and resulting coal demand

19

• The Japanese coal fired

fleet will remain the most

efficient in the world, and

the country will retain its

position as a leader in coal

technologies

• Oil burn for power

generation needs to be

phased out of the mix, and

will be replaced by coal

• Pipeline of solar projects

relatively strong, and

getting attention from the

government in coming

years


Total Generation 1,074 1,010 1,043 1,062 1,084

Coal 299 325 328 300 295

Oil 91 87 45 29 20

Gas 301 390 305 290 295

Nuclear 288 3 175 218 218

Hydro 91 91 88 91 95

Other 4 106 123 144 167

% Coal in the mix 28% 32% 31% 28% 27%

Coal demand - electricity [mt] 117 127 128 116 114

PP Efficiency [%] 40% 40% 40% 41% 41%




Total coal demand 125 133 134 122 120


MAY 2016

Country View: KoreaDrivers of long-term coal demand

20

• Similar to Japan, Korea will retain coal as a strong part of its baseload

• LNG will compete to some extent, with C2G substitution occurring as the arbitrage opens and closes


Bearish coal Bullish coal



Energy/power Demand 20% 1 1 1 Medium-strong: 1-2% CAGR

Electricity market structure 10% 0 0 0 Increasingly liberalised

Coal-fired PP pipeline 15% 2 1 0 Strong - under construction

Competing fuels (Gas , Nuclear, Hydro) 15% -1 -1 -1 Some competition from LNG

Domestic coal supply 20% 0 0 0 None

Renewables 10% 0 -1 -1 Slowly increasing capacity

CO2 Price/Tax 10% -1 -1 -1 Tax on coal in place

Country Coal Index 1.3 0.0 -0.8

MAY 2016

Country View: KoreaA strong pipeline of coal-fired projected to support demand

21

• The Korean baseload will

continue to rely on its

traditional mix of coal,

nuclear and gas in the

outlook period

• Between 2015-2020, coal-

fired generation will remain

supported by a strong

pipeline of projects

• Nuclear generation will

remain flat, as renewables

and gas take an increasing

share in the mix


MAY 2016

Country View: KoreaThe detail behind out estimates

22

Source: Noble Research

• Coal demand capacity to

increase by 64 million tonnes, but

utilization is expected to slightly

decline

• Fuel competition, and electricity

demand growth might limit coal

demand to 120-130 million

tonnes per annum

• Approximately half of this growth

to come from the government-

owned Gencos

• Industrial co-generation growth to

support coal demand also

Coal Demand by Sector 2015 2020 2025

Utilities - Government Owned

KOSEP 29 31 31

EWP 17 17 23

KOSPO 13 21 21

KOWEPO 14 21 21

KOMIPO 13 23 23

Total Gencos 86 113 119

IPPs

Dangjin Eco Power 4

Bukpyong 4 4

Gangneung Anin 6 7

Goseong Hai 2 7

Samcheok 7

Total IPPs 0 11 28

Industrial users

Cement 5 5 5

Chemical 3 3 3

Cogeneration 4 7 7

Others Industries 1 1 1

Total Industrial 12 15 15

Total Coal Demand 98 139 162

MAY 2016

Country View: KoreaThe detail behind out estimates

23


Total Generation 500 532 585 621 659

Coal 219 249 290 300 310

Oil 19 14 6 4 4

Gas 103 94 100 105 120

Nuclear 149 163 170 179 179

Hydro 6 6 8 8 8

Other 3 6 11 25 38

% Coal in the mix 44% 47% 50% 48% 47%


PP Efficiency [%] 40% 41% 41% 41% 41%




Total 95 103 120 122 126

Sources: IHS, Noble

MAY 2016

Regional View: Southeast AsiaDrivers of long-term coal demand

24

Southeast Asia will remain a stronghold for coal demand given its thriving energy demand, and the availability of inexpensive Indonesian coal


Against coal In favour of coal



Energy/power Demand 20% 2 2 2 Flat: 0% CAGR

Electricity market structure 10% 0 1 1 Increasingly IPP participation

Coal-fired PP pipeline 15% 2 2 1 Strong in almost every country

Competing fuels (Gas , Nuclear, Hydro) 15% 0 0 1 Some competition from LNG

Domestic coal supply 20% 0 1 1 Less coal available for exports

Renewables 10% 0 0 -1 Slowly increasing capacity

CO2 Price/Tax 10% 0 0 0 Not likely in the outlook period

Country Coal Index 1.4 2.0 1.8

MAY 2016

Regional View: Southeast AsiaThriving energy demand

25

• Electricity demand in

Southeast Asia to double by

2030

• Coal and gas will continue to

be the main fuels for

electricity generation as

Hydro and Nuclear are

limited options in this region

• The pipeline of projects in

Indonesia, Vietnam,

Philippines and Malaysia is

well under way, with a high

percentage of projects

already under construction,

or in advance stages of

developmentSource: Noble research

MAY 2016

• Coal demand in Southeast

Asia will grow by 242

million tonnes between

2015 and 2030

• Approximately half of this

growth will take place in

the Indonesian domestic

market

• Growing demand domestic

demand in Indonesia will

increasingly limit

availability for the export

market

• Vietnam and Philippines

will also become very

important markets in the

next 5 years

Regional View: Southeast AsiaThe detail behind out estimates and resulting coal demand

26


Total Generation 640 834 1,063 1,295 1,560

Coal 200 300 439 564 719

Oil 66 63 47 42 37

Gas 282 340 394 434 473

Nuclear - - - 14 23

Hydro 67 91 122 151 184

Other 25 40 61 90 124

% Coal in the mix 31% 36% 41% 44% 46%


PP Efficiency [%] 38% 38% 38% 38% 38%

Average coal quality [kcal/kg NAR] 5,000 5,000 4,900 4,800 4,800



Total coal demand @ Average CV 140 204 281 359 446


MAY 2016

Coal Supply and Demand BalanceWhere is the market going?

MAY 2016

MAY 201628

Coal View: The Pacific Market in 2015-2020

The Pacific market will grow by +46 million tonnes in 2015-2020


Coal Demand 2014 2015 2016 2017 2018 2019 2020 2015-20

Pacific 736 674 671 684 696 712 720 46

China 199 130 118 120 120 125 129 -1

Japan 130 133 134 136 136 136 134 1

Taiwan 60 60 61 62 62 65 66 6

Korea 102 103 105 108 112 115 118 15

Hong Kong 14 12 12 11 10 9 8 -4.2

India 163 165 159 153 147 141 132 -33

Pakistan 3.7 4.5 3.6 3.8 5.0 6.0 6.0 1.5

Bangladesh 0.0 0.9 1.0 1.0 1.0 1.5 2.0 1.1

Sri Lanka 1.6 1.5 1.6 1.6 1.8 2.0 2.5 1.0

Malaysia 21 21 24 28 32 34 36 15

Thailand 18 18 19 20 23 26 26 8

Philippines 15 15 19 23 28 31 33 19

Vietnam 2 4 6 7 9 10 14 10

Cambodia 1 1 2 2 2 2 3 1

United Arab Emirates 2.2 1.7 2.0 2.4 2.4 2.4 3.5 1.8

Africa 3.2 4.1 4.9 5.9 6.5 7.1 7.8 3.7

MAY 201629

Coal View: Demand in 2015-2020Coal Demand 2014 2015 2016 2017 2018 2019 2020 2015-20

Pacific 736 674 656 657 679 700 722 48

China 199 130 102 91 100 110 129 -1

Japan 130 133 134 136 136 136 134 1

Taiwan 60 60 61 62 62 65 66 6

Korea 102 103 108 111 116 118 120 18

Hong Kong 14 12 12 11 10 9 8 -4.2

India 163 165 159 153 147 141 132 -33

Pakistan 3.7 4.5 3.6 3.8 5.0 6.0 6.0 1.5

Bangladesh 0.0 0.9 1.0 1.0 1.0 1.5 2.0 1.1

Sri Lanka 1.6 1.5 1.6 1.6 1.8 2.0 2.5 1.0

Malaysia 21 21 24 28 32 34 36 15

Thailand 18 18 19 20 23 26 26 8

Philippines 15 15 19 23 28 31 33 19

Vietnam 2 4 4 6 8 10 14 10

Cambodia 1 1 2 2 2 2 3 1

United Arab Emirates 2.2 1.7 2.0 2.4 2.4 2.4 3.5 1.8

Africa 3.2 4.1 4.9 5.9 6.5 7.1 7.8 3.7

Atlantic 205 202 191 181 181 182 181 -21

Europe 127 118 105 89 86 85 82 -36

Mediterrenean 43 46 46 49 52 52 54 8

Americas 35 38 40 43 43 45 46 8

Total 941 876 847 838 860 882 903 28

• Global coal demand contraction is

likely to continue until 2017, but

the rate of decline will start to

slows in late in 2016 – negative

outlook has been priced-in

• The stabilization of China, and

new demand from Korea and

Southeast Asia will support the

market post-2017

• India imports are likely to

disappoint in the short term due to

increasing domestic production,

but imports will remain very much

needed

• The fall of the European market

will continue though 2020, but the

Mediterranean and Latin

American markets will remain firm


MAY 201630

Coal View: Supply in 2015-2020What would happen to the coal market if prices remain at current levels?

• At current prices,

Indonesia and

Australia will not

ramp-up production

when the market

needs it (2018)

• Only the lowest cost

producers with

existing spare

capacity can expand

(Colombia and South

Africa)

• USA will all but

disappear from the

export market as a

result of its lack of

competitiveness

The seaborne market has started to tighten due to

the drop in coal supply from high-cost origins


Coal Supply 2014 2015 2016 2017 2018 2019 2020 2015-20

Indonesia 422 373 355 350 350 350 350 -23

Australia 198 200 195 200 200 200 200 0

Russia 97 98 95 95 98 100 100 2

Colombia 75 82 86 85 88 90 92 10

South Africa 71 75 72 74 75 78 78 3.0

US 32 24 18 14 12 12 12 -12

Other 46 24 25 22 22 22 22 -2.0

Total supply 941 876 846 840 845 852 854 -22

Total Demand 941 876 862 865 878 894 901

Balance 0 0 -16 -25 -33 -42 -47

Can support come from costs?

MAY 2016

32We see price support from costs in 2020Sub-50 $/t views carry significant upside risks due to oil and FX exposure

Current spot price = $50

We see long-term price

support from costs:

• Current price levels do

not support greenfield

developments – existing

capacity will be stretching

in 5 years

• The most important driver

costs are producer

currencies – RUB, IDR,

AUD, COP, ZAR - low

coal prices command

currencies to remain low

in the long term

• The second most

important driver of costs

are oil prices – upside in

oil will support coal

Source: CRU, Noble Analysis

FX Assumptions (2020 CRU): 1.34 AUD/$; 56 RUB/$; 12500 IDR/$; 2540 COP/$;

Volumes based on CRU projections for 2020

Spot price shown for prompt loading in 6000 kcal/kg at Newcastle port, FOB

Marginal cost (Oil @ 30, Current FX) = $60

Marginal cost (Oil @ 70, 2020 FX) = $70

2015 Demand = 880 million tonnes

2020 Demand (Noble outlook) = 847 million tonnes

Even assuming demand collapses to 800 million tonnes by 2020 (an

extreme case), current prices are not sustainable

MAY 2016

Coal Price OutlookNoble, Consensus Economics and IHS

MAY 201634

Source: GlobalCoal; Consensus Economics; IHS

Coal Price Outlook

Conclusions and takeaways

35

• The global seaborne market has started to show signs of

rebalancing

• Current coal price levels will lead to an increasing

shortage of coal supply in the next five years, and

potentially beyond

• Coal production costs are highly dependent on

currencies and oil prices – assuming current coal prices

are sustainable requires producer currencies and oil

prices to remain weak

MAY 2016

THANK YOU

www.thisisnoble.com

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Long-term Coal Market Outlook - Q1 2016 FINAL