Domestic versus imported coal – in search of a perfect balance India’s dilemma Domestic versus imported coal – in search of a perfect balance John Howland September, 2017

Three primary international coal market drivers going forward Chinese regulations: by regulating production, China looks to have a key role in setting thermal prices going forward. Indian production: large growth targets, but if they are not met, then India will likely need to import more, supporting international prices. Coal-gas competition: has hurt demand in the United States and United Kingdom, and now somewhat in Europe. With an LNG oversupply developing and coal prices relatively strong, coal-gas competition represents a downside risk for coal demand.

China: Regulations may become the single biggest driver of all China: Regulations may become the single biggest driver of all. Import restrictions now? Re Red Range: government measures to rein in high prices will be triggered Upper red range starts at +RMB600 Blue range: watch and warn/guide RMB500-5700 ($77-$87) Lower red range starts at -RMB470

Chinese domestic prices vs global prices ($/t) Very well corralated

China is the biggest influence on seabone price ($/t)

What drives imports in India Monthly coal evacuation vs imports (mt) Domestic production/offtake Domestic consumption Stock levels Power prices International coal prices Government policy

Strong power generation and domestic supply issues has seen power generator stock plummet Monthly Indian Power Gen vs domestic evacuation vs power station stocks CIL stock have also fallen. From 69mt in March to 35mt today

Imports down as Government mandate and price hits Government mandated that state-owned plants stop importing Imports to these plants falling 20mt by end of FY 2016-17 Government prioritizes domestic production delivery to state-owned plants E-auction coal prices moving up Private generators designed for domestic coal having real problems sourcing recently Import plants increasing imports slightly Overall thermal coal imports down 10- 11mt since start of year. Coal imports by CEA monitored plants   Domestic coal based Imported coal based Total 2016-17 19.87 46.3 66.17 2015-16 37.21 43.5 80.72 2014-15 48.97 42.32 91.29 Imports by CEA monitored plans in 2017 Vs 2016 (Jan-May) Months 2017 2016 Imported coal based plants Domestic coal based January 3.7 1.425 3.881 2.943 February 3.826 1.769 3.409 2.653 March 4.172 1.257 3.122 2.772 April 3.72 1.078 3.824 2.296 May 3.763 1.568 4.335 2.114 Total 19.181 7.097 18.571 12.778

Indian mine location – not good for west and South

Transportation cost is the real cost For distances below 250km, trucking is slightly cheaper than rail. Above 250km, rail quickly enjoys a significant cost advantage, and is generally about half the cost of trucking coal. Coal delivery distances vary from roughly zero to about 2000km. The average transportation distance is 700km We expect modest ongoing growth in transportation costs in real dollar terms, primarily due to rising congestion slowly increasing train cycle times. Average transportation distance

Import/domestic coal competition, 2017, based on price

Imports have not reacted as price becomes more of an issue Monthly imports volumes and price Import volumes with a 2 month lag to prices

What gives: high import prices or imports? Increased enquiry on the import market post monsoon, but how much actual purchases Signs that stock and sale picking up as e- auction coal prices and availability for industrial players not sufficient Power prices largely do not support imports at current import values West coast IPPs feeling the brunt with a number of units being taken off line in Gujarat and Marashtra with owners taking penalty for non–PPS performance and the remaining units at very low PLF – 50% With current day ahead power prices, imports would have to be at $6-$7 lower for a 4,200kc GAR material. Or power price would have to increase to INR4/unit. Are power prices the Dilemma Or is the Dilemma China and the world market Current Chinese domestic prices and import demand are supporting the market at today’s levels However, there is now considerable noise about import restrictions. If these were to eventuate global prices would fall. However, if China was able to bring domestic prices down to the green band and penalise low cv material would this make import prices into India competitive? But what about GAS………..

Coal-gas competition is now impacting Europe Chart shows the range of marginal costs associated with coal fired generation (blue) and gas (grey) since Jan 2010 Small panel on right shows 2016 zoomed in With price movements of gas, coal and carbon over 2016 to date, there has been a convergence of generation costs from gas and coal since August The average fuel switching price is of the order of €18-19 /MWh, or around $6 per MMBtu Impact was extra 6 Bcm in the top 5 markets excluding UK. Overall we think gas burn in power sector was up 18 Bcm over 2015 (21%) (22 Bcm in EU28 19%) for reasons not purely related with fuel switching. In Austria up 5% (just 0.1 Bcm) Q. Where have we seen more gas burn? France – Gas demand up 5.5% overall year to date; gas burn 30% higher burn Sep thru Nov, mainly due to tightness of the system. All gas plants in France (including those previously scheduled for mothballing) operational this winter (13 units totalling 5.7 GW). Gas demand from CCGTs up from 7m/d average for Nov to 20 m/d - EDF extended till end December outages on 5 units (4.5 GW). Outages 21-23 GW in Sep/Oct (37% fleet) falling to 12 GW by end Dec Germany – Up in every month of the year, averaging 40% higher. Highest gas burn in September since 2011 (+162%). Netherlands – clean sparks have been positive since late summer as well UK – up6bm in 2016 to nov. CCGT output at 7 year high in Nov with lower I/C flows, ended up 70% y-o-y (2.1 Bcm vs 1.3 Bcm). Towards top of historic range (higher than any Nov except 2009). Year to Nov 18.8, just under the 19.3 in 2011. Spain – higher exports to France have supported gas burn (not switching related) but gas burn down vs last year overall 1.6 Bcm. Italy – seen gas burn up 11% over the year (2 Bcm), and 30% since Sep (in line with 2011 levels) due to lower output from wind and hydro, and lower net imports, more than sparks

The Shale Gale moves out of the US US shale gas initiated the seaborne coal industry's recession in the 2010s, when gas displaced coal which was then exported. Since then shale gas has decimated the US industry with output nearly halved. Gas with help of regulation has displaced coal in the UK. With liquifaction coming on line in the US Gulf, can LNG displace coal in Continental Europe? Probably. In Asia? Probably limited. European coal demand is set to decline as a growing LNG oversupply causes lower gas prices and stimulates generation switching from coal to gas. The reduction in coal imports is expected to about around 15 mt/y by 2019. The largest hit will be Russia, which will lose around 8.5mt/y of expor.ts The bulk of the rest will be taken by the US which will lose 6.4mt/y of exports, evenly spread between CAPP and ILB

Coal-gas competition, 2017, based on price

Coal-gas competition, 2017, based on cost