1. NS4054 Fall Term 2015 Coal Markets

2. Coal Markets: Overview Oxford Analytica, “Coal Market Will Stay Oversupplied” September 15, 2015 Seaborne thermal coal prices on a long-term slide. Peaked above 130 dollars per metric ton (mt) for deliveries into north-western Europe in 2011 Have sunk to 58.2 dollars/mt on September 7, 2015 At these prices, only the lowest-cost producers can remain profitable Production costs for US Central Appalachian producers (CAPP) and Australian underground mining are close to 90 dollars/mt 2

3. Coal Price Trends 3

4. Coal Markets I Impacts Should expect further coal sector bankruptcies and mine closers Coal will remain competitive with natural gas for power generation in most markets Medium term demand response limited by a lack of new coal plan construction and environmental regulation 4

5. Coal Markets II Alpha Natural Resources filed for Chapter 11 bankruptcy protection in August 2015 Sign of pressure facing not just U.S. CAPP producers but the overall coal industry CAPP falling into unprofitability High end of the cost curve Little scope to reduce production costs Globally coal producers have been slow to respond to price drop by cutting output Now happening with output reductions in South Africa and Indonesia Not sufficient to have major impact on prices Initially many producers produced more coal in attempt to lower unit costs. U.S. producers also badly hit by strength of dollar and weeking of currencies in major exporting countries 5

6. Coal Producers Currency Movements 6

7. Coal Markets I Chinese Market High and rising coal prices up to 2012 encouraged an expansion in mining capacity predicated on expected growth of Primarily Chinese coal imports and, To a lesser extent Indian coal imports Expansion based on rapid construction of coal-fired generation plants in these countries 7

8. Coal Markets II Even though China produces roughly as much coas as it consumes it Exports from the producing areas in the northern part of the country and Imports into coastal areas in the south Price of domestic coal setting a ceiling for trade in seaborne coal Faced with slowing coal demand for power generation China’s producers engaged in a series of price cuts that have undermined price imorters have been able to achieve Chinese government also but up a number of barriers protected domestic industry 8

9. Coal Markets III Demand side restructuring Current situation has all elements of a cyclical market readjustment Just as mining capacity has over expanded on back of a period of high prices Also many indications that coal industry is seeing fundamental demand destruction in the power sector as a result of environmental regulation China China’s coal demand fell by 2.9% in 2012 following years of expansion Country’s thermal coal imports January-July2015 43.3% lower compared to same period in 2014 Utilization rate of coal fired generation plants fell to 56% in 2014 compared to 60% in 2013 9

10. Coal Markets IV China (contd.) Patterns reflect slower Chinese growth and decision by government to limit new coal fired plan construction in major urban areas encourage encouraging construction of renewables have renewables to make up 15% of generation mix by 2020 Target coal to fall below 65% Chinese want to reduce economy’s carbon intensity per unit of GDP by 45% between 2005 and 2020 10

11. Coal Markets V United States U.S. coal consumption has fallen sharply. From 573.3 million tons of oil equivalent (mtoe) in 2007 to 453.4 mtoe in 2014 Reduction has been due to Competition from cheap shale gas The direction of new plant construction Government requirements away from coal Government’s Clean Power Plan (CPP) – still subject to legal challenge is expected to result in closure of much of the country’s older coal plants EIA expects no coal plants in 2015 increased generating capacity 12.9 GW coal plant expected to retire as a result of stricter standards 11

12. Coal Markets VI Europe European coal demand is also expected to fall Many coal plants that opted out of the Large Combustion Plant Directive are exhausting their allocated operating hours. In UK number of coal plant closures where higher carbon tax than EU has been implemented In continental Europe,gas remains uncompetitive versus coal But again direction of generation plant construction shows coal losing share Of 19GW of new plant construction in Europe starting operations before 2018, only 3.9GW is coal 12

13. Coal Markets VII India Indian coal imports expected to rise Result of construction of new coal plants and Inability of country’s large coal producer, state-owned Coal India to expand domestic production fast enough New government elected in 2014 prioritized domestic coal production Promises to remove the bureaucratic barriers to new mine development 13

14. Coal Markets VIII Remain pockets of coal demand growth Morocco, Turkey, Vietnam – other South-east Asian countries Some major coal producers are looking to expand their own domestic coal use Russia and Indonesia Intention here it to meet this consumption with domestic production rather than imports. Broadly low prices and oversupply look likely to persist in short and medium term Lack of new coal plant construction in major markets suggest a dim long-term outlook 14

15. Assessment Greater output cuts among coal producers likely in face of persistent oversupply and week import demand from major markets like China Producers will seek further cost reductions and some mine closures appear certain New investment in coal mine construction for export will remain on hold for the foreseeable future Currency movement will prove key determinant of coal producers 'export proceeds. U.S. producers are most vulnerable as the currencies of other major coal exporters are weakening against the dollar. 15