IHS Markit - Sumatra Miner - March 2019 PDF

Coal
Global Coal Market Outlook: A Near to Mid Term View

March 2019
Sumatra Miner, Palembang
Diyana Putri Alan, Energy Markets Editor, +62 5799 8707 | +65 91509164 , DiyanaPutri.Alan@ihsmarkit.com
Dr. James Stevenson, Senior Director, +61 (0) 447 622 258, james.stevenson@ihsmarkit.com
Scott Dendy, Director (APAC – Coal), +65 (0) 9721 9006, scott.dendy@ihsmarkit.com
Confidential. © 2019 IHS MarkitTM. All Rights Reserved.

IHS Markit Global Coal Market Update | Presentation for Sumatra Miner| March 2019
The current coal situation
The Good The Bad The Uncertain
Currently still a relatively strong A thin pipeline for both thermal and Prospective tightness (good or bad
market: not the highs of 2017 and metallurgical coal, particularly depending you your perspective)
early 2018. beyond the next 2 years, despite
strong prices
Though price volatility persists, the Limited access to capital – but this Huge regulatory uncertainty
lows of 2015 and early 2016 seem will help support price (China, other parts of Asia, Europe,
a distant memory the United States)
Global import demand continues to Progressive actions impacting

grow and will for some time, for demand
both thermal and coking coal
Outside of Europe and the United A fuel that will ultimately decline in
States coal is the lowest cost fuel the very long term
for power generation and industrial
uses
Confidential. © 2019 IHS MarkitTM. All Rights Reserved. 2

IHS Markit Global Coal Market Update | Presentation for Sumatra Miner | March 2019
A quick catchup on the last few years…
Total global coal trade and Northwest Europe price

1,200 160
140
1,000
120
800
USD per metric ton

100
Million metric tons
600 80
60
400
40
200
20
0 0
2008 2010 2012 2014 2016 2018
Total Met Total Thermal NW Europe Price
Source: IHS Markit © 2019 IHS Markit

Different qualities are trading very differently

Importers Exporters
• Australia is the dominant supply country for 6,000kc coal, and within that Glencore dominates. That coal predominantly goes to Japan.
• China dominates buying of 5,000-5,600kc, plus lower qualities. Australia is also a strong supplier of this quality.
• South Korea the biggest buyers of subbituminous coal
Genuine 6,000kc quality trading at a strong premium. What changes this?

- Different Japanese buying?
- More Australian or Russian exports?
- Vertical integration? Quality spreads will likely
- Regulatory action? shrink but not quickly
Confidential. © 2019 IHS Markit TM. All Rights Reserved. 4
Source: Glencore sell-side analyst site visit report, 2018
Very different suppliers and demand centres across different qualities
China predominantly imports

low CV coal from Indonesia,
Australia predominantly
and 5,500kc High Ash coal
supplies higher CV coals
from Australia
(>5,000kc NAR), to a
range of destinations
South Korea is the largest
importer of subbituminous
coal (from Indonesia and the
US), and also imports high
Russia is a rapidly CV Australian coal
growing exporter of
predominantly high CV
coal
India predominantly imports
low CV coal from Indonesia,
as well as a small portion of
Australian higher CV coal
Indonesia predominantly
supplies low calorific
value coal, to
destinations in Asia and
the Indian Ocean
Japan predominantly imports
high CV coal from Australia,

Coal demand soared in 2018, but it was primarily growth in low CV coal
demand (<5,000 kcal/kg, NAR)

By contrast, demand for high CV coal (5,600-6,200 kcal/kg, NAR) grew little

Regulatory surprises from China coupled with election fever in Indonesia and
India heightens uncertainty
China imports, monthly
• Chinese imports surged in 2018, rising 13 MMt
40
year on year. However, import restrictions had a Import restrictions
cause November and
massive impact from mid-November—without 35 December imports to
plummet—quickly
them, imports would likely have risen more than swinging the global
30 MMt year-on-year. 30 market bearish
<4,200 kcal/kg NAR
• Import restrictions in 2019, and their degree of
Million metric tons

25
4,200-5,000 kcal/kg
enforcement, apply a huge amount of risk NAR
20
around the size of the global coal market in 5,000-5,600 kcal/kg
NAR
2019. 15 5,600-6,200 kcal/kg
NAR
10 >6,200 kcal/kg NAR
5 SSCC + PCI
HCC
0
Jan-17 Jan-18 Jan-19
Source: IHS Markit © 2017 IHS Markit © 2017 IHS Markit

Election fever in Indonesia and India
• Status quo in Indonesia until post-

election
• DMO sanctions/production cut has
not supported stability in growing
price levels
• Oversupply risk if weather
improves
• India still a positive story in
election year, power demand
strong

2019 demand growth driven by India and SE Asia, despite lower China
Seaborne thermal coal demand growth, 2018 to 2019

1,040
1,035
1,030
1,025
Million metric tons
1,020
1,015
1,010
1,005
1,000
China
Vietnam
Taiwan
France
Malaysia
Others
Mexico
2018
Philippines
Morocco
Spain
2019
India
Pakistan
Bangladesh
Italy
Belgium
Israel
Germany
Kingdom
South Korea
United

India and SE Asia drive growth over the next 5 years
Seaborne thermal coal demand growth, 2018 to 2023

1,090
1,080
1,070
1,060
1,050
Million metric tons
1,040
1,030
1,020
1,010
1,000

Demand growth through 2023 will continue to favour low CV coal,

with high CV demand declining
Thermal import demand growth by quality, 2018 to 2023 (excl. North Korea)
Total 47.4
<4,200 kcal/kg, NAR 16.6

Calorific value
4,200-5,000 kcal/kg, NAR 10.3
5,000-5,600 kcal/kg, NAR 6.8
5,600-6,200
-7.0kcal/kg, NAR
>6,200 kcal/kg, NAR 0.5
-10.0 0.0 10.0 20.0 30.0 40.0 50.0 60.0

Million metric tons

Global import demand growth to continue, albeit slowly from the 2030s
Total coal imports
1,800
1,600
Vietnam
1,400
Million metric tonnes
1,200
1,000
South Korea
800
Japan
600
China
400
200 India
0
2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045 2047 2049

But will suppliers be able to handle expected levels of demand growth?

Long term thermal supply
500
Indonesia Russia
400 United States
Colombia
Million metric tons
300
South Africa
Australia
Mozambique
200
Indonesia
Russia
South Africa Australia

100
Colombia
United States Canada
0 Others
2015 2020 2025 2030 2035 2040 2045 2050
Source: IHS Markit

Sustained strong pricing: thin project pipeline struggles to keep up with

demand
Prices: History and Outlook
350
300
250
USD per metric ton (real)
200
150
100
50
0
2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
Richards Bay FOB Newcastle FOB Indonesian Australia Hard Coking FOB Queensland
Subbituminous FOB

Changing buying landscape – thermal coal
• More competition in Asian power markets

• Fuel purchasing to become biggest factor in how generators compete
• Long-term fixed-price contracts less common, despite long-term need for supply
• Buyers increasingly looking to mark their coal exposure on a market-to-market basis to measure their
performance and offer hedging potential
• Buyers will increasingly become more sophisticated in their fuel purchasing including buying on index and
hedging
• For this they need benchmarks that accurately express value of the day in a timely and fair manner –
they may also be answerable to regulatory bodies that will demand more and more transparency and
accountability – IOSCO compliance should help regulatory acceptance
• Producers should look to better understand their customers needs so they can better plan for the future –
good long term relationships underpin good business. Facilitating pricing options that allows for buyers to
better manage their risks can become a differentiator

Multiple Benchmarks tracking different markets

Grades and destination play a major role in shaping prices, especially in Asia no ‘one-size-fits-all’ solution
Australia
• Newcastle (6,000kc NAR) - typically follows Japanese market – but also has some push/pull from Richards Bay and
European markets
• Australian 5,500 kc NAR - designed to feed into China’s base 5,500 kc NAR market – does not necessarily track
Newcastle
South Africa
• Richards Bay (API4) - Typically used to track European market (API2), although now does not ‘price in’ and tends to
follow Newcastle.
• Sub-products – 5,700 kc NAR min, 5,500 kc NAR, 4,800 kc NAR; typically trade at discount to API4
Indonesian prices
• High c.v. (6,000 kc NAR) – tracks Newcastle as it is largely a Newcastle substitute into Japan – advantageous freight,
although very limited market size
• Sub-bituminous, 4,700 kc NAR/5,000 kc GAR, (M50) – tracks both Indian and Chinese purchasing, but is strongly
influenced by to Taiwanese, South Korean and Malaysian buyers – big market but fewer participants than low rank coals
• Low-rank (M42) 4,200 kc GAR and below – is mainly influenced by both Indian and Chinese purchasing

Prices becoming more and more volatile

Low-rank prices used to be much more stable than they are currently
IHS McClsokey Indonesian FOB prices, 2012-2019, ($/t)
120
100
80
60
40
20
0
Aug-12 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 Aug-18 Feb-19
3,400 kc GAR 3,800 kc GAR 4,200 kc GAR 5,500 kc NAR 6,000 kc NAR
Source: IHS Markit
© 2018 IHS Markit

Reasons for popularity of 4,200 kc GAR

Competitive Transparency What makes M42 Compliance
different?
Low-rank Indonesian coal is The spot trade in 4,200 kc
Its more trade backed than IHS Markit’s M42 Index
a very competitive portion of GAR material is very liquid.
other indices – making it adheres to the highest
the market with many More spot deals are typically
faster to respond to real standards:
competing suppliers of reported for this grade than
underlined spot market
varying size any other coal market sector.
Complies with international
standards for price reporting
Should lead to production This is beneficial as it helps
Little scope for single source and benchmark provision /
solid trade back index – no to better understand the true
of market power dominating administration such as
need for a ‘black box’ index impact of prices on business
market IOSCO and the European
Benchmark Regulation
(BMR).
It is arguably the most
Its transparent – you know
competitive market in the
how it is formulated and
international seaborn coal
evidence is provided
trade

M42: IHS McCloskey Indonesian 4,200 kc GAR FOB
The basis of SGX’s Indonesian 4,200 kc GAR FOB Futures contract launched in early April 2018
• IHS McCloskey has one of, if not the, largest coal reporting teams globally
• IHS McCloskey’s Indonesian 4,200 kc GAR FOB marker, or M42, is independently audited to check it meet
the International Organization of Securities Commissions (IOSCO) principles for PRA index provision
• IOSCO has become the standard for international coal market index compliance for exchange listed
indices and represents proof of a high level of rigor, robustness and fairness expected in today’s
commodity futures markets
• M42 compliance has increased from ‘Limited’ to ‘Reasonable’ this year – a far more stringent audit – the
same level as API2 and API4 (and Indonesian Sub-Bituminous, a.k.a M50)
IHS McCloskey Indonesian (4,200 kc NAR FOB) marker – Basic Specifications
Basis Max sulphur Vessel type Typical cargo
4,200 kc GAR (M42) 0.6% Geared 50,000 t
Source: Thermal Coal and Petcoke Marker Price Methodology and Specifications, published by IHS Market

M42 forward curve

The forward curve gives a view on where the market values 4,200 kc GAR in future months.
IHS McCloskey's M42 forward curve, 22 Mar 2019 ($/t)
39.00
38.50
38.00
37.50
37.00
Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Oct-19 Nov-19 Dec-19 Jan-20 Feb-20
Source: IHS Markit

© 2019 IHS Markit

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Coal

Global Coal Market Outlook: A Near to Mid Term View

Sumatra Miner, Palembang

Confidential. © 2019 IHS MarkitTM. All Rights Reserved.

The current coal situation

The Good The Bad The Uncertain

Global import demand continues to Progressive actions impacting

Confidential. © 2019 IHS MarkitTM. All Rights Reserved. 2

A quick catchup on the last few years…

Total global coal trade and Northwest Europe price

USD per metric ton

Confidential. © 2019 IHS MarkitTM. All Rights Reserved. 3

Different qualities are trading very differently

Source: IHS Markit © 2018 IHS Markit

Genuine 6,000kc quality trading at a strong premium. What changes this?

Very different suppliers and demand centres across different qualities

China predominantly imports

Confidential. © 2019 IHS MarkitTM. All Rights Reserved. 5

Confidential. © 2019 IHS MarkitTM. All Rights Reserved. 6

Confidential. © 2019 IHS MarkitTM. All Rights Reserved. 7

• Import restrictions in 2019, and their degree of

Million metric tons

10 >6,200 kcal/kg NAR

Source: IHS Markit © 2017 IHS Markit © 2017 IHS Markit

Confidential. © 2019 IHS MarkitTM. All Rights Reserved. 8

Election fever in Indonesia and India

• Status quo in Indonesia until post-

Confidential. © 2019 IHS MarkitTM. All Rights Reserved. 9

Seaborne thermal coal demand growth, 2018 to 2019

Confidential. © 2019 IHS MarkitTM. All Rights Reserved. 10

India and SE Asia drive growth over the next 5 years

Seaborne thermal coal demand growth, 2018 to 2023

Source: IHS Markit © 2019 IHS Markit

Confidential. © 2019 IHS MarkitTM. All Rights Reserved. 11

Demand growth through 2023 will continue to favour low CV coal,

<4,200 kcal/kg, NAR 16.6

4,200-5,000 kcal/kg, NAR 10.3

5,000-5,600 kcal/kg, NAR 6.8

>6,200 kcal/kg, NAR 0.5

-10.0 0.0 10.0 20.0 30.0 40.0 50.0 60.0

Confidential. © 2019 IHS MarkitTM. All Rights Reserved. 12

Total coal imports

Confidential. © 2019 IHS MarkitTM. All Rights Reserved. 13

But will suppliers be able to handle expected levels of demand growth?

400 United States

South Africa Australia

Source: IHS Markit

Confidential. © 2019 IHS MarkitTM. All Rights Reserved. 14

Sustained strong pricing: thin project pipeline struggles to keep up with

Confidential. © 2019 IHS MarkitTM. All Rights Reserved. 15

Changing buying landscape – thermal coal

• More competition in Asian power markets

Confidential. © 2019 IHS MarkitTM. All Rights Reserved. 16

Multiple Benchmarks tracking different markets

Confidential. © 2019 IHS MarkitTM. All Rights Reserved. 17

Prices becoming more and more volatile

IHS McClsokey Indonesian FOB prices, 2012-2019, ($/t)

Confidential. © 2019 IHS MarkitTM. All Rights Reserved. 18

Reasons for popularity of 4,200 kc GAR

Confidential. © 2019 IHS MarkitTM. All Rights Reserved. 19

M42: IHS McCloskey Indonesian 4,200 kc GAR FOB

Basis Max sulphur Vessel type Typical cargo

4,200 kc GAR (M42) 0.6% Geared 50,000 t