Dr Neil J. Bristow Presentation at 7 th EuroCoke Summit Conference - PowerPoint PPT Presentation

Dr Neil J. Bristow Presentation at 7 th EuroCoke Summit Conference Barcelona, Spain 25 th – 27 th April 2016 H & W Worldwide Consulting neil.j.bristow@hwworldwideconsult.com +61249149377

Introduction – setting the scene 1. Snapshot – conditions Coke meeting Pittsburgh 2. Outlook today – what has changed and why 3. Australia’s role in the met coal and coke market 4. 5. Looking ahead Australia in 2020 6. Long term future, where will we be in 50 years? 7. Concluding remarks H & W Worldwide Consulting

Introduction – setting the scene 1. Snapshot – conditions Coke meeting Pittsburgh 2. Outlook today – what has changed and why 3. Australia’s role in the met coal and coke market 4. 5. Looking ahead Australia in 2020 6. Long term future, where will we be in 50 years? 7. Concluding remarks H & W Worldwide Consulting

It’s a China story stupid – or is it? • Is high coke strength the key factor anymore? • Are Chinese steel exports here to stay? • The commodity cycle has ended – or has it? • Do we need any more met coal and if so.. • Who’s investing in new coking coal? • When does scrap/EAF replace the coke/BF? •

Introduction – setting the scene 1. Snapshot – conditions Coke meeting Pittsburgh 2. Outlook today – what has changed and why 3. Australia’s role in the met coal and coke market 4. 5. Looking ahead Australia in 2020 6. Long term future, where will we be in 50 years? 7. Concluding remarks H & W Worldwide Consulting

In a nutshell = really bad!! • Macroeconomic conditions deteriorating fast • Falling demand for steel and coke, met coal • “flood” of Chinese steel exports • Prices heading south: • • benchmark US$81.5 / spot US$78 – heading down Industry unprofitable – severe cost reductions • Mine closures, across all major supply centres • Outlook for 2016 - bleak •

Prices – heading down •  Widening differentials HQHCC  PCI weakening HCC Demand softening •  Steel demand  Chinese steel exports replacing imported coking coal steel  Chinese imports sharply lower 2.5Mt vs >4Mt in 2014 Supply – mines closing as unprofitable •  Australia – Isaac Plains, Integra, Wollongong coal, Crinum 1/1/16  Canada – Grande Cache, Teck lowering volumes  US – entering Chapter 11

Slide from October 2015 In the near term further cost cutting is underway and could reach iron ore levels, adding to further US met coal problems. Could this even lead to increased met coal imports to keep coke plants operating? 3 8 % ~20% Unfortunately I was right it did!! H & W Worldwide Consulting

Prices – steelmaking raw materials heading down further •  Bottom November 2015; met coal US$73/t PHCC, IO US$38/t  Steel forecasts down – change in China view, 2015 turning point Chinese Demand – peak steel now softening? • 2015 entry China toward 1bt, exit, peaked ~820mt!! •

Prices – steelmaking raw materials heading down •

2016 average price vs LR price expectations 2020 average price vs LR price expectations 0% 10% 6% - 5% - 5% 5% - 10% - 8% - 11% 0% - 13% - 15% - 17% - 20% - 3% - - 18% - 5% 3% - 20% - 20% - 22% - 25% - 24% - 10% 8% - - 8% - 26% 10% - - 30% - 15% 13% 13% - - - 31% - 35% - 16% - 16% - 20% - 18% - - 40% 37 % - 19% Tin Zinc Lead Gold Steel Nickel Copper Iron Ore Platinum Uranium 23% Aluminium Thermal Coal Hard Coking Coal - 25% Hard Coking Coal Thermal Coal Aluminium Platinum Iron Ore Uranium Copper Nickel Steel Gold Lead Zinc Tin - Source: Macquarie bank, consensus forecasts, Bloomberg

Global crude steel consumption Chinese steel exports, crude steel basis kg per 140 capita 250 Global financial crisis 120 million tonnes 100 200 80 150 60 40 100 China takes off Oil price shocks 20 Collapse of the USSR 0 50 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015F 2016F 2017F 2018F 2019F 2020F 3,000 5,000 7,000 9,000 11,000 13,000 GDP per capita (PPP 2005 Int dollar) 1950 - 2013 2014E - 2019F Source: Macquarie bank

Changes in Steel production (MT) Steel Production Growth (Mt) 120 400 100 350 Asia 80 300 Europe 60 250 North America 40 200 Middle East 20 150 0 100 -20 50 -40 0 -60 -50 Asia Europe North America -80 -100

2015 - 2020 forecast growth in seaborne met coal demand growth ex China Downward revision 20 8Mt during 2015 Downward revision Downward revision 15 2Mt during 2015 1Mt during 2015 12 10 Million tonnes 5 2 1 0 0 0 0 - 5 - 3 Total downward revision 14Mt during 2015 10 - India Korea Taiwan Other Brazil Europe Japan Source: Macquarie bank

2016 met coal cost curve 160 USA Canada HCC equivalent BMA Russia 140 Indonesia Australia Mozambique China 120 Other 100 Quarterly contract 80 FOB Cost ($/t) - Spot price 60 40 20 0 0 50 100 150 200 250 Volume (mt) Source: Macquarie bank , H&W Worldwideconsulting

In a nutshell = really bad!! • Outlook forecast to deteriorate in 2016 • No improvement for a “number” of years • China steel lower future, • Exports continued threat to global steel • Met coal in “significant” oversupply • and haven’t even mentioned India and others • impacted by large volumes of cheap Chinese coke!

Introduction – setting the scene 1. Snapshot – conditions Coke meeting Pittsburgh 2. Outlook today – what has changed and why 3. Australia’s role in the met coal and coke market 4. 5. Looking ahead Australia in 2020 6. Long term future, where will we be in 50 years? 7. Concluding remarks H & W Worldwide Consulting

Prices US$97/t PHCC +US$24/t from lows November • Premium JM25 (cfr) PHCC (fob) Prices predicted to “breakthrough” US$100/t • Rise in benchmark to US$84/t and PCI % up to 87% HCC • Source: Macquarie bank

Real estate market started to pick up • New starts increased strongly into 2016 • Steel recovery as construction ~60% of steel demand • Strong recovery in steel prices • Source: Morgan Stanley

China new loans Change in real & apparent consumption demand 3,000 25% 2013 2014 2015 2016 New Rmb loans, Rmb bn 2,500 20% 15% 2,000 10% 1,500 5% 1,000 0% 500 -5% -10% 0 "Real" demand (i.e after stock changes) Apparent Consumption -15% Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Source: Macquarie bank, NBS

How do you expect steel production to change over the next month 100 Total Increasing expectations of rising production Large Mills (>10mtpa) 90 Medium Mills (5 - 10mtpa) 80 Small Mills (<5mtpa) 70 60 50 40 30 20 10 Increasing expectations of falling production 0 Jul - 11 Jan - 12 Jul - 12 Jan - 13 Jul - 13 Jan - 14 Jul - 14 Jan - 15 Jul - 15 Jan - 16 Source: Macquarie bank

Chinese pig iron annualised Chinese coke price production (Mt) (Tanshan spot US$) 740 170 720 160 700 150 680 140 660 130 640 120 620 110 600 100 April May July September October March June August November December January February March

YoY change in met coal supply to China 120 Million tonnes 100 80 60 40 20 0 20 Domestic Coal 40 Mongolian Imports Seaborne Imports 60 2002 2003 2004 2005 2006 2007 2008 2009 2010 2012 2013 2014 2015 2011 Effect potentially increasing Q2 as further mines idled on • safety and coal production adjustments = more imports?

The key question! • Yes • Real estate market continues strong • Steel remains strong, restarts, and improving prices • Continued modest infrastructure spending boosting demand • Loans more available and easier credit • No • Overcapacity remains and could be getting worse • Too rapid recovery, too quick a response • Real estate inventories tier 3, 4 still large, too large? • Lack of pick up in ROW • Summary – yes for now, but late 2016 into 2017?? risks •

Introduction – setting the scene 1. Snapshot – conditions Coke meeting Pittsburgh 2. Outlook today – what has changed and why 3. Australia’s role in the met coal and coke market 4. 5. Looking ahead Australia in 2020 6. Long term future, where will we be in 50 years? 7. Concluding remarks H & W Worldwide Consulting

BOWEN BASIN Darwin Premium high quality coking coal, Very low volatile PCI coals Cairns Townsville Mackay AUSTRALIA Rockhampton Gladstone HUNTER VALLEY Brisbane Semi-soft coking coals and PCI coals Perth Sydney Adelaide ILLAWARRA Premium high quality Canberra Melbourne coking coal and moderate coking coal Hobart H & W Worldwide Consulting

2mt Russia 2mt From Canada Europe 13mt 7mt 20mt 20mt Canada 2mt 53mt 5mt 30mt 6mt USA Japan 7mt Korea China 33mt 30mt 55mt 34mt India Taiwan 20mt 11mt 55mt 3mt 42mt 9mt 6mt 4mt 1mt 46mt Colombia 26mt 6mt Indonesia 1mt Brazil 20mt Mozambiq 31mt ue 2mt Australia 183mt Major exporter Major importer *Coking coal and PCI Source: Customs data, Macquarie Research, H&W Worldwide Consulting

Australian met coal exports 200,000,000 180,000,000 160,000,000 140,000,000 120,000,000 100,000,000 80,000,000 60,000,000 40,000,000 20,000,000 - 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Europe China Japan Korea Taiwan India Brazil Other