The Coal Market 2014

Junior Coal Mining Ventures IX

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IEA Major coal producers 2013 (Mt)

2010 2011 2012PR of China 3 140.2 3 418.8 3 549.1United States 996.1 1 005.9 934.9India 570.4 582.3 595.0Indonesia 325.0 360.3 442.8Australia 424.4 402.2 420.7Russian Federation 321.7 321.7 353.9South Africa 254.5 252.8 259.3Germany 182.3 188.6 197.0Poland 133.2 139.3 144.1Kazakhstan 110.9 116.5 126.0Colombia 74.4 85.8 89.5Ukraine 57.7 69.7 71.6Turkey 73.4 76.1 69.5Canada 67.9 67.1 66.6Greece 56.5 58.7 61.8Czech Republic 55.2 57.9 55.0Other 366.1 404.1 393.9World 7 209.9 7607.6 7 830.8

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IEA Major coal consumers 2013 (Mt)

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IEA Major coal exporters 2013 (Mt)

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Markets – Why the Chinese are Bullish on Coal –And You Should Be Too

Despite years of cutbacks in American coal consumption, it still remains the number one source of energy in the United States...And in China... and India... and South Africa... and Poland…In countries like China and India with over 2 billion people and an energy appetite to match, coal will remain a dominant power source for years to come.

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Coal Set for a Comeback - US

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After years of stagnation, the coal market is finally starting to show some signsof life. Coal companies have had a terrible year, Arch Coal down 29% andPeabody Energy down 20%. The past five years which have been crippling forthe coal industry. Over this period, Arch's share price has crashed 80%. Still,some green shoots are appearing. A bottom may have formed in the market.Morgan Stanley say things could be getting better in the coal industry forseveral reasons.Extreme weather in winter has depleted coal inventories - below the 100Mtlevel. Stockpiles have not been this low since 1997.Demand and price of coal has fallen during the last years, production volumeshave slumped in the US. Falling production volumes should cap the supply ofcoal.

US Coal prices and productivity

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US coal prices forecasts an increase of 1.4% per year as coalmine productivity continues to decline.The impact alters coal’s competitiveness in the energy mix,substantially impacting coal production by 2040.This tells that the US coal industry needs to push productivity.Coal’s competitiveness will be determined not just by marketforces but also by coal pricing, driven in part by coal miningproductivity. Mines must regain their competitive footing byfocusing on costs and productivity.”

Outlook for coal remains weak - Yancoal

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Yancoal says that the outlook for the coal market remains depressed. “We anticipate that weak coal prices will persist for a considerable time. The past year had been dominated by challenging market conditions, with coal prices continuing to deteriorate, driven by excess supply.While the entire mining industry is experiencing challenging circumstances, persistent companies with long-term and global vision will still find good opportunities.

API4 Index 2004 – 2014

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Platts NW Europe Marker1992 – Jun 2014 ($/t)

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Platts Asian Marker 1998 –Jun 2014 ($/t)

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A quarter of Queensland coal produced in the red - QRC

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The Queensland Resources Council on Friday revealed that 25% of the coal produced in Queensland was being done so at a loss.QRC noted that this loss occurred despite vigorous cost cutting across the industry. “Some of these mines are only staying open because production is a better option than closing operations locked on a take or pay basis,” said QRC.With one out of every 10t of coal currently produced in Queensland in the red to a value of more than A$14, some mines are at extreme risk of shutdown.Roche warned that if this were to happen, Queensland could lose up to A$1.8-billion and more than 22 000 jobs.

Global coal exporters face many hurdles in bid to meet 2014 volume targets

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Major global coal exporting countries have some tough times to reach their goals for the year as they continue to face challenges due to a low prices, slow demand from China and India, and a full supply glut situation.US coal exports have flooded global markets causing the current supply excess, with no relief in sight as deliveries from other countries grew in the first quarter of 2014. Highly competitive coal export prices from Indonesia, the world's main thermal coal exporter, kept pressure on the oversupplied seaborne market. A slowdown in Chinese and European demand and increased supplies from the US have impacted the markets.Colombia and the US compete for a bigger share of the EU coal market. In 2013 the US exported 60.8Mt, while Colombia supplied about 50Mt of coal to Europe.Australia, the 2nd largest exporter, increased volumes, to 71Mt.

Global coal exporters face many hurdles in bid to meet 2014 volume targets

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Excess supply and lower prices have remained crippling factors for the global coal market, affecting profitability of companies in Australia, the US and other markets. Forcing companies, in North America and Australia, to set production cutbacks. Coal miners in Australia, BHP Billiton, Vale and Glencore, have moved into cost-cutting mode, and have slow-down or closed several mines. Despite that, Australian coal producers continued to increase output in early 2014.Coal exporters are finding ways to manage through the weak coal market. Prospects for thermal coal, do not look good in the short term. Chances of a rebound in thermal coal prices will remain low as long as there is an abundant supply and a very weak demand. Russia export pace, if it continues, could easily surpass the 2014 export target. Russia ships most of its coal to Europe and China.

Global coal exporters face many hurdles in bid to meet 2014 volume targets

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China’s coal output, consumption almost as much

as world combinedChina’s coal output and consumption had increased for the thirteenth consecutive year, consuming about four-billion tons and producing just over the same amount, which was almost as much as the total consumption and production of the rest of the world combined.EIA said that China was the world's largest producer and consumer of coal, accounting for 46% of coal production and 49% of coal consumption.China's coal consumption increased by more than 2.3-billion tons over the past ten years, accounting for 83% of the global increase in coal consumption. Coal accounts for most of China's energy consumption, and coal had maintained about a 70% share of Chinese consumption since at least 1980

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China’s Coal Imports

China’s coal-import future continues to be shrouded in mystery. A few years ago, no one expected the Chinese to so quickly switch from a net exporter of coal to the world’s largest importer of coal. Some are banking that the Chinese will indefinitely continue to import 200–300Mtpa of coal. Some have said imports go as high as 600-800Mt.CERA, told delegates at the MCC conference that it may be wise to moderate Chinese import expectations. Coal imports will plateau in the next three years before entering long-term decline after 2015. Their logistic bottleneck will persist only until 2015 and imports will retain price advantage. After 2015? That’s where things begin to get a little uncertain again.

Global thermal import demand growth to slow to 2% a year until 2018

Global demand for imported thermal coal is expected to continue to grow at a slower rate of 2% per year until 2018, as China faces an oversupply of domestic coal and shifts to a diverse mix of renewable energy sources to attend air pollution concerns, global bank Goldman Sachs said. They said that a small increase in thermal coal demand will be met with rising productivity, keeping prices near the level of marginal costs.They pointed out that China’s coal production is benefiting from significant investment in consolidation and mechanization of mines.GS said that, as China cuts its demand for imported coal, India and other Asian markets — namely Japan and South Korea — will be “key drivers of demand over the forecast period to 2018.”GS said that India will be the biggest growth market, as its “power sector is highly dependent on coal, but the inland coal mines has been unable to keep up with the demand — unlike China.

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The World's Biggest Environmental Killer: Indoor Air Pollution

More than one third of the world’s population – 2.9 billion people –still burns wood, charcoal and dung indoors to keep warm and cook food. The World Health Organization estimates that 4.3 million people in 2012 lost their lives due to indoor air pollution. Estimates from the WHO and others suggest that between 30 and 150 times more people are killed due to indoor air pollution than global warming. Yet, the latter dominates the headlines.In the 20th century alone, 260 million people were killed by indoor air pollution, which is more than the losses of the century’s many wars. The good news is that we’re seeing quite some improvements on air pollution. Whereas in 1900 the total cost of this problem was as high as 23% of global GDP, today it is around 6% and we believe this number will fall to 4% in 2050.

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Will Asia save the Southern African coal industry?

Analysts predict coal decline in 2014

Despite the low coal price environment and current margin squeeze, take-or-pay contracts are incentivising coal producers to increase rather than reduce production, even if additional production is generating negative cash margins. This is because the fixed cost of infrastructure capacity makes the cost of shutting down even more expensive than the cost of maintaining production.They deduced that if average prices fall to $77/t for thermal coal, then 45Mt, or 13% of Australia's coal exports would be at risk of closure. At that price, a total of 204Mt of production would be suffering negative margins. “Our expectation is that there will not be a significant reduction in Australia's production this year. However, if prices do fall below expectations, the risk of closure for mines producing at negative margins will increase, reducing output.”

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ARA spot market trades justabove $70/t at over four-year

low (Platts Thursday, June 5, 2014)

The European-delivered CIF ARA physical thermal coal spot market decreased 35 cents Thursday, trading at an over four-year low, as participants lamented the lack of price arbitrage with most origins of coal.Platts assessed the price of CIF ARA thermal coal basis 6 000 kcal/kg NAR and for delivery within the next 15-60 days at $72.95/t, down 35 cents on-day.In the morning, a 50 000t DES Rotterdam multi-origin cargo with US optionality traded via the globalCOAL screen at $70.15/t, the lowest DES ARA trade since March 2010, according to Platts’ records.

Spot CIF ARA price drops to lowest since late Feb in weak, quiet market (Platts Monday, June 9, 2014)

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Delivered CIF ARA physical thermal coal prices dropped, following the low demand, oversupplied Atlantic market.Platts assessed CIF ARA thermal coal basis 6 000kcal/kg NAR for delivery within the next 15-60 days at $72.50/t, its lowest level since February 26.Shipments for June delivery into the Amsterdam-Rotterdam-Antwerp market continued bid under $70/t, as the low supply-demand fundamentals take hold of spot European thermal coal. The current “status quo” of the market is that of a low-demand scenario, particularly as natural gas was currently “more profitable” than thermal coal for power generation in the UK.FOB Richards Bay drops to lowest since early AprilThe SA spot market dropped to its lowest since early April following a lack of demand from Indian buyers for RB1 coal. Platts assessed the FOB price of RBCT thermal coal basis 6 000kcal/kg NAR and for loading within the next 7-45 day period at $74.30/t, down 20 cents from Friday and at its lowest level since April 3.

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Bleak outlook for Indonesianthermal coal prices

(Platts Thursday, June 5, 2014)

Indonesian thermal coal prices remain under downward pressure, as only a few spot deals have been carried out and the recently concluded industry gathering underlining the bearish sentiment in the market.“Thermal coal prices are very low. It does not seem like a brilliant future for coal trading,” a trader said.An India trader said “traders with positions are liquidating at zero margin levels.” He said he did not expect prices to fall any further, as they were already close to production costs.

• One of the statistics the WCA often quote is the transformation of the Chinese economy over the past two decades. 660 million people lifted out of poverty in an economy fuelled 80% by coal. It’s an astonishing figure – and one we often highlight when arguing why the role of coal in fuelling developing economies cannot be overlooked.

• The IEA Southeast Asia Energy Outlook, highlights that the Chinese story is one that is increasingly emerging elsewhere in Southeast Asia.

• The WCA argues that as nations develop, they seek secure, reliable and affordable sources of energy to strengthen and build their economies. Coal is a logical choice in many of these countries because it is widely available, safe, reliable and relatively low cost. In launching this special report the IEA has reflected that message, saying “coal is emerging as the fuel of choice because of its relative abundance and affordability in the region”.

• This report highlights that through to 2035 “electricity generation in Southeast Asia is projected to increase by more than the current power output of India, with coal accounting for almost 60% of the growth”. Looking at the graph below, coal accounts for more of the incremental electricity generation to 2035 in the region than all other sources combined. According to the report it will provide almost half of the region’s power.

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IEA Southeast Asia Energy Outlook

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IEA Southeast Asia Energy Outlook

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EU Policy developments that will shape the coal industry

The energy companies in the EU see the year controlled by new Energy and Climate Policy Framework for 2030, and new environmental standards, of the Clean Energy Package. For coal, it is not climate targets, but environmental rules, that are likely to be most challenging.New standards for coal-fired power and boilers could prove difficult for coal in the EU. The key initiatives to are:• More bold definitions of best available technologies (BAT) for emissions of for large coal-fired plants.• New standards for medium plants, such as heat-generating boilers.• Tighter limits on emissions allowed for each of the EU member states.According to EURACOAL, small heat producers using coal might find it difficult to comply with EU rules, while the national emissions ceilings might trigger new action against large point-source emitters, such as power plants. The competitiveness of the EU’s industry could set the tone for the negotiations. Until now, companies in EU member states have been granted some relief from the costs of decarbonisation.

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Overview of supply and demand – Coal unlikely to rein in output

unless prices fall further

Coal prices have much further to fall as demand growth slows sharply in Asia and Europe, although hedging, lower freight costs and weaker domestic currencies will mean most major exporters will be slow to slash output, analysts say."The combination of falling foreign exchange rates, tepid demand for coal in the Pacific Basin and a rising surplus of metallurgical coal suggest that longer-dated thermal coal prices have further to fall. Newcastle coal might lead the next leg lower to push Aussie producers into action.”Australia, the world's second-largest exporter and viewed as a key swing producer, had been strongly tipped by the coal market to make big supply cuts in response to forecasts of slower demand from China and India. Front-year prices for Australian high-grade coal and South African exports are trading 11% lower.

How does South Africa fit into this scenario?

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The Status of South Africa Coal Industry

• Reserves and Resources

• Production

• Exports

• Local Sales

Coal Reserves by Coalfield

29%

25%21%

13%5%

2.2%1.7%1.6% 0.8% 0.4% 0.3%

0.01%

HIGHVELD WITBANK WATERBERG * ERMELO

VRG.-SASOLBURG SOUTH RAND UTRECHT KLIPRIVIER

SOUTPANSBERG KANGWANE VRYHEID NONGOMA

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Run-of-MineProduction

329.6Mt

“Washing”

“Screening”

Discards74.9Mt

205.4Mt

124.2Mt

Stocks

2.7Mt

Synfuels39.4Mt

Electricity119.7Mt

Local Use 23.7Mt

Exports74.6Mt

69.8Mt 0.3Mt 39.7Mt

5.1Mt 39.1Mt 80.0Mt

The Coal Chain end of 2013

Source : XMP Consulting

Local Market 2013

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66%

21%

5%4.6% 3% 0.01%

ELECTRICITY SYNTHETIC FUELSINDUSTRIES MERCHANTS AND DOMESTICMETALLURGICAL MINING

Exports by Destination 2013

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RBCT Exports by Destination 2013-2014

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The Coal Market 2014

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