Seaborne steam coal market dynamics and future production costs
Dr. Arne K. Bayer, E.ON New Build & Technology GmbHMaggi Rademacher, E.ON Kraftwerke GmbH, Hannover
Resources Workshop “Long-Term Costs and Reserves of Coal, Oil, & Natural Gas”March 22, 2012
2DIW Resource Workshop - Bayer, Rademacher - March 2012
Seaborne steam coal market dynamics and future production costs
Utilities’s
requirements
Agenda
1 Security of supplyPredictable coal qualitiesStable fuel costs
Influencing
factors
Current exporting nations and seaborne coal flows
2
Mining costs and its development4
Reserves and resources situation incl. quality development
3
Development of global demand5
6
View on future origin of global seaborne coal and its quality
7 Conclusions
3DIW Resource Workshop - Bayer, Rademacher - March 2012
Mine(in Russia)
LoadPort $5
DischargePort $5
PowerStation
Rail $30
Stockpile
Shipfreight$8
InlandTransport
Stockpile
(FOB $92)
(Delivered(CIF ARA
$100)
Rail $10
Cap cost / profit maintenance labour royalties explosives supplies
(FAS $87)(AMP $57)
Site $115)
Key Terms:
AMP = At Mine Price
FAS = Free Alongside Ship
FOB = Free On Board
CIF = Cost, Insurance, Freight
Cost/prices in USD/tSource: EET-AMF
Talking about seaborne coal markets means talking about a complex logistics chain with a number of input factorsCoal Logistics Chain – Pit to Power Station – February 2012
0RECAP COAL VALUE CHAIN
4DIW Resource Workshop - Bayer, Rademacher - March 2012
Coal based generation is a long term business with a needfor predictable input parameters like costs or quality
1UTILITIESREQUIREMENTS
Currently E.ON operates some 20 GW of hard coal fired power stations in Germany,
Benelux, UK, Italy, Spain and France
These thermal power plants (TPP) consume next to domestic coal approximately
17 mn t of seaborne import coal annually
E.ON also invests in high efficiency blocks of 1.100 MW each – with 35-40 years of
operational lifetime as a basis for investment decisions – and engages in new
international markets like Brazil, India and Turkey
Consequently to balance risk and optimize both existing fleet and new build, E.ON
has to be assured of security of supply and predictable coal qualities, as well as,
understanding the fundamental mining cost base and future trends
E.ON Kraftwerke‘s global coal database models major exportingnations on a mine/project basis (capacities and costs)
5DIW Resource Workshop - Bayer, Rademacher - March 2012
Middelburg, SAF
El Cerrejon, COLS. Kuzbass, RUS
Adaro, IND
Bailey, US
Source: EKW
$46.50/t$35.54/t$54.92/t
$96.34/t
$64.10/t
Each coal plant can take a spectrum of coal qualitiesThe wider the band and plant flexibility, the lower fuel and generation costs, though impact on plant efficiencyLow grade and off-spec coals offer opportunity for lower prices for plants in blends
Physical coal is not homogeneous like financial benchmarks
Variances in import coal specs & Est. Production Costs to Export Port (2012)
05
10152025303540
Total moisture [%]
HardgroveIndex
48
60
52
56
20
2824
26
Gross CalorificValue[MJ/kg]
2.0
0.5
1.5
1.0
Sulphur[%ar]
Ash[%ar]
510
15
05
10152025303540
Total moisture [%]
HardgroveIndex
48
60
52
56
20
2824
26
Gross CalorificValue[MJ/kg]
2.0
0.5
1.5
1.0
Sulphur[%ar]
Ash[%ar]
510
15
1UTILITIESREQUIREMENTS
6DIW Resource Workshop - Bayer, Rademacher - March 2012
Seaborne trade makes up just some 1/7 of global prod-uction – therefore E.ON model focused on export nations
**Est., **incl. MediterraneanSource: EET Market AnalysisData: CERA
2STATUS QUOEXPORT MARKETS
LatinAmerica
SouthAfrica
USARussia
China
Indonesia
Australia
Poland
Americas36 Mt
Europe**178 Mt
Asia533 Mt
15
21
2
4
56
2346
13
6
298
148
28
1355
7
“Asian market is now triple the size of Europe’s!”
-8% vs 2008
+30% vs 2008
Key Import Region
6 %4 37 4 77 0 4T o t a l
- 42 12 5o t h e r & s t k
1 73 11 4U S
- 861 4C h i n a
06 96 9S A F
47 77 3C o l / V
88 47 6R u s s ia
71 4 81 4 1A u s
1 93 1 12 9 2I n d o
G r o w t h2 0 1 12 0 1 0E x p o r t e r s
6 %4 37 4 77 0 4T o t a l
- 42 12 5o t h e r & s t k
1 73 11 4U S
- 861 4C h i n a
06 96 9S A F
47 77 3C o l / V
88 47 6R u s s ia
71 4 81 4 1A u s
1 93 1 12 9 2I n d o
G r o w t h2 0 1 12 0 1 0E x p o r t e r s LatinAmerica
SouthAfrica
USARussia
China
Indonesia
Australia
Poland
Americas36 Mt
Europe**178 Mt
Asia533 Mt
15
21
2
4
56
2346
13
6
298
148
28
1355
7
“Asian market is now triple the size of Europe’s!”
-8% vs 2008
+30% vs 2008
Key Import Region
6 %4 37 4 77 0 4T o t a l
- 42 12 5o t h e r & s t k
1 73 11 4U S
- 861 4C h i n a
06 96 9S A F
47 77 3C o l / V
88 47 6R u s s ia
71 4 81 4 1A u s
1 93 1 12 9 2I n d o
G r o w t h2 0 1 12 0 1 0E x p o r t e r s
6 %4 37 4 77 0 4T o t a l
- 42 12 5o t h e r & s t k
1 73 11 4U S
- 861 4C h i n a
06 96 9S A F
47 77 3C o l / V
88 47 6R u s s ia
71 4 81 4 1A u s
1 93 1 12 9 2I n d o
G r o w t h2 0 1 12 0 1 0E x p o r t e r s
6%43747704Total
-42125other & stk
173114US
-8614China
06969SAF
47773Col/V
88476Russia
7148141Aus
19311292Indo
Growth20112010Exporters
6%43747704Total
-42125other & stk
173114US
-8614China
06969SAF
47773Col/V
88476Russia
7148141Aus
19311292Indo
Growth20112010Exporters
Main seaborne trade flows in hard coal, 2011* (747 mt)
7DIW Resource Workshop - Bayer, Rademacher - March 2012
Financial markets follow rising Pacific physical trade
SouthAfrica
API#45
ARA
API#2
API#2: Steam coal ARA range (North Western Europe) , 6.000kcal/kg, ACPRS standardquality (Coal cargoes from Australia, Colombia, Poland, Russia or South Africa
API#4: Steam coal South Africa, Richards Bay coal terminal, 6.000kcal/kg
API#6: Steam Coal Australia, Newcastle terminal 6000kcal/kg, 1%S
Traded European Utility Spread (es. 2004)
Clean dark spread CDS: Price difference between coal (including CO2) and power
Atlantic Market Pacific Market
European Standard Trading Products (est. 2001)
New Coal Swaps 2011/12
South Chinese CFR:steam coal FOB 5500 kcal/kg NAR
Indonesian Sub-BituminousSteam coal FOB 4,900 kcal/kg NAR
Future?interest in off-spec coal qualitiesgrows from price sensitive Utilities(high sulphur, low energy, petcoke?)
API#6
2STATUS QUOEXPORT MARKETS
8DIW Resource Workshop - Bayer, Rademacher - March 2012
Ongoing supply issues for utilities increase fuel risk
Infrastructure Bottlenecks delay new mine capacity and exports
Sufficient number of mine projects & expansions in planning across globe
Port expansions are underway in existing exporters; missing in new mining countries
Largest hindrance is in inland rail infrastructure due to high cost of investments and
permitting difficulties
Quality Management a growing challenge with global share of lower grade coals on the rise
Indonesian sub-bituminous dominates exports to China and in India
NSW Australia exports of high ash off-spec coal increasing
South African suppliers seeing off-spec export market as a viable option
High sulphur US cargoes offer high spot discounts in the market
Growing government intervention to manage local coal reserves & resources delays investment
Indonesia moving to secure domestic supplies; plans to limit foreign ownership of mines
Nationalisation in South Africa mining sector a possibility
Australia’s Resource Tax could return;
Increasing difficulties in permitting (USA, Australia)
2STATUS QUOEXPORT MARKETS
9DIW Resource Workshop - Bayer, Rademacher - March 2012
E.ON analysis shows that coal market will become less competitive in mid-term – any impact on consumers?
High market concentration Moderate market concentration No concentration High competition
The share of “free coal” in the market, not controlled by utilities, state or steel companies is fallingMarket trend is for miners to become “integrated” controlling supply chain or utilities to take a direct share in mining projects at home and abroad (ex. MPX, Chinese)Market concentration strengthens in 2015 versus 2010 increasing supply risksNew supply regions will be strongly concentrated (e.g. Mozambique). Source: EKW
2STATUS QUOEXPORT MARKETS
2010 2015
10DIW Resource Workshop - Bayer, Rademacher - March 2012
BGR puts geological coal reserves at approx. 750 bn t globally - exceeding 100 years current annual demand
3RESERVES &QUALITITES
Coal reserves Coal resources
Source: Bundesanstalt für Geowissenschaften und Rohstoffe (BGR), 2009
11DIW Resource Workshop - Bayer, Rademacher - March 2012
Coming from a mine‘s perspective, E.ON has identified specific reserves at mines/projects of almost 100 bn tCoal reserves Coal resources
1) Code for Reporting of Mineral Resources and Ore Reserves Source: E.ON Kraftwerke GmbH internal research
3RESERVES &QUALITITES
1) 1)
12DIW Resource Workshop - Bayer, Rademacher - March 2012
E.g. E.ON reviews exporting mine/project portfolio of com-panies like Xstrata to forecast future volumes & qualities
Source: Xstrata public sources, E.ON Kraftwerke GmbH internal research
3RESERVES &QUALITITES
Σ 4 bn t (JORC certified) Xstrata is a globally active miningcompany with 32 active mines and 30+ green & brownfield projects in thepipelineAnnual production sums up to some 90 mn t – theoretical lifetime of reservesclose to 45 yearsAdditionally approx 20 bn of resourcesidentifiedE.ON Kraftwerke allocates dedicatedcoal types/brands to mines/projects to be able to forecast future coal quality(besides capacities & costs)
Xstrata coal reserves
13DIW Resource Workshop - Bayer, Rademacher - March 2012
Hence, core of E.ON model is the constant tracking of newprojects/investments and running mines incl. expansions
Create a list of existing export mines and potential mining projects based
on AME database and E.ON proprietary information collected over 10+
years to identify potential mining capacity to cover demand needs over the
LTP period
For each mine, identify the start of production, annual saleable production
and years of future potential production based on provable reserves /
saleable production), incl. information on qualities if available
*for missing data, assumptions made based on similar mines and historical data
Explanation of methodology for supply (1/4)
2
1
3RESERVES &QUALITITES
14DIW Resource Workshop - Bayer, Rademacher - March 2012
FOB cost positions for opencast and underground ope-rations vary significantly – impacting future development
4 MINING COSTS
Free on board (FOB) cash costs New South Wales [USD/t]
Source: E.ON Kraftwerke GmbH internal research
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
O/C Dragline + truck&shovel (Production Capacity 7,5mt) U/G Longw all (Production Capacity 7,0mt)
Royalties
Port fees
Transport
Processing
Labour
Mining costs
Subject to political influence
Subject to e.g. trsp. congestion, taxation and fuel costsSubject to future coal geology
Subject to innovation e.g. auto-mation, contracting
Subject to geology e.g. over-burden ratio, seam depth/thick-ness; mining method, fuel & explosive costs
15DIW Resource Workshop - Bayer, Rademacher - March 2012
Generic costs model e.g. allows for allocation of produc-tivity ranges to mine types in certain mining countries
0
5.000
10.000
15.000
20.000
25.000
AUS AUS -
NSW
AUS -
QLD
CAN CHN COL INDO NZ RUS SA USA VEN Ø
underground operations opencast operations
Productivity [t per FTE year] for mine types and countries 1)
1) 172 mines in total analyzed
4 MINING COSTS
16DIW Resource Workshop - Bayer, Rademacher - March 2012
Generic cost model developed incorporating oil component
Initial AME set forms a sufficient sample for various kind of mining countries and technologies – sample testing for prominent mines and OEM suppliers by E.ON done to cross-check accuracy of dataE.ON expert knowledge distinguishes between general inflation related cost items of coal extraction and oil related cash costsMain mining costs rooted in fueling excavators like trucks as well as explosives in open pit mining operations are exposed to trends in oil price (truck employment in coal and overburden haulage)Ratio between excavated coal and overburden is essential in this respectOn top; transportation costs are evaluated for respective mines as rail carriage by diesel fuel trains has to be incorporated in comparison to electrified systems line in SAF or to Indonesian barge transportation
General distinction between cash costs
4 MINING COSTS
17DIW Resource Workshop - Bayer, Rademacher - March 2012
Fundamentally, oil correlation of mining costs only relevant for basis mining expenses and transportation costs to portsFOB cash cost item
Oil corre-lation Comments
Labour costs ✘ Mine type and country specific labor costs on US$/t basis
Mining costs ✔ Depending on mine type (opencast vs. underground), overbur-den:coal ratio (O:C) and technology (truck & shovel vs. dragline)
Processing costs ✘ Coal type and reserve specifics
Transportationcosts ✔ Depending on transportation to export harbors via train
(diesel vs. electricity), truck or barge
Port costs ✘ Port specific handling costs
Royalties ✘ Country/state specific royalty charges
4 MINING COSTS
18DIW Resource Workshop - Bayer, Rademacher - March 2012
Future generic mine cost model incorporates mining specific characteristicsMining costs in relation to O:C ratio (Indonesia T&S)
y = 0.3924x - 0.053
R2 = 0.9192
0
2
4
6
8
10
12
14
0 5 10 15 20 25 30$/ t
m3/ t
4 MINING COSTS
19DIW Resource Workshop - Bayer, Rademacher - March 2012
When looking at producers cash costs, e.g. Australian merit order depicts large bandwidth of miner’s cost base
4 MINING COSTS
Source: E.ON Kraftwerke GmbH internal research
Free on board (FOB) cash costs [USD/t]
20DIW Resource Workshop - Bayer, Rademacher - March 2012
Assumptions on cost development combined with pro-duction generate country specific merit order supply curves
For each mine, assign an estimated production cost (USD/t) based on historicalmine specific production costs (where available) or the clustering of similar mines(type / region) for mines with no cost information
Estimate the impact of oil price on production costs for open cast mines to fit in with E.ON oil scenarios
Adjust the fixed cost component of production cost curves for E.ON inflationassumptions to 2030
Create a merit order supply curve for global export production capacity weighting the total available annual mining capacity (mntpa) by production price (USD/t FOB) for each of the years in the sample
Explanation of methodology for supply (2/4)
4 MINING COSTS
3a
3b
3c
4
21DIW Resource Workshop - Bayer, Rademacher - March 2012
In current situation coal is at a crossroads – demand to rise til 2020, but post?
Coal demand is set to slow – just how much depends critically on government energy & environmental policies, especially in China
World primary coal demand by region and scenario
47%
50%
14%
14%
2 550 Mtce
1 883 Mtce
2 000
3 000
4 000
5 000
6 000
7 000
8 000
Mtce
1980 1990 2000 2010 2020 2030 2035
Current PoliciesScenario
450 Scenario
New PoliciesScenario
Rest of worldIndiaChina
Coal fights energy poverty
Greenhouse gases limited
Source: IEA 2011
5DEMAND DEVELOPMENT
22DIW Resource Workshop - Bayer, Rademacher - March 2012
A look into crystal ball – E.ON positions itself for the futureby using detailed scenarios, also effecting coal models
6FUTUREDEVELOPMENT
Source: E.ON Investor Relation Information, 2009
RECENT REVISION OF MODELLING
ASSUMPTIONS UNDERTAKEN, BUT PRINCIPLE
VIEW ON EXTREME POSITIONS REMAINS VALID
23DIW Resource Workshop - Bayer, Rademacher - March 2012
Production volumes are adjusted in terms of active mines in case a 15-20% capacity safety margin is not yet covered
Evaluate needed demand for seaborne coal capacity with the available merit order supply curve for each year to make certain enough capacity is availableAvailable supply capacity should exceed demand scenario by at least +15-20% to assure adequate supplies and minimize price volatiliy due to seasonality, constraints, mining outages, weather, transport problems etc.
Explanation of methodology for supply (3/4)
6
5
FUTUREDEVELOPMENT
2008 2010 2015Region Production Demand Region Region Production Demand Region Region Production Demand
[mt] [mt] [mt] [mt] [mt] [mt]Australia - New South Wa 141,2 194,0 Europe Australia - New 161,7 197,8 Europe Australia - New S 178,2 233,5Australia - Queensland 74,1 346,0 Pacific Australia - Qu 93,2 369,1 Pacific Australia - Queen 219,9 405,5Canada 7,8 8,4 Mexico Canada 7,8 8,4 Mexico Canada 7,8 4,2China 0,0 70,0 Asia China 0,0 91,7 Asia China 0,0 142,0Columbia 91,6 7,0 Africa & Middle EColumbia 116,4 7,0 Africa & Middl Columbia 119,1 7,0Indonesia 203,9 12,6 Brazil Indonesia 229,4 16,8 Brazil Indonesia 268,8 21,0Mozambique 0,0 0,0 Russia and FrienMozambique 0,0 0,0 Russia and FrMozambique 4,8 0,0New Zealand 1,5 New Zealand 0,8 New Zealand 0,0Norway 2,5 Norway 2,5 Norway 4,5Russia 59,9 Russia 59,9 Russia 71,7South Africa 82,9 South Africa 95,7 South Africa 114,0USA 19,7 USA 19,7 USA 38,8Vietnam 0,0 Vietnam 0,0 Vietnam 0,0Venezuela 12,0 Venezuela 13,0 Venezuela 19,6
Total 727,0 638,0 830,1 690,7 1067,1 813,1Relationship 114% 120% 131%
xx xx xx
ILLUSTRATIVE
internainterna
24DIW Resource Workshop - Bayer, Rademacher - March 2012
Merit orders are matched in GAMS model with demandpoints and freight assumptions to determine volume flows
Evaluate what production cost (FOB) is needed from the merit order curve to suffice global demand in each scenario. We have now identified the coal exportsources. These results are reviewed and optimised using the freight costs in theGAMS model.
Merit Order Curve for 2010 Capacity
0,0
100,0
200,0
300,0
400,0
500,0
600,0
700,0
800,0
900,0
L L L M H M L L M H H L M L M L M H H L L H M M M M H H H H
SAF NZL COL SAF SAF COL VIE IND VIE COL VIE RUS IND NSWNOR QLD RUS NZL IND USA CAN RUSNSW USA CAN QLD CANNSW QLD USA
Segment
Cum
ulat
ive
Cap
acity
(mnt
pa)
0,0
10,0
20,0
30,0
40,0
50,0
60,0
70,0
80,0
90,0
Segm
ent F
OB
Pric
e (U
SD/t)Cumulative Capacity 2010
Avg Price for Segment
Scenario Demand +20% FOB Price SourceSlow Recovery 625 750 65,2 QLD - MGreen World 651 781,2 71,6 NSW - HClimate Concerns 655 786 71,6 NSW - HUnabated Growth 691 829,2 83,6 USA - H
2010 Demand Levels
Outcome:
Explanation of methodology for supply (4/4)
6
6FUTUREDEVELOPMENT
ILLUSTRATIVE
25DIW Resource Workshop - Bayer, Rademacher - March 2012
Merit Order Curve for Export Mine Capacity in 2010/11
0
20
40
60
80
100
120
0 100 200 300 400 500 600 700 800 900
Capacity (Cumulative mtpa)
FOB
Cas
h C
ost (
USD
/t)
NZ
-
,mid
Sout
h A
fric
a-l
ow
Sout
h A
fric
a-m
id Sout
h A
fric
a-h
igh
Indo
nesi
a -
low
Indo
nesi
a -m
id
Indo
nesi
a -
high
Col
umbi
a -l
ow
Col
umbi
a -m
id Col
umbi
a -
high
Aus
tral
ia
(NSW
)-lo
w
Aus
tral
ia
(NSW
)-m
id
Aus
tral
ia
(NSW
)-hi
gh
Aus
tral
ia
(QLD
)-lo
w
Aus
tral
ia (Q
LD)
-hig
h
Aus
tral
ia (Q
LD)-
mid
Rus
sia
-lo
w
Rus
sia
-m
id Vene
zue
laC
anad
a -
low
Can
ada
-mid
USA
-lo
w
USA
–m
id
USA
-hi
gh
Rus
sia
-hig
h New
Ze
alnd
E.ON forecasts conclude that sufficient steam coal capacity is available, if the coal chain functions efficiently
Actual plant costs must add freight, handling surcharges and a mark-up
Source: EKW Internal Analysis
Merit Order Curve for Export Mine Capacity in 2010/11
6FUTUREDEVELOPMENT
26DIW Resource Workshop - Bayer, Rademacher - March 2012
With seaborne coal demand above 1 bn t in 2030, E.ON model predicts stable supply situation with usual suspects
6FUTUREDEVELOPMENT
1) Assuming specific scenario based on EKW mine based supply modelSource: E.ON Kraftwerke GmbH internal research
World seaborne coal supply 2030 in mn t1)
27DIW Resource Workshop - Bayer, Rademacher - March 2012 27Status world coal markets and their development
The magnitude is line with other experts which also expect
thermal coal export markets to grow significantly in the future
585
713
824
613
804
979
0
200
400
600
800
1000
1200
2006 2015 2025
WoodMac
Global Insight
EIA
IEA
Development of steam coal exports (Mio t)
Source: Various forecasts
6FUTUREDEVELOPMENT
28DIW Resource Workshop - Bayer, Rademacher - March 2012
Consequently no significant change in European coal import mix expected with somehow predictable qualities
6FUTUREDEVELOPMENT
As majority of demand growth Asia centered – Australia, Indonesia and Mozambique will supply this area with seaborne thermal coalSouth African coal exports will most likely shift direction towards India rather than to European consumersConsequently Columbian and Russian coal are seen as the natural suppliers for EU thermal power stations in the futureUS will remain swing supplier, gas squeezes coal domestically and increases export capacity Norway and Venezuela will make up only small remainder of import coalsFundamentally cost mining cash costs are not expected to rise significantly above today’s levels given moderate oil prices (incl. freight rates) and current taxation/royalty schemesGiven the origin of future imports, quality bands for European utilities are not likely to deviate substantially from today, but quality mix means this will be premium coal qualities and = higher prices.
Where will European coal imports come from?
29DIW Resource Workshop - Bayer, Rademacher - March 2012
Fundamental coal data on mine by mine and project basis becomes more difficult - modelling also challenging
Difficulties in procuring data are becoming a real issueFewer sources of information available in the market from coal experts/consultantsMovement towards information summarized at country level; mine level information limitedInformation on coal qualities by producer / mine not in public realmQuality of data for some large exporters (Indonesia, Russia) poor
Optimisation modelling difficultiesTheoretically, a mark-up function for market premium possible; quantitatively, no successful proven approach for traded market Measuring capacity availability / utilization means having a view of mine production capacity, inland transport and port capacity as restriction
7 CONCLUSIONS
Challenges for coal modeling