Coal Trading in Asia Bangkok, November 2012

James OConnell Platts

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Presentation overview

International trading platforms

Role of indices in market transparency

Rising production costs & volatile international prices

Is coal buying strategy changing in Asia ie short term contracts versus long term arrangements

globalCOAL NEWC Index what is it?

An index based on the spot (prompt 3 months) price for thermal coal delivered on an FOB basis in Newcastle, NSW, Australia, basis 6,000Kcal/Kg NCV NAR globalCOAL NEWC Index used for settling ICE Futures Europe futures contract and OTC derivatives in Asia. Approx 250 million tonnes traded in 2011. Widely used benchmark reference point for Asian coal and underpins the vast majority of index linked physical coal sales contracts in Asia.
17th June 2012
1 hour trading window introduced: Encourage market to post all bids & offers between 08.00 09.00 London time Designed to increase participation during Asian hours Price collar introduced: To safeguard against human error and potential market distortion

Volume and frequency of Phys NEWC trades increase since window

130

120
NEWC Trading Window Introduced

110

Price US$

100 Size denotes Transaction Volume

90

80

70

60 23-Dec

11-Feb

1-Apr

21-May

10-Jul

29-Aug

18-Oct

7-Dec

Source: globalCOAL

Volume of Index
100 90

qualifying Phys NEWC bids & offers increases post window

80 70
Number of bids & offers 60

NEWC Trading Window Introduced

50
# of Bids & Offers

40
30 20

10 0 3-Jan

3-Feb

3-Mar

3-Apr

3-May

3-Jun

3-Jul

3-Aug

3-Sep

3-Oct

3-Nov

Source: globalCOAL

Value: a function of time

Brent futures during Platts Asia MOC May 25, 2008

4.02.00pm: After Brent falls $1 in 3 minutes (33 cents a minute for three minutes) Platts crude, products and aromatics editors all raise incrementability to $2/mt or 20 cents/barrel per minute: eWindow, manual processes and headlines all move at same time

Drop of $3.20/barrel (or $22.50/mt) in 40 minutes

4.27.00pm: Fall slows and prices rise moderately. Platts crude, products and aromatics editors reinstate incrementability at $1/mt or 10 cents/barrel per minute: eWindow, manual processes and headlines all move at same time

M O C

Windows, e-Windows have standard increment guidelines

10

MOC: Increments and Repeatability in action

11

Window makes the market transparent

12

Platts eWindow screenshot Market on Close (MOC)

13

Windows participation is subject to vetting procedures

Business profile (history, registration, ownership, documents of incorporation etc.) Financial standing Creditworthiness (bank references and credit lines, or evidence of ability to issue LC against first class bank in the absence of credit lines Market reputability Trade performance history Counterparty acceptance Adherence to Platts Editorial guidelines Adherence to operational and logistical market standards (for best endeavor basis performance)

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Coal cash costs by country 2011

.
Thermal Coal: cash costs of production, by country
cash cost of production (U S$/t fob) .

150 130 110

50th 90th 2011 cash cost curve

75th spot: 7-Sep-12

Australia

90
Indonesia

50 30 10 -10 0

Colombia

70

South Africa

FOB Kalimantan 50th centile 38.6 5,900 - $70.25/mt 75th centile 48.1 5,000 - $55/mt 90th centile 59.6 4,200 - $38.40/mt
spot 72

US$/t fob

Shanxi cash costs 2011 $46/mt

100

200

300

400 500 cumulative production (Mt)

Volatility in Asian coal prices since 2002

Qinhuangdao - Red Newcastle 6000 - Black Richards Bay 6000 - Green Kalimantan 5900 - Blue Newcastle 5500 - Pink

Kalimantan and Newcastle relationship?

Newcastle 6,000 Newcastle 5,500 FOB Kalimantan 5,900 - $70.25/mt 5,000 - $55.00/mt 4,200 - $38.40/mt Jun 15 - $4.20/mt

Japan strike deal

Feb 7 - $21/mt spread Mar 13 - $11.65/mt

5,000 GAR in $70-78.30/mt range 4,200 GAR steady in $38-42/mt range

Aug 14 - $22.10/mt

Platts FOB Newcastle 5500 Vs 6300 GAR

Newcastle 5500 NAR vs. Newcastle 6300 GAR
130 125 120

$20.25
115 110 105 100 95 90 85 18- 15- 22- 29- 5- 12- 19- 26- 3- 10- 17- 24- 31- 7- 14- 21- 28- 5- 12- 19- 26Aug- Aug- Aug- Aug- Aug- Sep- Sep- Sep- Sep- Oct- Oct- Oct- Oct- Oct- Nov- Nov- Nov- Nov- Dec- Dec- Dec- Dec11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 11 Platts Newcastle 5500 NAR Platts Newcastle 6300 GAR

$15.25 $19.90

Newcastle 5500 NAR vs 6300 GAR

Japan annual talks

Japan utilities strike deal

$23.45/mt spread

August 9 $22/mt spread June term talks October term deal

March 13 - $11.45/mt spread June 15 - $7.50/mt spread

June 26 $16.95/mt spread

Asian benchmark???
.
Physical New castle trades 10
9

-58%YoY 8
Mt 7 6

5
4

3
2

1
0

2009

2010

2011

2012proj

Long-term pricing systems are inefficient

The benchmark system of annual contract setting leads to huge price distortions Large annual rises / falls in price have a dramatic effect on balance books downstream, and on bilateral relationships Since annual contracts dont reflect market value throughout the year, price takers and givers take on board significant market risk Term contracts which price off daily spot prices would enable consumers to accurately hedge with financial derivatives This is a natural trend observed in oil, gas, petchems, steel and thermal coal markets already

Spot prices have correlated with quarterly contract settlements

Utilities adopt the short term tender: CTI Aug 14

Kosep late July tender for September delivery

Kospo spot tender (CTI Sep 13)

FOB Kalimantan 4,200 GAR

.

Platts FOB Newcastle 5500 NAR

1 2

Platts response to import trends

Platts FOB Newcastle 5500 NAR ash differential

FOB Newcastle 5500 NAR 17-23% ash

Friday, October 19, 2012 Ash differential per 1% ash = $0.62 17% ash = $71.50/mt + ash differential = $73.36/mt 18% ash = $71.50/mt + ash differential = $72.74/mt 19% ash = $71.50/mt + ash differential = $72.12/mt Newcastle 5500 20% ash = $71.50/mt 21% ash = $71.50/mt - ash differential = $70.88/mt 22% ash = $71.50/mt - ash differential = $70.26/mt 23% ash = $71.50/mt - ash differential = $69.64/mt

FOB Newcastle 5500 NAR (5300-5700)

Tuesday, October 19, 2012

FOB Newcastle 5,500 NAR 20% ash = $71.50/mt Ash differential per 1% ash = $0.62 Ash normalization process:
5,700 NAR 20% ash is $74.10/mt ($71.50 / 5500 X 5700)
19% ash = $74.10/mt + ash differential = $74.72/mt 18% ash = $74.10/mt + ash differential = $75.34/mt

17% ash = $74.10/mt + ash differential = $75.96/mt

Indonesian exports to China (to Sept 2012 YoY)

.
40,000,000

35,000,000

30,000,000

25,000,000

2012
20,000,000

15,000,000

2011

10,000,000

5,000,000

0
Lignite Steam Other coal

China thermal imports to July 2012

China thermal imports to July Colombia USA 3% 5% Australia 37% Other 23% South Africa 13% Indonesia 32%

Canada 1% Russia 9%

Republic of Koreas 2011 Total Imports by Country

Richards Bay Coal Terminal 2012 exports

Richards Bay exports to Sep 2012 (million mt)

Meet the Coal team at Platts

James OConnell, Editor in Chief Michael Cooper - Editor, Australia Cecilia Quiambao, Associate Editor, Indonesia & North Asia Deepak Kannan, Associate Editor Indonesia & Freight Reggie Le, Associate Editor - China Sapna Dogra, Assistant Editor - India Gareth Carpenter, Team Leader, Europe Jacqueline Holman, Associate Editor, Europe Jaime Concha, Associate Editor, Europe Regional correspondents

Chris Bishop, South Africa Toby Muse, Colombia Chris Kraul, Colombia Anita Nugraha, Indonesia Sunil Saraf, India Jayanta Sarkar, India

Sarah Cottle, Editorial Director EMEA

Vandana Hari, Asia Editorial Director Larry Foster, Editorial Director, Global Power Jorge Montepeque, Global Editorial Director, Price Group

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James OConnell, Editor-in-Chief, Platts Coal Trader International Platts International Coal Report James_OConnell@platts.com coal@platts.com