What are the two main categories of Coal?

Thermal or Steam Coal used for electricity generation to power turbines o Primarily Sub-bituminous and bituminous Metallurgical or Coking Coal used for steel production due to its high heat burn point o Primarily Bituminous and Anthracite Other Industrial Applications: construction, pharma, solvents, tars, lubricants, carbon fiber, rayon and nylon As of 2011, 60% of steel production was dependent on Coal. Approximately 13% of hard coal production is used for Steel. The primary sources of electricity generation were: Coal 42%, NatGas 25%, Nuclear 19%, Petrol <1%, and renewable energies 13%. (EIA http://energyforumonline.com/date/2012/06/) Who are the primary producers of Coal as a % of total? (2012 BP) China 49.5% United States 14.1% Australia 5.8% India 5.6% Who are the primary consumers of Coal as a % of total? (2012 BP) China 49.4% USA 13.5% India 7.9% Japan 3.2% Coal based Electricity Generation as a % by Country: (2010 EIA) South Africa 93% Poland 90% China 79% Australia 76%

Major Coal Indices: 12M fwd CAPP $61.78/t, 12M fwd PRB $10.12/t, NewCastle Index 90.70/t, Queensland $225/t Primary Impacts to Prices: Political and environmental legislation -( ex. The EPAs Mercury Rule) Prices of substitute goods NatGas, Oil, Renewables Global Supply/Demand Weather Impact on temperatures, production and delivery The Current Environment: Inventory builds and weak economic data have put continued pressure on coal prices. Now with Natural Gas approaching a critical $2.50/mmbtu and renewed concern over industry threatening legislative initiatives, our outlook continues to remain negative. At this current time there are four main factors affecting coal prices: Coal-to-Gas Switching, Supply/Demand, Labor Disputes, and a New Administration the White House. With Thermal Coal being the primary source of electricity generation in the world, one could conclude that Coal-to-Gas switching poses serious threats to near term demand. Stephen Byrd of MS anticipates that there will be a 5-6bcf/day of coal-to-gas switching during the summertime. MS analysts are also speculating that NatGas will be understood as a decade of two halves. Therefore, greater than expected supply and inventory builds will keep NatGas prices depressed into 2015. At which point demand is expected to pressure production output through 2020 enough to elevate prices. Latest data confirms that China continues to be far and above all other consumers of Coal. Concurrently, concerns have begun to surround the momentum of the Chinese economy. Given current rates, The Chinese Academy of Social Sciences, anticipates urbanization plateauing beginning in 2013. The Chinese government has already responded to economic contraction with a series of stimulus packages, and most recently announced a cut in rates. Wes Sconce anticipates these actions will be impactful, but will not reflect the intensity of economic packages in 2008.

Arguably the most important factor affecting the coal industry today is the current administration is Washington. Through the EPA President Obama has proposed stricter regulations on the energy industry primarily focused on coal. One example being the recent concern that EPAs Mercury Rule will pass in the senate. The probability of this rule passing as a whole is unlikely, but concerns of a partial pass are enough to put the coal industry on edge. According to

Platts, the EPAs Mercury Rule would require coal and oil fired plants to install maximum achievability control technologies or MACT. Concerns surround the cost of implementation and the ability for coal powered plants to comply given the short 3 year time constraint. A new administration is Washington will be deemed as more coal friendly and should be a bullish indicator for the industry.