CLSA Coal Report

Coal outlook
Commodity analysis

Coal prices will remain hot
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Hard coking coal Semi-soft Thermal (US$/t)
Source: Company announcements, Bloomberg, CLSA Asia-Pacific Markets
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proprietary database at clsa.com

Ian Roper
ian.roper@clsa.com
(86) 2120205806
Yingxiang Zhao
(86) 2120205805

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sector, see our weekly
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18 November 2010
Global
Materials

For our latest views on
the resources sector, see
Ians weekly Asia Rocks
commodities analysis

www.clsa.com

Craving for coal
We expect thermal-coal prices to remain above US$100/tonne in nominal
terms from now on while coking coal should hold above US$200/tonne
until 2014. Despite slowing Chinese coal consumption, domestic supply
will struggle to increase amid escalating safety and regulatory costs as
well as mine depletion. The Chinese renminbis appreciation should make
coal imports increasingly attractive. Meanwhile, India adds further upside
to seaborne demand for thermal and coking coal as its economy grows.
Thermal coal - US$100 to eternity
We forecast Chinas import dependency for thermal coal to rise from 7% in 2010 to
13%, or 255 million tonnes, by 2015.
Indian domestic coal output will also struggle to meet demand growth from the
countrys power sector, driving imports to 200 million tonnes in 15CL.
Supply growth is mostly from Australia once infrastructure expansions come
through, but in the short term, Indonesia will supply most of the thermal coal.
Coking coal - Premiums to widen
Hard coking-coal prices should stay above US$200/tonne until 14CL as the market sees
a widening structural deficit. Semi-soft coal discounts will widen from 27% now to 37%.
The shift towards larger blast furnaces for steelmaking in China and India should keep
demand for hard coking coal growing at a faster pace than headline steel production.
Australian supply will lose market share to new players Mongolia and Mozambique.
Demand drivers - China and India
China and India combined account for 90% of demand growth for thermal imports,
driven by commissioning of new thermal power generation in India.
The two countries also account for 77% of the increase in coking-coal consumption.
Despite environmental trends against thermal generation, demand growth in
emerging markets should more than offset moves to cleaner fuels in the OECD.
Swing supply factors - Costs and infrastructure
Cost inflation in China is the main driver of our price forecasts, having jumped 30%
since 2008 amid the increasing safety and regulatory focus, and mine depletion.
With 25% of Chinas coal transported from the north to the south, the rising renminbi
should make imports increasingly attractive for southern steel mills and power plants.
Australian coal exports continue to wait for the completion of infrastructure
developments, but should double by 15CL.
Indonesia will account for much of the growth in thermal-coal supply until 2012, while
Mongolia drives short-term coking-coal supply.
Prepared for: kwong@cubecap.com

Coal outlook

2 ian.roper@clsa.com 18 November 2010
Contents
Executive summary ............................................................................ 3
Thermal coal - US$100 to eternity...................................................... 4
Coking coal - Premiums to widen ..................................................... 16
Demand drivers - China and India.................................................... 29
Swing supply factors - Costs and infrastructure............................... 46
Appendices
1: Data tables......................................................................................86
2: Technical terms................................................................................88
3: Long-run Chinese steel .....................................................................91
4: Indian thermal demand.....................................................................95
5: Chinese power demand................................................................... 102
6: Global coking-coal supply by company .............................................. 122
All prices quoted herein are as at close of business 10 November 2010, unless otherwise stated
Our global materials team
Andrew Driscoll, Head of Resources Research Hong Kong (852) 26008528 andrew.driscoll@clsa.com
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YingXiang Zhao Shanghai (86) 2120205805 yingxiang.zhao@clsa.com

Resourceful analysis
on commodities

Executive summary Coal outlook

18 November 2010 ian.roper@clsa.com 3

Craving for coal
We project thermal-coal prices to remain above US$100/tonne in nominal terms
from this point. The recent surge in Chinas coal imports will not reverse, as
domestic production growth is constrained by quality, environmental and logistics
issues. Some 56% of Chinas coal consumption is in the central, southern and
eastern regions, which produce only 33% of supply. Thus, almost a quarter of
Chinas coal has to be transported from the north to the south, in many cases
over 1,000km by road but mostly around the coast by ocean vessels.
Chinas coal production costs have risen 30% since 2008 amid the increasing
focus on safety and regulatory burdens. Environmental issues such as water
shortages in the northern mining areas, lack of high-quality coal, and reserve
depletion should all contribute to higher costs and make supply growth
increasingly difficult. Additionally, renminbi appreciation will make US dollar-
based imports increasingly attractive for consumers on the southern coast.
We forecast Chinas import dependency to rise from 7% in 2010 to 13% of
thermal-coal consumption, or 255 million tonnes, by 2015. Thermal
generation capacity in India is rising faster than domestic coal supply, and
this will require imports to rise to 200 million tonnes by 15CL. With such
strong demand drivers and cost inflation, we do not expect thermal-coal
prices to see much mean reversion over time.
We expect prices for hard coking coal (HCC) to remain above US$200/tonne
for the next four years. Structural shifts towards larger blast furnaces for
steelmaking in China and India should keep demand for HCC growing at a
faster pace than headline steel production. On the domestic supply side,
China will struggle to meet demand growth from its steel industry due to
rising costs and reserve depletion, thus the country will become increasingly
reliant on imports.
Existing suppliers have little in the way of capacity additions planned for the
next few years, which will allow new producers to gain market share.
Mozambique will see first export cargoes next year, while Mongolia will triple
its exports over the next four years, and has potential for significantly more
supply subject to infrastructure costs.
While there is enough growth in total coking-coal supply to meet demand
from steel makers, there is not enough high-quality HCC, and we see a
widening structural supply deficit. Price premiums will continue to widen, with
semi-soft coking coal declining to a 37% discount from 27% now.
Price upside in the short term, and staying strong in the long term
(US$/t, nominal) 2009 10CL 11CL 12CL 13CL 14CL 15CL
Thermal coal BM 85 92 105 110 107 101 101
Thermal coal spot - 98 109 112 107 101 101
Qinhuangdao contract (Rmb) 540 570 610 640 672 700 669
Qinhuangdao spot (Rmb) 599 745 760 760 725 700 669
Hard coking coal 171 191 210 230 200 200 167
Semi-soft coking coal 123 139 137 161 136 130 106
Pulverized coal injection coal - 150 168 184 160 160 126
Shanxi coking coal 744 835 875 920 780 780 781
5,500kcal coal, including VAT. Note: All prices are calendar year averages. Source: McCloskey, CCTD,
CLSA Asia-Pacific Markets
Thermal coal prices will
remain above US$100/t
due to Chinese cost
appreciation
Price premiums will widen
as hard coking coal sees
increasing shortage
Coal prices have a very
bullish price profile
India and China combined
account for 90% of
demand growth
Coking-coal consumption
will rise ahead of steel
demand due to
structural factors
Chinas production-cost
increase is the main
driver for imports
Traditional suppliers
expanding only slowly

Section 1: Thermal coal - US$100 to eternity Coal outlook


Thermal coal - US$100 to eternity
We expect thermal-coal prices to remain above US$100/tonne in nominal terms
from now on. The recent surge in Chinas coal imports will not reverse, as
domestic coal production growth is constrained by logistics bottlenecks, an
increasing focus on safety and environmental issues such as water shortages in
the northern mining areas. Additionally, higher cost inflation than the general
economy and renminbi appreciation will combine to make US dollar-based
imports increasingly attractive for consumers on the south and east coast. We
forecast Chinas import dependency to approach 13% of thermal-coal
consumption, or 255 million tonnes, by 2015. Unlike most commodities, we do
not expect thermal-coal prices to see much mean reversion over time.
Figure 1
Thermal-coal-price forecasts (nominal)
(US$/t) 2009 10CL 11CL 12CL 13CL 14CL 15CL
Thermal coal BM 85 92 105 110 107 101 101
Thermal coal Spot - 98 109 112 107 101 101
Qinhuangdao contract (Rmb) 540 570 610 640 672 700 669
Qinhuangdao spot (Rmb) 599 745 760 760 725 700 669
Qinhuangdao inc VAT. Source: CLSA Asia-Pacific Markets
Thermal-coal prices will be all about China for the next few years, but from a
supply rather than a demand perspective. We believe China will be largely
absent from the seaborne market as government policy is clearly trending
against the export of low-value, polluting products.
The pressures on domestic mine output and costs will result in rising coal
imports over time, despite a substantial slowing in Chinas thermal-coal
demand growth as the economy restructures away from fixed-asset
investment-led expansion and additional power generation is focused more on
renewables and nuclear. While downside for prices is limited by Chinese coal
costs, upside potential for prices is capped by the ability of Chinese
consumers to arbitrage imports. If seaborne prices rise too far, China has
plenty of coal to provide a domestic supply response, although due to
logistics constraints this would take a while to appear.
Chinese thermal-coal mining costs have jumped by nearly 30% over the past
two years, largely due to increased safety focus and a rising regulatory
burden. While such cost drivers are likely to abate in the years ahead, reserve
depletion, water shortages, rising environmental awareness and renminbi
appreciation will all serve to raise Chinas domestic mining costs in US dollar
terms and make imports increasingly attractive.
Seaborne coal demand to accelerate despite environmental trends
Global consumption of seaborne-traded thermal coal has enjoyed a 6.2%
Cagr over the past five years, but we forecast a slight acceleration to a 6.7%
Cagr over the next five years to 2015.
Excluding China, the global traded coal market will see significant growth, led
mainly by Indian imports to feed its thermal power capacity build out. Indian
coal imports will experience a Cagr of more than 25% through 2015 as Coal
India struggles to meet domestic demand growth, with nearly 30GW of new
coal-fired generation coming into operation in the next two years.
China coal-mining cost
inflation has been rapid
and will continue
Thermal coal prices wont
fall below US$100/t again
Qinhuangdao contract
prices to continue rising
Thermal coal all about
Chinese supply rather
than demand
Global coal import
demand to accelerate
through 2015
China provides a cap and
a floor to global thermal
coal prices
India will lead demand
growth in power
consumption



Figure 2
Global thermal-coal seaborne import market
(mt) 2007 2008 2009 10CL 11CL 12CL 13CL 14CL 15CL
Seaborne total 693 706 736 816 861 923 983 1,069 1,123
China 45 34 92 119 130 150 180 230 255
Japan 121 126 110 121 124 122 123 123 122
Korea 67 78 84 93 93 95 97 99 101
Taiwan 58 58 54 55 56 56 57 58 58
India 33 37 47 59 80 120 145 175 200
Other Asia 51 55 49 55 57 59 62 64 67
EU27 187 185 179 184 186 184 182 180 178
Other Europe 34 38 34 35 35 35 35 35 35
Middle East & Africa 26 26 26 26 26 26 26 26 26
North America 50 49 39 44 48 49 50 51 52
South America 22 22 24 25 26 26 27 28 29
Source: Australian Bureau of Agricultural and Resource Economics (ABARE), Trade data, McCloskey, CLSA
Asia-Pacific Markets
Combined, China and India will account for more than 90% of the growth
in seaborne thermal-coal imports to 2015, more than countering the rising
global trend of switching away from thermal generation towards other
cleaner energy sources.
Supply growth led by Indonesia and Australia
Indonesia and Australia account for a combined 53% of seaborne thermal-
coal exports. Their share of supply should rise to 65% by 15CL as both grow
their export volumes.
Figure 3
Global thermal-coal seaborne export market
(mt) 2007 2008 2009 10CL 11CL 12CL 13CL 14CL 15CL
Seaborne total 684 716 730 782 845 910 977 1,075 1,161
Indonesia 193 198 231 260 286 304 318 334 350
Australia 111 121 134 137 140 180 240 330 410
China 51 43 22 19 10 5 5 5 5
Other Asia 16 21 24 26 28 30 32 34 36
South Africa 68 68 67 66 69 70 73 77 78
Russia 85 86 91 93 98 95 95 95 95
USA 24 35 19 21 28 26 24 22 22
Colombia 65 69 63 68 76 82 85 88 90
Other 71 75 78 93 110 118 105 90 75
Indonesia has seen substantial growth in coal exports in recent years, and
should provide much of supply growth to 12CL, but we expect this pace to slow
as equipment shortages, rising stripping ratios and more challenging logistics
for new mines make bringing on new capacity increasingly harder and more
expensive, while strong domestic demand limits the share of exports.
Australian supply represents the main threat to prices in the medium and
long term, as infrastructure plans in Queensland and New South Wales are
now advancing on capacity of more than 600 million tonnes per annum
(mtpa) by 2015, up from about 300mtpa in 2010. Should demand stumble,
this capacity growth is unlikely to be underutilised given the low costs of
China and India will be
the two major importers
China and India will
account for 90% of
demand growth
Indonesia is a major
exporter in the seaborne
thermal-coal market
Australia to double coal
export capacity by 2015
Indonesia and Australia
account for most of supply



Australian coal production. The success of these projects is one of the key
influences on medium-term price forecasts. However, given that this supply
wont be impacting the market until at least 2012, we see upside to thermal-
coal prices globally over the next two years.
Ultimately, these sustained high prices will just incentivise more infrastructure
capacity to come on in places with abundant coal reserves such as Africa, but
we believe the long lead times for these projects mean a significant increase
in supply is not likely within the forecast period to 2015. Consequently, we
see the thermal-coal seaborne market in deficit in 2011 and 2012, before
rebalancing as Australian export capacity ramps up.
Figure 4
(mt) 2007 2008 2009 10CL 11CL 12CL 13CL 14CL 15CL
Seaborne demand 693 706 736 816 861 923 983 1,069 1,123
Seaborne supply 684 716 729 783 845 910 977 1,075 1,161
Supply deficit 9 (10) 7 33 16 13 6 (6) (38)
Chinese cost inflation will drive the appetite for imports
In assessing the long-run thermal-coal price, we have to strike a balance
between coal costs in the Chinese market, which is 93% domestically
sourced, and the global traded coal market balance and costs. Our belief is
that China will not see significant coal exports in the future, however high the
global coal price gets. Government policy is quite clearly moving away from
exporting low-value, highly-polluting products, which use up their own
transport and energy resources without making much return. Should global
coal prices rise to an attractive level for Chinese coal traders to export, we
believe the authorities would respond by hiking export taxes from their
current 10% level, or furthering the use of export quotas which were a major
factor in restricting exports of coke over the past decade.
Figure 5
Chinese coal trade tax changes
Thermal coal
Pre 2004 13% export rebate
Jan 2004 11% export rebate
Jan 2005 8% export rebate
Sept 2006 export rebate removed
Aug 2008 10% export tax
Source: Media reports, Ministry of Finance, CLSA Asia-Pacific Markets
According to NBS statistics in 2008, 56% of Chinas coal consumption was in the
central, southern and eastern regions, which produces only 33% of the coal
supply. Thus, nearly 25% of Chinas coal has to be transported from the north to
the south, which is costly and puts great strain on Chinas logistics networks.
With China absent from the global traded thermal-coal market as a supplier,
the big question is at what price China will find it attractive to import coal.
Given Chinas (washed) thermal-coal consumption will be about two billion
tonnes in 2015, and the total seaborne coal market ex-China will still be
about 900mt, Chinas presence or absence in the global market will be the
major swing factor for coal prices.
Global seaborne demand
will outpace supply
until 2014
China wont be a big coal
exporter again
China regional coal
consumption and
production is unbalanced
Chinas import demand
will define the global coal
market balance
Potential for higher
supply globally, but only
after 2015
Trade policy has
moved away from
supporting exports



The seven coastal provinces in east and south China, namely Hainan,
Guangxi, Guangdong, Fujian, Zhejiang, Shanghai and Jiangsu accounted for a
combined 22% of total coal consumption in 2008, according to the NBS, and
we estimate an even higher rate for thermal coal. Thus, we could easily
envisage Chinas thermal-coal imports rising to between 10% and 15% of
coal consumption, but would struggle to believe it could rise much above 20%
before raising cost assumptions for imports given that they will likely be
getting less competitive with domestic coal the further they are moved inland.
Figure 6
Chinese import penetration
(mt) 2008 2009 10CL 11CL 12CL 13CL 14CL 15CL
Coal consumption in generation 1,367 1,450 1,616 1,702 1,796 1,891 1,943 1,998
South/East coast consumption 342 363 404 426 449 473 486 500
Domestic coal production 1,376 1,380 1,515 1,582 1,651 1,716 1,718 1,748
Coal imports 34 92 119 130 150 180 230 255
Coal exports 43 22 19 10 5 5 5 5
Import penetration nationally (%) 2 6 7 8 8 10 12 13
Import penetration (S/E coast) (%) 10 25 29 31 33 38 47 51
Note: Thermal-coal consumption is washed basis. Source: NBS, CLSA Asia-Pacific Markets.
To calculate the price at which China will choose to import thermal coal, we
need to asses Chinas domestic coal sources and associated logistics costs.
Inner Mongolia is already Chinas largest thermal-coal producing province, but
given the provinces low quality and water shortages, growth in thermal-coal
production is likely to come increasingly further west, from Xinjiang in
particular. While we expect Chinas economic growth to rebalance towards the
centre and west over time, the bulk of Chinas energy needs will remain on
the eastern and southern coastal provinces.
Mining costs for thermal coal in China are quite high in relation to the rest of
the world. More than 80% of Chinas thermal-coal mines are underground, and
on average the costs of underground mines are at least twice that for open-pit
mines. The most efficient thermal mines in China have a cash mining cost as
low as Rmb150/tonne, while the least efficient can be as much as Rmb200-
230/tonne (prior to quality adjustments). Adding in washing costs, non-mining
operating costs and rail loading fees, and the average mining cost comes in
about Rmb230-240/tonne, with the highest cost mines being at Rmb280-
320/tonne free on rail/truck.
Figure 7

Figure 8
Cost breakdown of middle-cost mine

Cost breakdown of high-cost mine
0
100
200
300
400
500
Mining,
washing and
loading
Non-ming
cost and rail
loading fee
Taxes Logistics
(Rmb/t)

0
100
200
300
400
500
600
700
Mining,
washing and
loading
Non-ming
cost and rail
loading fee
Taxes Logistics
(Rmb/t)
Source: Industry sources, CLSA Asia-Pacific Markets
Infrastructure is the major cost for coal delivered to southern consumers. The
cost of moving coal from Shanxi to Guangdong is currently near Rmb300/tonne
while the cost to move coal from Inner Mongolia is about Rmb380/tonne.
China coal-mining costs
are at the higher end of
global cost curve
Transport from Shanxi
costs Rmb300/tonne
Import coal penetration
can easily rise to 10-15%
Seven coastal provinces
account for 22% of coal
consumption
Chinas domestic coal will
come from further west
Infrastructure is the
major cost for coal
delivered to southern
consumers



Figure 9
Transport cost for coal from Shanxi (650km rail + ship) to Guangdong
0 50 100 150 200 250 300 350
Road to railway station
Rail loading
Rail
Port construction
Port handling
Other
Ship to Guangdong
Port unloading
(Rmb/t)

Figure 10
Transport cost from Inner Mongolia (200km road, 900km rail) to Guangdong
0 50 100 150 200 250 300 350 400
Rail loading
Rail
Port construction
Port handling
Other
Ship to Guangdong
Port unloading
(Rmb/t)
We expect these costs to come down as more rail infrastructure is put in
place. The Ministry of Rail is planning capacity to carry 1.2 billion tonnes of
coal from 2013 so there should be less need for more expensive trucking.
Assuming all coal moves by rail, at current tariff rates that would imply a cost
of about Rmb300/tonne from a generic mine in Inner Mongolia, 1,000km to
Qinhuangdao and along the coast to Guangdong.
By 2015, assuming a moderate pace of real cost inflation for mining at 5%
per annum in 2011/12 and 2.5% thereafter, adding the new resource tax at
4%, and allowing for some efficiency gains in logistics which more than offset
inflation, we would expect the cost for Shanxi mines on a delivered
Guangdong basis to be about Rmb570/tonne, or US$104/tonne, in real 2010
terms assuming a Rmb5.5/US$1 rate.
China domestic coal cost
will rise in coming years
due to inflation and
resource tax
As rail capacity increases,
costs could come down
Main costs are rail and
shipping, but additional
ones add up
Road and rail are the
main cost additions for
mines in Inner Mongolia



Figure 11
Total cost (2010 terms), 2015 Shanxi mid-cost mine delivered to Guangdong
0
100
200
300
400
500
600
Mining cost Non-mining cost Taxes and other
costs
Logistics to
Southern China
(Rmb/t)
For the lower-quality mines in Inner Mongolia delivering the longer distance
to Guangdong, we could easily see costs being as high as Rmb725/tonne, or
US$132/tonne, in real 2010 terms.
Figure 12
Total cost (2010 terms), 2015 Inner Mongolia high-cost mine delivered to Guangdong
0
100
200
300
400
500
600
700
800
Mining cost Non-mining cost Taxes and other
costs
Logistics to
Southern China
(Rmb/t)
A good check on these costs is also the arbitrage opportunity for Mongolian
thermal coal, as this could also become a significant supplier to the Chinese
market once logistics are in place. An analysis of the potential for Mongolian
coal exports is discussed in detail in the supply section. Briefly, our discussions
with Mongolian coal companies suggest a target operating cost of US$15/tonne
for raw coal, but after adjusting for low quality and washing, and transport to
the Chinese border once rail capacity is in place, and currency appreciation, the
free-on-board (FOB) China cost would still be US$40/tonne at best, or
Rmb220/tonne at a Rmb5.5/US$1 exchange rate. Even assuming minimal
border-crossing fees, such as under a free-trade agreement, the logistics costs
through Inner Mongolia and on ship to Guangdong would still bring the total
cost to about Rmb550/tonne, or US$100/tonne. We believe there is probably
upside to the inflation, currency and tax assumptions, so the cost could
potentially be another 20% higher at least.
Mongolia coal cost
delivered to south China
is also above US$100
Lower-quality mines will
be higher cost
China domestic coal cost
from Shanxi will rise to
Rmb570/tonne
Despite logistics savings
Inner Mongolian costs will
still hit Rmb725/tonne
to Guangdong



The final marginal source for new coal supply in China would be from new
mines in Xinjiang. These are expected to be mostly open pit, and higher
quality than Inner Mongolian coal. Even with cheaper mining costs however,
Xinjiang coal would still need to travel 2,000-2,500km to central/southern
China, which on current rail fees would work out about Rmb300-340/tonne
including loading and fees, so we would struggle to see them competing at a
delivered price to the southern power plants of under Rmb550/tonne.
Given the expensive logistics for coal, and the provinces desire to add value to
their raw materials, there is growing talk of more mine gate power capacity
being installed, with the power being exported to other provinces rather than the
coal. In principal, this sounds like a promising and logical idea, however, Chinas
grid already has serious issues and it will be many years before it could have the
capacity to handle hundreds of gigawatt hours (GwH) worth of transmission from
north to south China. Given that the distance would be 1,500-2,500km from
most mines to the south coast, the cost of the power cable combined with the
transmission losses would be significant. China is already reportedly planning to
invest Rmb2.2tn in the power grid over the next five years, up from Rmb1.5tn
over the past five years, but most of this is just to upgrade and improve the
existing grid rather than provide capacity for such a significant increase in cross-
province distribution. Consequently, we view the issue of mine gate power as a
potential long-term risk, but it will not be enough to destroy the potential import
market for thermal coal in the next decade.
It is quite apparent from our cost analysis that domestic thermal coal will
struggle to be delivered into southern power plants for under US$100/tonne
in 2015 (real 2010 terms). Thus we would expect to see significant import
penetration into southern and eastern China from seaborne coal up to this
cost level.
Figure 13
Chinese thermal coal costs, 2015
(mt) Shanxi Inner Mongolia Xinjiang Mongolia
Mining cost 180 275 150 100
Taxes and other costs 140 150 100 130
Logistics to Southern China 250 300 340 330
Total cost Rmb/t 570 725 590 560
Total cost US$/t 104 132 107 102
Source: CLSA Asia-Pacific Markets
To net back to an FOB Newcastle equivalent price, we simply deduct the
freight and Chinese port-handling costs, and make an adjustment for the
higher calorific value of Australian coal, which is about 6,000Kcal compared to
standard Chinese quality at 5,500Kcal. After making these adjustments, the
netback would equate to about US$90/tonne FOB Newcastle in real 2010
terms in 2015. We therefore choose to set our long-run thermal-coal price at
this level, which is equivalent to US$100/tonne in nominal 2015 terms.
Prices have upside in near term
In terms of the interim prices, thermal-coal markets look reasonably tight for
the next few years. Our market balance shows that there is a sustained
supply deficit in the 2010-12 period, before large-scale infrastructure capacity
expansions come through in Australia and lead to a surge in exports.
Spot coal prices have rallied strongly in the six weeks to 12 November. While
the rally is reflective of the liquidity pressures and US dollar weakness that
have been driving all commodities, the coal price has also been boosted by
Power transmission is
hard to replace coal
transport in next decade
Spot coal price is
very sensitive to
weather change
Xinjiang is too far from
southern consumers to
be competitive
Our market balance is
very tight through 2012
Domestic coal to
Guangdong does not look
viable at under
US$100/tonne
Mongolia and Shanxi best
placed to provide
southern power plants



expectations of a colder-than-usual winter in China and a worse-than-normal
summer rainy season in Australia, both due to the La Nina weather pattern.
The weather traditionally provides a very clear seasonal pattern for coal
prices, with strength in 4Q and 1Q, and softness in 2Q and 3Q.
Figure 14
Thermal-coal prices have clear seasonal effect
0
40
80
120
160
200
240
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
(US$/t) 2010 2009 2008
2007 2006 2005
Source: McCloskey, CLSA Asia-Pacific Markets
Given coals sensitivity to weather impacts on both the supply and demand
side, we expect there could be upside risk to spot prices over 1Q11, but there
is also a danger that expectations of weather impacts are baked into current
spot prices and could thus cause downside if they dont eventuate.
With the tight market balance, we forecast thermal-coal spot prices to
average US$109/tonne in 2011, up from US$98/tonne in 2010. There will be
another increase in 2012 to US$112/tonne, before prices moderate towards
the long run US$100/tonne level in 2015 (nominal terms) as Australian
exports grow strongly and ease the market tightness.
For Chinese pricing, thermal-coal contract prices in China have never gone
down, and we forecast them to rise another 7% in 2011 and continue to gain
through the forecast period. The rise in prices reflect a closing of the discount
to spot, as producers have been switching more tonnages away from contract
towards the spot market to avoid giving away this discount, and ultimately
the two prices should converge. For Chinese spot prices, they will follow a
similar pattern to seaborne spot prices, but at a slightly slower pace to reflect
the 4-5% pa renminbi appreciation.
Figure 15
Thermal-coal price forecasts (nominal)
Thermal coal BM 85 92 105 110 107 101 101
Thermal coal Spot - 98 109 112 107 101 101
QHD contract (Rmb) 540 570 610 640 672 700 669
QHD spot (Rmb) 599 745 760 760 725 700 669
Seaborne demand 736 816 861 923 983 1,069 1,123
Seaborne supply 729 783 845 910 977 1,075 1,161
Supply deficit 7 33 16 13 6 (6) (38)
QHD inc VAT. Source: CLSA Asia-Pacific Markets
Thermal-coal price will
rise through 2012
There is more upside to
1Q prices due to supply
disruptions
Chinese contract prices
will continue to rise
China contract price will
maintain uptrend until
converges with spot price



Risks to our forecasts - upside
Further policies to restrict Chinese thermal-coal output could be a major
upside risk to our forecasts. The success of the policies in Shanxi may
inspire similar consolidation in other provinces, though given no other
province has such dispersed ownership of coal assets, the effects would be
somewhat smaller. Nonetheless, this could still cut available Chinese
supply below our expectations.
In Shanxi, private-mine output before consolidation accounted for about 40%
of production, but post consolidation this has dropped to under 30%. Given
Shanxi had a uniquely high number of private mines, we chose to examine a
scenario where Chinese thermal-coal output is reduced by 3% due to further
closures and consolidation of small mines around the country. On this basis,
and assuming no change to the demand numbers, Chinas seaborne coal
imports would rise by more than 40mtpa from 2012, with an ultimate import
penetration in the south coast markets of 75% by 2015.
Figure 16
Chinese import penetration - base case
(mt) 2008 2009 10CL 11CL 12CL 13CL 14CL 15CL
Coal imports 34 92 119 130 150 180 230 255
Coal exports 43 22 19 10 5 5 5 5

Figure 17
Chinese import penetration - Production cut 5% by small mine closures
(mt) 2008 2009 10CL 11CL 12CL 13CL 14CL 15CL
Coal imports 34 92 119 157 190 221 272 297
Coal exports 43 22 19 10 5 5 5 5
Net gain in imports - - - 27 40 41 42 42
refers to washed thermal-coal consumption. Source: CLSA Asia-Pacific Markets
Given that our market balance is not in deficit until 2014, these extra Chinese
imports would further tighten the market and prevent prices falling back after
2012. However, we believe the upside to coal prices would be capped, as it is
unlikely the Chinese authorities would prevent a supply response from large-
scale efficient mines over time, especially given the increasingly attractive
returns from the higher-price environment.
An additional upside risk in China could come from more stringent safety and
environmental compliance requirements which raise mining costs above our
forecasts. We estimate the regulatory burden over the past two years has
raised mining costs by at least Rmb50/tonne. While further measures are
unlikely to raise costs that much given diminishing returns, an increase of just
Rmb25 could raise our long-run coal price by up to US$5/tonne. An increase
in the resource tax in China above the speculated 4% level could also add
around US$0.8/tonne to our long-run price for every 1% increase in the tax.
Further efforts unlikely
to be as significant
as in Shanxi
China coal mines
consolidation is a major
upside risk
Upside to prices capped
by potential domestic
supply response
Restricted domestic
supply would mean
higher imports
China mine cost may
further rise due to safety
and environmental
requirement and higher-
than-expected resource tax
Further cost pressure in
China could come from
more regulation



Any moves by the Indonesian government to restrict coal exports could
tighten the global coal market further. While these risks seem unlikely at this
stage, the environmental impact of the rapid increase in production may get
increasingly negative coverage in the country, leading to pressure on the
government to regulate the industry more strictly.
Indonesia accounts for 20% of our supply growth to 2015, but this is heavily
weighted to 2011 and 2012, when our market balance is at its tightest. If such
restrictions came in the next two years, this could cause significant upside to
prices, though we would then just expect Chinese imports to lessen and their
domestic production to respond to the higher prices. Restrictions from 2013 or
later meanwhile could lessen our expectation of prices declining after 2012.
Delays in infrastructure expansions elsewhere would provide upside to prices,
with Australia being the main factor in supply growth. However, these
expansions have been a long time in planning and look likely to be delivered
on time. Nonetheless, a delay of six months in commissioning could cut
Australian thermal exports by up to 30 million tonnes in 2012 and 2013, and
even more in later years.
Indian growth could surprise to the upside. While we are already being
aggressive in our import assumptions, with imports feeding over 50% of the
growth in thermal-coal generation, there could even be upside to these
numbers, most likely from disappointing domestic coal production growth.
However, our plant-by-plant assessment suggests the bulk of coastal power
plants will already be relying mostly on imports, and for imports to penetrate
much inland they will be subject to similar logistics costs and constraints to
the domestic supplies.
Nonetheless, a scenario where Indian coal production growth misses our
forecasts by 50% would result in imports rising by 20-25mtpa through the
forecast period. Such additional tightness to the market could add
US$5/tonne to our price forecasts through the period.
Figure 18
Indian demand for thermal coal in power generation - base case
(mt) FY10CL FY11CL FY12CL FY13CL FY14CL FY15CL
Demand 426 451 542 603 657 711
Domestic supply 374 387 432 473 489 522
Imports 52 64 110 132 168 189

Figure 19
Indian thermal-coal import demand - 50% reduction in domestic coal output
Demand 426 451 542 603 657 711
Domestic supply 374 381 403 424 432 448
Imports 52 71 139 180 226 263
Import gain - 6 29 48 58 75
Faster renminbi appreciation than we expect could lift interim and long-run
price forecasts as we drive our prices from the Chinese mining cost. We
assume a 5% pa appreciation for the next two years, followed by 4% pa after
that in our base case, giving a Rmb5.5/US$1 exchange rate by 2015. The
table below shows the impact of various exchange-rate assumptions on our
price forecasts.
Indian import demand
could be greater than
we expect
Indonesian government
could limit coal exports
Indonesia accounts for
much of the supply
growth through 2012
Capacity expansion delays
in Australia are a risk to
medium-term prices
If Indian coal supply
growth disappoints
imports would rise
Our base case expects
Indian imports of
189 million tones
in 2015
If domestic supply growth
disappoints, Indian
imports could be an
extra 75 million tonnes
Forecast prices are very
sensitive to renminbi
assumptions



Figure 20
Thermal-coal price forecasts - renminbi scenarios (nominal)
(US$/t) 2015 (Rmb) 10CL 11CL 12CL 13CL 14CL 15CL
Base case 4-5%pa 5.5 92 105 110 107 101 101
No appreciation 6.6 92 100 100 90 85 82
Slower case 2%pa 6.0 92 102 104 99 94 92
Faster case 6%pa 4.8 92 107 113 110 107 105
Note: QHD inc VAT. Source: CLSA Asia-Pacific Markets
Risks to our price forecasts - downside
One downside risk to our thermal-coal price forecast is the speed at which
Indian thermal generators come into operation. While our forecasts allow for
reasonable delays in construction and ramp ups, Indian construction projects
have a poor record for delivering on time, and significant slippage in the
commissioning of new plants could reduce demand for seaborne thermal coal
below our expectations.
Indian coal imports account for 45% of the growth in seaborne-coal demand
in our base case. If we factor in a six-month delay in the startup of all
thermal capacity additions for the next five years, but still assume the same
domestic thermal-coal production base, Indian imports would be on average
30mtpa lower over 2011-15, likely resulting in much lower spot thermal-coal
prices, particularly for 2011 and 2012 as the market tightness we are
forecasting then would be eliminated.
Figure 21
Indian demand for thermal coal in power generation - base case
Demand 426 451 542 603 657 711
Domestic supply 374 387 432 473 489 522
Imports 52 64 110 132 168 189

Figure 22
Indian demand for thermal coal in power generation - six-month delay
Demand 426 440 505 573 629 680
Domestic supply 374 387 432 473 489 522
Imports 52 53 73 100 140 158
Import loss - (11) (37) (32) (28) (29)
A second downside risk could come from a sudden slowdown in Chinese
demand growth, perhaps caused by a sharper-than-expected cooling in the
economy post stimulus, or external economic shocks from a double-dip
recession or re-emergence of worries over debt in the OECD. Any of these
factors could provide downside to our demand forecasts. Additionally, sharply
slower Chinese economic growth could lead the government to soften their
efforts to restrict low-value exports and reform industries, and thus allow for
greater coal supply in China.
Assessing the feed through of this scenario is rather complicated as there are
so many secondary effects, but on the whole a slowdown in Chinese economic
growth could reduce total coal consumption, and if inflationary pressures are
reduced may make domestic production more competitive. On this basis, we
could see substantial downside to spot prices in this scenario, as Chinese
A 5% pa renminbi rise in
next two years and 4% pa
afterwards are assumed
Indian thermal generators
could begin at a slower
pace than we expect
Imports could be 30mtpa
lower if there is a 6
month delay in start up
Our base case is for
Indian imports of 189
million tonnes in 2015
Imports would be cut
if power generation
is delayed
Sudden slowdown in
Chinese demand would
result in lower spot
thermal-coal price
Chinese imports below
100mt in 2011 would
push the spot price below
US$90/tonne



import demand would be significantly smaller. If Chinese imports decline
below 100mtpa from 2011, we would expect spot thermal prices to drop
below US$90/tonne FOB Newcastle.
As well as a slowdown in China, another risk would be a double-dip global
recession, particularly in Europe. The EU still accounts for 22.5% of thermal-
coal imports, while other OECD nations account for around one-third of
seaborne imports. Between 2008 and 2009 coal imports in OECD countries
fell by 6%, but have recovered all of this loss in 2010. While a repeat of such
a sharp slowdown as seen in 2009 is unlikely, a milder recession could still
knock thermal-coal demand by 3% in OECD nations, or 13-15 million tonnes.
While not enough to tip the market into surplus, the feed-through effects of a
double-dip recession onto emerging markets would likely cut thermal demand
elsewhere as well, pushing prices back below US$100/tonne.
Milder winters and less-extreme weather impacts could be another reason for
lower prices than we forecast. Thermal-coal prices have been very influenced
by extreme winter storms in China in recent years, so the absence of these
could mean weaker demand and improved coal supply, keeping prices lower.
Climate change and related environmental taxes could make the economics of
coal-fired power generation less attractive globally, encouraging a switch to
renewables, nuclear or gas to feed energy demand growth. While we already
assume a gradual shift away from coal in most countries, an acceleration of
this trend could lead to substantially lower coal demand than we forecast in
the long run. However, this is hard to envision within the five-year forecast
period, given the lead times in constructing new generating capacity,
especially nuclear. Technological breakthroughs which improve the efficiency
and economics of renewables could also contribute to slower coal
consumption than we expect in the longer term, and thus pressure long-term
coal prices.
The introduction of carbon taxes would be the main spur for reduced coal
consumption. In an extreme case where these caused power consumption to
fall at end users in developed countries, it is likely that thermal-coal
generation would bear the brunt of the cut in power production. Again, we
believe this is more of a longer-term risk however, and is unlikely to be
significant in emerging markets where we see most of the demand growth for
thermal coal, especially given that their thermal generation comes from
newer, more environmentally-friendly plants.
Cheap gas is another threat to thermal-coal consumption, but again this is
more of a medium-term threat given the lead time to develop new power
generation. The USA is looking to shale gas as a possible source of alternative
energy, but there are still environmental question marks over its operation
and thus how significant a power supply it could become. If the technology is
proven and shale gas becomes a popular energy source globally, this could
reduce coal consumption further in the long run. In the shorter term, cheap
gas prices in the USA could provide upside to US coal exports, as coal miners
look to alternative markets if home demand is weaker than forecast.

Less-extreme weather
could soften coal-price
volatility
OECD double-dip
recession would also push
spot prices below
US$100/tonne
Cheap gas is a long-term
threat to coal consumption
Climate-change issues
and carbon taxes could
make coal-fired power
generation less attractive

Development of
renewable energy and
improved energy
efficiency may contribute
to slower coal
consumption
Carbon taxes would
pressure coal
consumption

Section 2: Coking coal - Premiums to widen Coal outlook


Coking coal - Premiums to widen
We expect prices for hard coking coal (HCC) to remain above US$200/tonne
for the next four years. Structural shifts towards larger blast furnaces for
steelmaking in China and India will keep demand for HCC growing at a faster
pace than headline steel production growth rates. On the supply side, China
will struggle to meet domestic demand growth, and thus become increasingly
reliant on imports. While there is enough growth in total coking-coal supply to
meet this demand, there is not enough high-quality HCC, meaning that price
premiums will continue to widen.
Figure 23
Coking-coal price forecasts
Hard coking coal 171 191 210 230 200 200 167
PCI Coal - 150 168 184 160 160 126
Shanxi coking coal is near HCC grade, but unwashed and ex VAT. Source: CLSA Asia-Pacific Markets
As with thermal coal, the driver of the coking-coal market will be the pace of
cost inflation in China, and the consequent balance between imports and
domestic supply. Additionally, the pricing dynamics between different product
grades will change as the steel industry continues to upgrade steel production
in favour of larger furnaces, while global output of the highest-quality coking
coals struggles to expand.
For all coking coal we forecast demand growth of 42% in the five years to
2015. HCC will grow at a faster pace due to the structural demand drivers
such as industry trends towards larger furnaces and Indian steel mills
upgrading their facilities, which we outline later in this report. Total HCC
demand over the next five years will rise 55%, or a Cagr of 9%. China and
India will account for a combined 80% of the growth in HCC consumption.
Figure 24
Global coking-coal seaborne import market
(mt) 2007 2008 2009 10CL 11CL 12CL 13CL 14CL 15CL
Seaborne total 229 233 217 272 299 325 348 370 387
China 6 7 35 45 62 80 89 97 107
Japan 65 65 52 63 61 58 59 59 58
Korea 21 22 19 22 26 28 29 30 31
Taiwan 8 8 6 8 8 8 8 9 9
India 24 28 29 35 38 42 49 59 61
Other Asia 1 2 2 2 2 2 2 2 2
EU27 67 67 48 63 64 65 68 70 70
Other Europe 7 8 5 7 6 7 8 8 9
North America 8 7 5 7 7 7 8 8 8
South America 17 16 13 17 19 22 23 24 26
Source: Australian Bureau of Agricultural and Resource Economics (ABARE), Trade data, McCloskey,
Industry sources, CLSA Asia Pacific Markets
Global coking-coal
demand will rise over
40% in next five years
China domestic cost
inflation is the driver of
the coking-coal market
HCC prices to stay above
US$200/tonne until 2014
Tighter market for HCC
will widen price premium
Coking-coal demand
will enjoy a 7.3% Cagr
through 2015



Figure 25
Global hard coking-coal seaborne import market
(mt) 2007 2008 2009 10CL 11CL 12CL 13CL 14CL 15CL
Seaborne total 153 137 166 186 216 238 257 279 288
China 5 5 26 35 52 66 73 79 86
Japan 36 37 31 34 35 33 33 33 33
Korea 12 12 12 13 15 17 17 18 19
Taiwan 5 5 4 5 5 5 5 5 5
India 19 22 24 28 34 40 48 57 59
Other Asia 1 1 1 1 1 1 1 1 1
EU27 49 36 45 45 48 48 50 55 52
Other Europe 6 4 5 5 4 4 4 5 5
North America 6 4 6 6 6 6 6 7 7
South America 11 10 11 11 13 15 15 16 17
We believe Chinas steel demand still has a considerable way to grow over the
next seven or eight years, before peaking later this decade as the economy
reaches upper middle-income status. We assume steel production in China
will rise at a 7.3% Cagr over the next five years. Our reasoning is outlined in
the demand section, and explained in more detail in Appendix 3.
While steel production rose from 129 million tonnes in 2000 to more than 503
million tonnes in 2008, China remained largely self sufficient in coking coal,
importing only 6.9 million tonnes in 2008. China also managed to sustain
coke exports over that time, with exports peaking at 15 million tonnes in
2007, and declining to 12.1 million tonnes in 2008. However, in 2009 the
combination of reduced mine output in Shanxi due to safety related
consolidation issues, and the increased availability of coking coal on the
seaborne market as world steel production collapsed, meant China began to
import coking coal in large quantities. We expect Chinas import requirement
for coking coal to continue to expand as domestic coking-coal supply is
struggling to grow due to grade depletion and significant cost inflation.
Figure 26
Chinese coking-coal supply
(mt) 2007 2008 2009 10CL 11CL 12CL 13CL 14CL 15CL
Crude steel prod 489 503 568 630 665 716 772 835 897
Pig iron prod 477 469 544 609 641 686 746 807 863
CC consumption 334 328 381 426 448 480 522 565 604
Domestic CC 350 339 347 382 387 401 434 469 498
Imported CC 6 7 35 45 62 80 89 97 107
Exported CC 22 18 1 1 1 1 1 1 1
Import share (%) 2 2 9 11 14 17 17 17 18
Exports include coke. Source: NBS, CLSA Asia Pacific Markets
Chinas domestic production of coking coal recovered to new highs in 2010,
exceeding 2007 levels. For the next five years we forecast Chinese coking-
coal production to grow at a 5.5% pa rate, compared to the 7.3% growth in
steel production. Consequently, imports will be required to rise from 11% of
consumption to 18% by 2015.
HCC demand will grow
55% through 2015
China coking-coal import
requirement will expand as
domestic supply constrained
Chinas steel demand has
good long-term prospects,
with a 7.3% Cagr to 2015
Import share of
consumption will rise to
18% by 2015
Chinas domestic coking
coal to only grow 5.5% pa



Indian coking-coal imports will be driven by two factors. Steel production
growth in the country will rise 40% over the next five years. Steel demand
in the country will rise at a faster pace, but production will lag demand
growth due to the difficulties in constructing steel mills in most states. A
further boost for imported coking coal will come from existing steel-
production facilities upgrading their furnaces. India currently has one of
the highest average coke rates in the world, due to the small scale and
older average age of its steel-making capacity. As existing producers
upgrade their facilities, they will increasingly demand higher-grade coking
coals, which can only be supplied from the seaborne market. This is the
reason we have Indian HCC imports rising by 112% over the next five
years, and our reasoning is explained in more detail in the demand section
of this report.
Supply remains constrained
HCC supply growth on the seaborne market will be mainly led by four regions,
Australia, North America, Mongolia and Mozambique. Australia already
supplies over half of the seaborne HCC market, mostly from the Bowen Basin
in Queensland, and this level of concentration is one of the main reasons why
prices have been so volatile, as weather or logistics issues in this one region
have such a wide reaching effect on the market balance.
Figure 27
Global coking-coal seaborne export market
(mt) 2007 2008 2009 10CL 11CL 12CL 13CL 14CL 15CL
Seaborne total 220 231 226 271 309 338 362 382 395
Australia 139 139 139 154 171 179 181 185 187
Mongolia 3 4 6 13 19 25 33 41 43
China 3 2 1 1 1 1 1 1 1
Other Asia 2 2 2 3 4 7 8 10 12
Canada 26 27 24 27 32 36 39 40 40
US (ex Canada) 26 35 32 48 55 59 62 62 62
Mozambique 0 0 0 0 0 3 5 10 16
CIS 11 13 13 15 17 19 23 24 25
Other 11 9 8 10 11 10 10 10 10
Apparent deficit 9 2 (9) 1 (10) (13) (14) (12) (8)

Figure 28
Global HCC seaborne export market
(mt) 2007 2008 2009 10CL 11CL 12CL 13CL 14CL 15CL
Seaborne total 144 155 148 185 211 234 248 263 273
Australia 76 77 75 86 95 100 100 103 103
Mongolia 2 2 3 8 11 14 18 22 23
China 1 1 1 0 0 0 0 0 0
Other Asia 3 3 3 4 5 8 9 11 13
Canada 23 24 22 24 28 32 35 36 36
US (ex Canada) 26 35 32 48 55 61 62 62 62
Mozambique 0 0 0 0 0 3 5 10 16
CIS 6 7 7 8 9 10 12 12 13
Other 8 6 6 7 8 7 7 7 7
Apparent deficit 8 (18) 18 1 5 4 9 16 15
Indian demand driven by
steel expansions and
furnace upgrades
Australia is the
major player in the
seaborne coking-
coal market
Rising structural deficit
for HCC as supply
growth is lacking
Mongolia and
Mozambique will see the
fastest growth in supply



In terms of industry concentration by company, BHPB/Mitsubishi alliance
(BMA) controls more than 55% of Australias HCC exports, and 33% of the
total seaborne market. As seaborne coking-coal supply increases over the
next five years, BMA will see its market share decline to 19% by 2015,
though its share of Australian exports will be sustained at 55%.
Mongolian exports have been growing strongly in the past couple of years,
and recently replaced Australia as Chinas largest source of coking-coal
imports. Despite being next to China however, logistics costs are not cheap
given the lack of rail capacity in the region, while on a quality basis only
around half of Mongolias coking-coal volumes are truly HCC as outlined later
in the supply section of this report.
Mozambique has been a major focal point of investment in coking coal, and
will see first shipments from Vales Moatize mine in late 2011, with Riversdale
soon to follow from its Benga mine. However, despite the large-scale, high-
quality reserve base, logistics constraints will limit the production ramp-up for
the next few years.
Elsewhere, North American producers have seen a surge in exports this year,
but are unlikely to see much more growth in the years ahead due to logistics
constraints, while in Russia coking-coal exports from the east coast ports will
see a significant jump as the Mechels Elga project ramps up.
While we see total seaborne coking-coal supply having a 7.8% Cagr and HCC
having an 8% Cagr over 2011-15, we view demand as being more than
strong enough to absorb this supply. In fact there is a growing structural
deficit of HCC over our forecast time period, which will have to be reflected in
widening price premiums.
Figure 29
Coking-coal price forecasts (nominal)
Hard coking coal 171 191 210 230 200 200 167
PCI coal - 150 168 184 160 160 126
Total CC demand 217 272 299 325 348 370 387
Total CC supply 226 271 309 338 362 382 395
CC supply deficit (9) 1 (10) (13) (14) (12) (8)
HCC demand 166 186 216 238 257 279 288
HCC supply 148 185 211 234 248 263 273
HCC deficit 18 1 5 4 9 16 15
Shanxi coal is unwashed, ex VAT. Source: CLSA Asia-Pacific Markets
Price forecasts - Chinese cost inflation the key
To assess the long-run price of coking coal we look toward the global cost
curve, and particularly the costs for new suppliers. As the total seaborne
market for coking coal will see significant demand growth, the coking-coal
price will need to rise to a level which incentivises new supply. Currently, the
highest cost traditional large-scale coking-coal suppliers, on a CFR China
basis, are the North American mines at more than US$120/tonne, while some
of the smaller producers are over US$150/tonne.
Mongolian exports will
see the most growth
Global demand for HCC will
grow faster than supply
BMA will see declining
market share
Prices premiums will
widen reflecting HCC
supply deficit
North American suppliers
are highest cost in the
seaborne market
Mozambique will be a
major new supplier
North America and Russia
contribute some growth



The two alternatives to seaborne supplies for Chinese steel mills are domestic
coking coal, which comes mainly from Shanxi, or overland imports from
Mongolia. It is the costs of these producers which will set Chinas appetite for
seaborne imports and hence the long-run seaborne price for coking coals.
Shanxi provides the vast majority of Chinas coking-coal output. The
consolidation efforts in Shanxi are the main factor causing a rise in Chinas
imports for coking coal, especially hard coking coal.
Figure 30

Figure 31
China coal output by type

Shanxi coal output by type
Thermal
coal
63%
Coking
coal
37%

Thermal
coal
49.8%
Coking
coal
50.2%
Source: Sxcoal, CLSA Asia-Pacific Markets
The consolidation process and drives to improve mine safety in Shanxi have
seen many small mines there close. The number of mines in the province has
been reduced from more than 4,500 to only 1,063, of which 136 are SOEs
and 927 are local mines, of which 30% of those are truly private and the rest
have mixed ownership. Output from small and medium mines has declined
from more than 30 million tonnes per month in 2007 to only 22 million tonnes
per month in 1H10. The minimum size for the mines post consolidation is
about 300ktpa, and most of the still operating small mines are relatively new
ones which were built to a decent safety standard.
Figure 32
Shanxi coal mine consolidation
0
200
400
600
800
1,000
1,200
1,400
2003 2004 2005 2006 2007 2008 post
consolidation
(mtpa)
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000 (No.) Capacity (LHS) No. of mines
Source: Fenwei, CLSA Asia-Pacific Markets
Recent visits to Shanxi give the impression that mine output will recover in
the coming years, albeit at rather a slow pace. The SOE consolidators
complain that with so many small scale, often illegal, mine shafts scattered
around the now consolidated large deposits, the new owners are struggling to
Shanxi is the major
source of China domestic
coking-coal supply
Numbers of mines in
Shanxi dropped greatly
due to consolidation
Some deposits have been
ruined by illegal mines, so
output will recover slowly
China can alternatively
source from Mongolia
Shanxi has the greatest
share of coking coal
Production will recover
post consolidation



come up with viable mine plans. In many cases the remaining deposit looks
like Swiss cheese with multiple holes through the best bits, so the SOE
owners are unlikely to even try to restart production from some deposits as it
looks unsafe to do so.
In terms of Chinese costs, these have already jumped by over 30% in the
past two years as the rising focus on safety and environmental issues have
combined with a need for mines to go deeper and deeper underground into
more complex geology as resources are increasingly consumed. Some mines
now extend so deep and wide that it takes miners up to two hours to get to
the active coal face.
Cash costs of production in Shanxi are still low compared to current prices. The
pretax cost for mining, washing and loading coking coal is between Rmb350-
400/tonne for most mines in the province, with SOE mine costs generally
higher than the smaller ones as the only existing small ones now are newer,
more efficient ones. We expect structural mining issues will cause real mining
costs to inflate at least 5% a year.
Figure 33
Shanxi coking coal total cost delivered to Shanghai, 2010
0 100 200 300 400 500 600 700 800
Mining cost
Overheads
Taxes and fees
Railway loading
Railway
Railway construction fund
Port handling
Other
Ship to Guangdong
Port unloading
(Rmb/t)

Figure 34
Shanxi high cost mine delivered to Shanghai, 2010
0 200 400 600 800 1,000
Mining cost
Overheads
Taxes and fees
Railway loading
Railway
Port handling
Other
Ship to Guangdong
Port unloading
Port unloading
(Rmb/t)
Shanxi costs are low
compared to current prices
Safety issues have
contributed to a 30%
jump in mining costs
Current cost for Shanxi
coal to costal steel mills is
around US$120/tonne
High cost mines mainly
suffer higher mining cost
and logistics charges



In terms of total costs, logistics can easily add up to more than
Rmb250/tonne from Shanxi to a coastal steel mill (see the China
infrastructure section, page 61). Royalties add another Rmb12/tonne
currently, but under the likely resource tax reforms could well exceed
Rmb35/tonne. There are many other taxes payable for mines in Shanxi,
including environmental fees, safety fund and mineral resource compensation
fund contributions among others. After adding in other non-mining costs such
as sales and management of Rmb60-70/tonne the total cost base for an
average Shanxi coking-coal mine is easily above Rmb750/tonne or
US$115/tonne at current exchange rates. The highest-cost mines with
washing yields below 60%, which by some industry estimates account for
20% of production, have a cost of over Rmb900/tonne delivered to a coastal
steel mill, or US$135/tonne.
Assuming the resource tax is switched to a 4% base, this could increase all
coking-coal costs by Rmb20-25/tonne. Over time, Chinese costs for labour,
safety equipment and general inputs will be growing well ahead of basic
global inflation levels, and the renminbi will continue to appreciate against the
dollar at a rate of 4-5% pa according to our economists.
In total, if we add the tax changes and then inflate Chinese costs in real US
dollar terms by 10% pa through 2013, then 5% pa after that, this puts the
average mine costs in 2010 US dollar terms at US$158/tonne delivered to a
coastal mill, with the highest cost mines up to US$185/tonne. We believe
there would be some scope for efficiency gains and cost reductions in the
logistics chain as capacity improves, but even so it looks certain that the
highest cost Chinese HCC supply will be comfortably above a US$150/tonne
cost level delivered to a coastal Chinese steel mill.
Some 55% of the cost increase is driven by renminbi appreciation, with
further contributions from mine cost appreciation, general inflation and taxes.
Figure 35
Coking-coal cost drivers, 2010 to 2015 change
0
5
10
15
20
25
30
35
40
45
50
Mining costs Taxes General inflation Rmb appreciation
(US$/t)
Mongolia the main alternative to domestic supply
We use the cost of Mongolian coking coal as a check against our implied price
on the seaborne market. If Mongolian coking coal was substantially lower
cost, we would expect mines there to massively increase export volumes over
time, and displace the high-cost suppliers in the seaborne market.
Highest-cost mines above
US$135/tonne
Rising renminbi
accounts for 55% of
cost appreciation
Inflation and renminbi to
drive cost appreciation
Resource tax could add
cost pressure
Mining costs are low, but
logistics are high



While mining costs in Mongolia are generally low, the combination of VIU
(value-in-use) discounts for quality, and logistics costs to move coal to the
Chinese border, then through Chinas largest coal production base to the
coast and on to steel mills on the east coast, mean that its total cost is not
significantly below our expectation for long-run seaborne prices even after
assuming decent rail logistics are put in place.
The lowest total cost for Mongolian coking coal is currently around
US$150/tonne delivered to Shanghai (this is explained in more detail in the
Mongolian section of the supply chapter). Costs in Mongolia could develop in
two ways. We could see cost improvements if miners are able to build the
desired infrastructure, such as rail and wash plants, and a free-trade
agreement which lowers border crossing costs. Alternatively, we could see
costs continue to inflate, especially given the considerable investment
planned for the remote areas of Mongolia, which could lead to significant
input cost inflation, in addition to currency pressures.
Figure 36
Mongolia coking-coal total cost delivered to Shanghai, 2010
0 20 40 60 80 100 120 140 160
Mining
Truck 1
Border fees
Truck 2
Washing
Truck 3
Rail to port
Port fees
Shipping
Port fees
(US$/t)
Source: CRR, CLSA Asia-Pacific Markets
One caveat of overly relying on the Mongolian mining costs is the currency
impact. Given the proposed investments in coal, copper and other mining in
Mongolia, we would expect the currency to appreciate substantially over the
next decade. Indeed between March 2009 and November 2010 the Mongolian
tugrik has already appreciated by 25%, from 240 per US$1 to 192 per US$1.
Being a relatively small country, the authorities could try to limit this
appreciation by pegging the tugrik to the renminbi, rouble or US dollar. Given
the strong sense of independence in the country it is doubtful they would peg
to the renminbi despite the economic links, so the US dollar would be the most
likely option. However, this would bring negative consequences elsewhere in
the economy, and while other small countries seem able to cope with pegs, we
believe appreciation would still be the best option over time.
Under the optimal cost scenario, such as that planned by MCC building its
own wash plants and rail, combined with moderate currency appreciation and
a free-trade deal, we could see delivered HCC costs in 2015 from Mongolia to
Shanghai at US$130/tonne in 2010 real terms.
Mongolia currency may
appreciate substantially
over the next decade
Current Mongolia coking
coal cost to Shanghai is
around US$150/tonne
Mongolian coal could be a
swing supplier to China
Current Mongolia coking-
coal cost breakdown
Limited options to
prevent currency
appreciation
Cost Mongolia coking coal
to Shanghai could reduce to
US$130/tonne in 2015



Figure 37
Mongolia coking coal delivered cost to Shanghai, 2015 optimal
0 20 40 60 80 100 120 140
Mining
Washing
Rail 1
Border
Rail 2
Port fees
Shipping
Port fees
(US$/t)
We believe a more likely scenario of moderately higher cost inflation and
currency appreciation will result in costs above US$155/tonne in real 2010
terms for the most efficient producers with captive infrastructure.
Figure 38
Mongolia coking-coal transportation cost to Shanghai, 2015 likely
0 20 40 60 80 100 120 140 160 180
Mining
Washing
Rail 1
Border
Rail 2
Port fees
Shipping
Port fees
(US$/t)
The total change from 2010 would not be significant, as efficiency gains from
improved logistics and trade terms would largely offset the cost increases and
currency appreciation.
Figure 39
Mongolia coking-coal transportation cost change, 2015 likely versus 2010
0 10 20 30 40 50 60
RMB appreciation
Tugrit Appreciation
Input cost inflation
Trade agreement savings
Logistics savings
Net cost increase
(US$/t)
Cost more likely to be
US$155/tonne in 2015
Optimal scenario involves
improved infrastructure
and free trade deal
Cost of US$155/tonne for
those with captive
infrastructure; higher for
smaller players
Logistics savings are the
main hope for lower costs



However, if producers are unable to change the current logistics structure,
and currency appreciation is more aggressive, we could see costs spiralling
above US$215/tonne delivered to Shanghai, making Mongolian coking coal
uneconomic for all but the northern Chinese steel mills.
Figure 40
Mongolia coking-coal transportation cost to Shanghai, high cost 2015
0 50 100 150 200 250
Mining
Truck 1
Border fees
Truck 2
Washing
Truck 3
Rail to port
Port fees
Shipping
Port fees
(US$/t)
In conclusion, we choose to set our long run HCC price from 2015 at
US$150/tonne FOB Australia in real 2010 terms. The analysis above shows
that neither Shanxi nor Mongolian coal is economically feasible for south/east
coastal steel mills at a delivered price of US$150/tonne, and even
US$160/tonne will still be a struggle. Moreover, we believe the risks to costs
are to the upside, especially given the Mongolian currency issue. A
US$150/tonne FOB Australia price would equate to about US$160/tonne
delivered to a Chinese steel mill, after allowing US$8/tonne for long-run
freight and US$2/tonne for port handling, which appears more than
competitive with Shanxi and Mongolian coal. Australian HCC will also benefit
from a quality premium for most grades.
Interim prices - Pressure remains in the near term
For short-term price forecasts, we see increasing upside to prices in 1Q11.
Spot HCC prices have averaged US$215/tonne mid-way through 4Q, and this
is amid a weak steel market in China. Additionally, rains in Queensland have
already put additional pressures on the market, though to some degree this is
priced in and should cyclones not occur could actually be a downside risk to
prices. We look for benchmark HCC prices to rise to US$215/tonne in 1Q, and
average US$210/tonne for the year as a whole as we expect Chinese steel
demand to be depressed post stimulus.
Beyond 2011, we do not see significant supply growth to pressure prices lower
before 2013, and assuming our Indian demand profile, perhaps before 2015.
This would imply prices can continue to see a comfortable margin ahead of
costs for a few years yet, before returning to long-run prices. With a recovery
in global steel markets into 2012, we see coking-coal prices rising further.
The price dynamics between different coking coals is another variable in our
forecasts. 4Q10 prices saw a significant disconnect in prices for various
qualities, with HCC prices declining 8% QoQ, while semi-soft prices fell 18%
on average.
Costs above US$215/tonne
if no improvement in
infrastructure
These costs would
be uneconomic
We set our long-run
HCC price at
US$155/tonne
FOB Australia
We see increasing upside
to prices in the short term
Prices will peak in 2012
Price premiums
will widen



How wide can price differentials get? As HCC premiums rise, we would expect to
see steelmakers look to using more PCI in their burden, and reduce HCC usage
to the minimum which is structurally required to hold up the burden (see
Appendix 2 for technical details). However, quality PCI coals are also not plentiful
in supply, so if too many steelmakers chase these, its price could increase closer
to HCC prices. Additionally, steelmakers have been put off from using more PCI
as this product has seen the most pricing volatility in recent years.
We forecast the semi-soft coking-coal price discount versus premium HCC to
widen from the 27% average in 2010 to a 36% discount by 2015. Any greater
discount than this and the semi-soft price will become close enough to
thermal coal to not warrant producers efforts in processing. Given the market
tightness and increasing attraction of switching to PCI, we forecast PCI
discounts to narrow to 20% from HCC through 2014, before settling at a
long-run discount roughly 25% below HCC prices.
Pricing dynamics
There has been a structural shift in pricing. Traditionally, prices were set on an
annual benchmark based on the Japanese fiscal year (April to March). Prices for
hard coking coal were agreed and then the lower-value coking coals were
priced according to the hard coking-coal price. The presence of more frequent
price setting reduces the gaming of the system by both buyers and sellers,
and should lead to reduced volatility in prices and shipments. One impact of the
switch is that the liquidity in the spot market has dried up, given that producers
are able to get prices more in line with market conditions every quarter so are
happy to continue shipping on a contract basis. The spot market has thus been
reduced to only a few cargoes a month to India and China. Overall the pricing
system doesnt change the structural underlying dynamics of demand and
supply, so has little impact on our price view.
Key risks to our price forecasts - Upside
Chinese steel production has slowed sharply in 2H10 on the back of energy
intensity cuts. While we believe the low steel prices indicate that underlying
demand is entering a softer period post stimulus which could last until 2H11,
it is possible that steel production recovers faster than we expect. Strong PMI
data, buoyant consumer sales for autos and appliances, and high housing
starts this year boosted by social housing could all contribute to steel
production being higher than the 5.5% we expect. If this happens, coking-
coal prices could be sharply higher than we forecast.
In a scenario where Chinese steel production achieves a Cagr of 8.5% for the
next five years, compared to our base case of 7.3%, Chinas coking-coal
imports in 2015 would be 26 million tonnes higher than our base case, with
HCC 22 million tonnes higher, assuming that the higher prices incentivise a
domestic supply response which fulfils half of the additional demand growth.
Figure 41
Chinese steel growth sensitivity
China CSP base case 568 630 665 716 772 835 897
Coking-coal imports 35 45 62 80 89 97 107
HCC imports 26 35 52 66 73 79 86
HCC prices 171 191 210 230 200 200 167
China CSP high case 568 630 684 742 805 874 948
HCC imports 26 35 61 77 86 98 108
HCC prices 171 191 210 250 220 220 167
Note: Shanxi coking coal is near HCC grade, but unwashed and ex VAT. Source: CLSA Asia-Pacific Markets
PCI discount to HCC will
narrow while semi-soft
coking-coal discount to
HCC will widen
Faster production
recovery in 2011 will put
upside risk on price
Steel mills will try to
switch further to PCI
from HCC
New pricing system will
lessen volatility, but no
change to price outlook
Chinas import of coking
coal would have to rise
Higher Chinese coking-
coal imports would
raise prices



While we expect a subdued 2011 for steel production in China, we also look
for a weak year in the rest of the world too given our economics teams
pessimistic view on OECD macro. If OECD macro and hence steel demand are
stronger, this could again add tightness to the seaborne market.
With Queensland supplying almost 50% of seaborne HCC, severe weather
impacts in the region could reduce supply, sending prices sharply higher.
Heavy rains in 1Q08 were the key driver for spot HCC prices reaching
US$400/tonne, and a repeat of such supply disruptions could see a repeat of
those price levels. However, expectations for disruption are already high given
the La Nina weather cycle is expected to cause a higher-than-normal number
of cyclones this year, so there is also potential that a quieter than forecast
season could add downside to prices.
Further tightening of mine safety issues in China, possibly caused by another
serious accident in Shanxi, could reduce Chinese domestic coking-coal supply
further. We are forecasting Chinas coking-coal production growth recovering
to a 5.5% Cagr over the next five years, after struggling since 2007. If this
was cut to 2.5%, it could provide a need for an additional 70 million tonnes of
imports by 2015.
Figure 42
Chinese coking-coal supply - Base case
(mt) 2007 2008 2009 10CL 11CL 12CL 13CL 14CL 15CL
Crude steel prod 489 503 568 630 665 716 772 835 897
Pig iron prod 477 469 544 609 641 686 746 807 863
CC consumption 334 328 381 382 387 401 434 469 498
Domestic CC 350 339 347 45 62 80 89 97 107
Imported CC 6 7 35 45 57 70 83 94 107
Exported CC 22 18 1 1 1 1 1 1 1
Import share (%) 2 2 9 11 14 17 17 17 18

Figure 43
Chinese coking-coal supply - A 2.5% domestic production Cagr
(mt) 2007 2008 2009 10CL 11CL 12CL 13CL 14CL 15CL
Crude steel prod 489 503 568 630 665 716 772 835 897
Pig iron prod 477 469 544 609 641 686 746 807 863
CC consumption 334 328 381 426 448 480 522 565 604
Domestic CC 350 339 347 382 392 401 411 422 432
Imported CC 6 7 35 45 55 78 110 142 171
Exported CC 22 18 1 1 1 1 1 1 1
Import share (%) 2 2 9 11 12 16 21 25 28
Greater renminbi appreciation is more of a risk to prices in the medium and
longer term. We are already assuming a 4-5% pa appreciation for the next
few years, but a sudden one-off revaluation could boost Chinas purchasing
power and appetite for imports ahead of more expensive domestic supply,
adding upside risk to prices.
Figure 44
HCC price forecasts - Renminbi scenarios (nominal)
(US$/t) 2015 (Rmb) 10CL 11CL 12CL 13CL 14CL 15CL
Base case 4-5% pa 5.5 191 210 230 200 200 167
No appreciation 6.6 191 200 210 175 165 137
Slower case 2% pa 6.0 191 206 218 184 180 152
Faster case 6% pa 4.8 191 212 235 208 212 175
Weather disturbance in
Australia is another
upside risk
Further tightening of mine
safety and greater renminbi
appreciation can drive up
domestic Chinese costs
Our base case is for 5.5%
pa domestic supply growth
If supply only grows
2.5%, imports would rise
70 million tonnes by 2015
Disruption to exports from
Queensland could send
prices sharply higher
Prices are very sensitive
to renminbi assumptions
Long-run prices may be
under US$140/tonne if
there is no renminbi rise



Key risks to our price forecasts - Downside
Slower Chinese steel demand growth than we forecast would be a serious
downside risk to prices. While our 5.5% growth in Chinese steel production in
2011 is already below consensus, a sharper than expected cooling in the
economy post stimulus, or external economic shocks from a double dip or re-
emergence of worries over debt in the OECD, could all provide downside to
our demand forecasts.
If we look at a scenario where China sees zero steel production growth in
2011, followed by a 7% growth from then on, demand for imported coking
coal would be about 20mtpa lower over the forecast period assuming slightly
less domestic coking-coal production as well. This would eliminate the
tightness in the HCC market, and likely keep prices comfortably below the
US$200/tonne level for the forecast period.
Figure 45
Chinese steel growth sensitivity
China CSP base case 568 630 665 716 772 835 897
HCC imports 26 35 52 66 73 79 86
HCC prices 171 191 210 230 200 200 167
China CSP low case 568 630 630 674 721 772 826
HCC imports 26 35 37 46 53 57 66
HCC prices 171 191 190 180 170 170 167
Note: Shanxi coking coal is near HCC grade, but unwashed and ex VAT. Source: CLSA Asia-Pacific
Markets
Closer cooperation between Mongolia and China to lower Mongolian delivered
costs and increase their export volumes would be a threat to our medium and
long run price forecasts. Border fees currently represent US$20/tonne for
Mongolian exports, while the argument over Chinese and Russian gauge rail
within Mongolia is proving a serious delay to miners infrastructure hopes. If
the two countries were to cooperate more closely, perhaps signing a free
trade agreement, this could substantially reduce Mongolian coal costs on a
delivered China basis, and thus allow them to raise their export volumes and
lower long-run prices nearer to a US$130-140/tonne level.
Alternative steel and coke-making technologies which allow for use of lower
grade coking coals are limited at the moment, and unlikely to become a
significant factor in the medium term. Technological developments are likely
to focus on alternative iron-making technologies which look to utilise lower
grade raw materials, as well as improve environmental efficiencies, such as
Finex and HIsmelt. However, both of these have struggled to role out beyond
small scale demonstration plants as the existing steel-making technology is
well known and in China, relatively cheap to construct. However, the adoption
over time, or additional technological breakthroughs, could provide downside
to our price views, especially regarding the premiums for HCC.
The emergence of more steel scrap in China is a serious long-term threat to
coking-coal demand. As China is an emerging economy, it has a very small
scrap pool, but this will expand rapidly later this decade, thus negating the
need for virgin iron units. If scrap emerges as Chinas steel production peaks,
demand for coking coal in China could turn negative year by year, but this is
unlikely to happen until 2018-20. For more details on the potential threat from
scrap, please see Appendix 3 on Chinas long-term steel industry outlook.
Scrap will limit Chinas
coking-coal demand in the
long term
Sharper post-stimulus
slowdown in China can
eliminate market tightness
Mongolia coal cost can be
reduced through better
cooperation with China
Zero steel production
growth in China in 2011
would push HCC prices
below US$200/tonne
Prices would be sharply
lower if steel production
in China disappoints
Technological
developments could harm
long-term demand growth

Section 3: Demand drivers - China and India Coal outlook


Demand drivers - China and India
The demand drivers for coking and thermal coal are very different. For this
report, we will analyse the demand by product, and sub-categorise by
region. Thermal coal is probably the only commodity which is not going to
be driven by demand growth in China over the next few years, as it is the
take off in thermal generation in India which will be driving this market
from a gross demand perspective. Coking coal will also see a demand
boost from Indias development, but that remains more of a longer-term
forecast. Coking coal, particularly hard coking coal, will remain a China
story for the near future.
Just under one-third of the worlds primary energy demands are fed by coal,
and coal was used to produce 41% of the worlds electricity in 2009. The
main consumers of coal from the seaborne traded market are countries which
lack in domestic coal supply, namely Japan, Korea, Taiwan, the UK, and
countries which have plenty of coal themselves but not enough to meet all
their needs, such as India and Germany.
Thermal coal - Accelerating
China - Powering down, but imports will take share
For thermal coal, China will remain an optional importer, with southern power
plants choosing to import if seaborne prices are cheap, but easily switching
back to domestic supply if prices rise too far.
Figure 46
Chinas coal consumption by sector
Fertilizer
(incl other coal-based
chemicals)
4%
Cement
(incl other construction
materials like glass)
14%
Steel
16%
Other
17%
Power
generation
49%
Total coal consumption
in 2009 = 3.2bn tonnes

Used by households, steam locomotives and other end-users. Source: CCTD, CRR
Chinas thermal-coal imports have risen from 13 million tonnes in 2007 to 39
million tonnes in 2009, and an annualised 60 million tonnes over 1H10. On a
net basis, China has switched from being an exporter of 32 million tonnes in
2007 to net imports of 20 million tonnes in 2009. Thermal coal accounts for
about 30% of Chinas coal imports.
Coking coal remains a China
story while thermal coal
will be benefit from India
Half of coal consumed by
power sector in China
Coal supplied 40% of the
worlds electricity in 2009
Economics of local supply
will drive Chinese thermal
coal imports
Thermal coal accounts for
30% of Chinas imports



Figure 47
China thermal-coal imports and exports
(40,000)
(30,000)
(20,000)
(10,000)
0
10,000
20,000
30,000
40,000
50,000
2007 2008 2009 2010 Jan-Sep
Thermal coal import Thermal coal export Net import ('000 t)
Source: CCTD, CLSA Asia-Pacific Markets
Unlike coking-coal demand, which we expect to see solid growth in the years
ahead, for thermal coal we expect demand to slow significantly, as the
economy rebalances away from investment driven growth which has spurred
the development of heavy industry and hence power consumption. As
explained in detail in Appendix 5, from our September 2010 Chinas energy
binge report, Chinas economy will be moving away from investment-led
growth, and this will translate into substantially lower rates of power
consumption, as witnessed in the development of Japan and Korea.
The three challenges China faces are reducing the energy consumption per
unit of economic output, changing the mix of that energy towards greener
energy and reducing the environmental pollution from energy being
consumed. Achieving these objectives involves economic, legal, political and
social reforms, but as they are achieved the pace of demand growth for coal
will slow substantially.
With Chinas energy consumption growth slowing amid economic
restructuring, and an increased focus on new power supply from gas, nuclear
and renewable sources, Chinas thermal-coal consumption growth looks likely
to be subdued in the years ahead. Our forecasts for Chinas energy
consumption growth over the next 10 years are for a Cagr of 4.8%, while for
thermal-coal generation we only expect a Cagr of 3.1%.
Chinas overall energy mix is set for a big change with a fairly sharp drop in
the share of coal and a rise in the share of natural gas, oil and renewable
energy capacity as is evident from Figures 48 and 49.
Wind power will experience the highest increase in capacity share among all
available technologies, rising from 3% in 2010 to 12% in 2020 and 18% in
2030. While wind will have the highest incremental share in capacity, the
technology with the biggest portion in actual power generated will be nuclear.
This is because of the much higher utilisation levels for nuclear (more than
80%) compared with less than 25% for wind and solar. We expect nuclear to
account for 7.9% of power generated by 2020 and 15.1% by 2030.
Power consumption in
China will slow as the
economy rebalances
Three challenges are
energy intensity, energy
mix and pollution
Chinas energy mix in for
a big change
Wind power will
experience the biggest
rise in terms of capacity
Thermal-coal demand will
grow slower than total
power demand
China used to be an
exporter of coal,
but no longer



Figure 48
Chinas total energy consumption trend by fuel/technology
0
1,000
2,000
3,000
4,000
5,000
6,000
2003 2006 2009 2012 2015 2018 2021 2024 2027 2030
Hydro, nuclear, wind, solar, others
Natural gas
Oil
Coal
(m tonnes)

Figure 49
Share of various fuels, technologies in Chinas long-term energy mix
0
20
40
60
80
100
2003 2006 2009 2012 2015 2018 2021 2024 2027 2030
Coal Oil Natural gas Hydro, nuclear, wind, solar, others
(%)

Source: CEIC, CLSA Asia Pacific Markets
While the near-term demand for coal (2011-13) is relatively robust (also
supported by potential implementation of Nitrogen Oxide control norms) at about
5%, we expect a sharp slowdown from 2014 due to a steep decline in coal-fired
power generation as well as a slowdown in production of steel, aluminium and
cement, among others. We expect thermal-coal demand to slow to about 2-3%
in 2014-16 before slowing further to about 1% or less in the following years.
Figure 50 Figure 51 Figure 52
Chinas mix of power generated
2010
Hydro
15.6%
Nuclear
1.7%
Wind
1.3%
Gas
2.7%
WTE
0.1%
Other
0.9%
Coal
77.7%

2020
Hydro
15%
Nuclear
8%
Wind
6%
Gas
4%
Solar
1%
Other
2%
WTE
1%
Coal
63%
2030
Wind
9%
Hydro
14%
Coal
51%
Other
3%
WTE
1%
Solar
2%
Gas
5%
Nuclear
15%
Source: CEIC, CLSA Asia-Pacific Markets
CLSAs energy
mix forecast
Coal will experience a
sharp slowdown in
demand around 2014
Share of wind, solar,
nuclear and gas to rise at
the cost of coal



Coal will remain the king - But one with shrinking turf
Despite the increase in share of non-coal power capacity, power generation
through coal-based capacity will remain the largest in China in 2020 as well
as 2030. However, the share of power generated from coal will shrink
considerably over this period. We expect the share of coal in total power
capacity to come down from 71% in 2009 to 52% in 2020 and 42% in 2030.
While the portion of coal-fired capacity in total generation should come down
from 78% in 2010 to 63% in 2020 and 51% in 2030.
In the past decade, thermal power (primarily coal) accounted for 74% of net
new installed capacity, hydropowers share was 20%, wind 5% and nuclear
had 1% share. In the next decade, we expect the share of coal to shrink to
less than half at 36%, wind at 24%, hydro 14%, nuclear 9% and gas 5%.
During the decade ending 2030, winds share in net new installations rises to
35%, followed by nuclear at 22%, hydro 14%, solar 10%, gas 7%, biomass
6% and waste to energy at 3%.
Overall, thermal and coal-power capacity additions are already down from
their peak of about 96GW in 2006. However, capacity additions have picked
up again in 2009 after a sharp fall in 2008. Based on the capacity already
under construction, we anticipate 2010 additions to be at similar levels and a
gradual decline in 2011. However, we expect capacity additions to start a
steady decline from 2012.
We have assumed that the shutdown of old and inefficient capacity
continues at about 10GW per annum beyond 2010. This number could be
higher if the government is stricter, allowing gross capacity additions to
grow at a faster pace than we are forecasting. The shutdown is likely to
accelerate from 2020 as the capacity China added in the mid-1990s
approaches its retirement life of close to 25 years. Towards the late-2020s,
Chinas coal and thermal power capacity additions are likely to turn
negative as the plants added by China during its boom period after 2002
start to reach retirement age.
Figure 53
Gross and net thermal power capacity additions forecasts
(20,000)
0
20,000
40,000
60,000
80,000
100,000
120,000
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
1
0
C
L
1
1
C
L
1
2
C
L
1
3
C
L
1
4
C
L
1
5
C
L
1
6
C
L
1
7
C
L
1
8
C
L
1
9
C
L
2
0
C
L
2
1
C
L
2
2
C
L
2
3
C
L
2
4
C
L
2
5
C
L
2
6
C
L
2
7
C
L
2
8
C
L
2
9
C
L
3
0
C
L
(MW)
Net thermal additions Gross thermal additions
Source: CEC, CLSA Asia-Pacific Markets
Coal will still be the most
important energy resource
Thermal capacity
additions already down
from their peak
Thermal capacity additions
set to decline
Capacity shutdown
could be higher than
our estimates
Thermal capacity
additions will lessen in
favour of renewables



Apart from a higher share of renewable capacity and a slowdown in energy
intensive industry, improving energy efficiency will be another driver for the
slowdown in coal demand. We expect gradual efficiency improvements in
energy intensity for most industries.
Figure 54
Coal demand growth rate
(%)
(5)
0
5
10
15
20
2000 2005 2010 2015 2020 2025 2030
China is also experimenting with coal to liquid technologies to reduce its
dependence on imported oil. However, this increases Chinas dependence on
coal and hence is not an ideal solution to the oil shortage. The success of these
technologies will depend on oil prices and future development in technologies
which can make the conversion processes cleaner and more efficient.
As China still has plenty of thermal-coal reserves to exploit, it should
theoretically have no problem meeting its own demand growth with domestic
supply. However, we believe cost pressures and tighter domestic policies on
safety and environmental issues will restrict Chinas domestic coal output
while still encouraging imports. China will import a significant volume of coal
should the global price become cheaper than its domestic cost base as
happened in 2008. That is largely dependent on Chinas domestic inflation,
logistics network costs, and renminbi appreciation, and is discussed in the
supply section of this report.
Figure 55
Chinese import penetration
(mt) 2008 2009 10CL 11CL 12CL 13CL 14CL 15CL
Coal imports 34 92 119 130 150 180 230 255
Coal exports 43 22 19 10 5 5 5 5
Note: Thermal-coal consumption is washed basis. Source: NBS, CLSA Asia-Pacific Markets
India - Powering up
Demand for thermal coal in India will grow very strongly over the next few
years, as a recent spate of investment in thermal generation plants come into
operation. Nearly 75% of Indian thermal-coal consumption is by power
utilities, with the remainder mostly from heavy industrial plants.
Improving energy
efficiency lowers
coal demand

Coal to liquids unlikely to
become significant

Indian demand will be led
by significant power
capacity additions

Rising coal imports
despite the slowdown in
demand growth

Improving energy
efficiency will also cut
coal demand growth
China to see rising import
penetration for thermal coal




Figure 56
India power consumption by sector
Power - Utility
75%
Other
7%
Cement
6%
Power - Captive
8%
Steel (non-coking)
4%

Figure 57
Indias power demand basket - End-user breakdown
Domestic
27%
Commercial
8%
Irrigation
22%
Industry
35%
Others
8%
Source: CEA, CLSA Asia-Pacific Markets
We expect power demand to grow more or less at the same rate as GDP, as
India has a substantially smaller share of industrial output to GDP than China.
Industry is the largest part of the pie in overall power consumption in the
country. However the higher (and growing) share of services in GDP (which is
less energy-intensive than industry and agriculture) could lead to a continued
drop in elasticity of power demand. On the positive side, increasing industrial
activity, electrification of villages and rising power supply over the next couple
of years should all create additional demand for power.
To meet this strong demand, generating capacity is already seeing massive
investment, spurred by reforms earlier in the decade. In 2003, India passed
the Electricity Act, which ushered in a new era of reforms, leading to a
massive increase in new investment especially from the private sector.
Capacity addition over FY10-13 should exceed that in the past 10 years with
US$50bn being invested in the sector. In total India is likely to add about
50GW of total power capacity over the next three years.
Non industrial sectors
consume two-thirds of
Indian power

We expect demand
to grow at the
same rate as GDP
Power consumption in
industry is relatively low

We expect 50GW
addition in the 11
th
plan



Figure 58
Electricity-demand and real-GDP growth
0
2
4
6
8
10
12
F
Y
9
4
F
Y
9
5
F
Y
9
6
F
Y
9
7
F
Y
9
8
F
Y
9
9
F
Y
0
0
F
Y
0
1
F
Y
0
2
F
Y
0
3
F
Y
0
4
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
Demand Real GDP
Average demand Average GDP
(%)

Figure 59
Capacity-addition targets
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
F
Y
9
3
F
Y
9
4
F
Y
9
5
F
Y
9
6
F
Y
9
7
F
Y
9
8
F
Y
9
9
F
Y
0
0
F
Y
0
1
F
Y
0
2
F
Y
0
3
F
Y
0
4
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
F
Y
1
1
F
F
Y
1
2
F
11
th
plan 10
th
plan 9
th
plan 8
th
plan
12,282MW 19,015MW 21,095MW ~50,000MW
Coal-based power generation capacity (86GW) is 53% of the total installed
capacity (162GW) in the country and it contributes 66% of the generation (in
kWh). We have identified 105 thermal-generation plants currently in
operation throughout India, and another 59 which we expect to come into
production over the next three years.
Figure 60
Demand for thermal coal in power generation
Demand 426 451 542 603 657 711
Domestic supply 374 387 432 473 489 522
Imports 52 64 110 132 168 189
Indias thermal-coal capacity expansions have struggled to deliver in recent
years and we believe they are unlikely to accelerate in line with demand (see
supply section). Consequently, the ramp up in Indian thermal-power
generation will lead to a surge in import demand for thermal coal, heavily
weighted towards the next two years.
Growth in power
demand has lagged
behind that in GDP
Better performance in
achieving targets under
11
th
plan than in the past
The number of thermal
generation plants will rise
over 50% in three years
No production has
started for coal blocks
allocated after 2004
Ramp up in thermal
generation will require
more coal imports



The Ministry of Power expects coal imports for the power sector to increase
from 16 million tonnes in FY09 to 68 million tonnes in FY12. We expect the
imports to exceed these estimates significantly in FY12. For FY11, 35 million
tonnes of imports have been targeted for blending purposes for power
projects. The imports of dedicated imported coal based power projects alone
would be over and above this.
Figure 61
Demand/supply balance for coal for power in FY11 and FY12
(mt) FY11 FY12
Demand
Coal requirement for existing capacity 426 451
Coal requirement for FY11 additions 25 91
Total demand 451 542
Supply
Coal India 335 355
SCCL 31 33
Captive mines 22 22
Total supply 388 410
Gap 63 132
Imports required to fill the gap 43 90
Calculations are done for 85% PLF. Source: CLSA Asia-Pacific Markets
Figure 62
Actual and expected imported coal requirements (for power sector)
90
43
28
16
10 10
10
5
3 3 4
0
10
20
30
40
50
60
70
80
90
100
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10CL FY11CL FY12CL
Actual imports (mt) Requirement
This is only for utilities and does not include captive power projects. Source: Ministry of Power, CLSA
We believe it is too simplistic to assume that all gaps in domestic-coal
production would be filled up by imports, for example; there are many project
locations in the country where it would be uneconomical to transport the
imported coal from the ports. Thus, the utilisation rates for the projects
where imported coal is not an option would likely be cut if domestic-coal
supply is not available.
India has a number of geographical advantages to becoming a significant coal
importer. Given the volume of iron ore and other materials imported in China
from Brazil, there is a considerable surplus of empty ships making the return
journey. Thus ship owners will charge very low rates for vessels to carry a
coal cargo from Australia or Indonesia into India, en-route back to the
Atlantic market. Also, India is positioned significantly closer to Indonesia and
South Africa than Europe and North Asia, so will see a much cheaper landed
Coal imports are likely to
increase significantly over
the next three years
Official import forecasts
are conservative
India is well positioned
geographically to be a
coal importer
Some thermal plants
find it uneconomic to
import coal
There is a significant gap
between demand and
domestic coal supply



cost of coal. For energy this is not so important given energy is not traded
across borders, but for steel this is a significant advantage for the Indian steel
industry in turning increasingly toward coking-coal imports.
Other reasons why we are positive on Indias prospects to become a major
thermal-coal importer are that Indias coal is mostly located in the north and
northeast, and the logistics troubles of moving coal to the coast to ship around
the coast is very problematic, especially when that area is also one of the
major iron ore production bases. The presence of Naxalite rebels is also a
major barrier to further infrastructure investment in the area. Additionally,
India has an extensive coastline, so seaborne imports make considerable sense
for power plants located in the south and west of India as imported coal does
not need to travel too far inland. We believe these factors contribute upside to
our thermal-coal import volume forecasts. For more detail on this view see
Appendix 4 on Indias prospective power demand growth
North East Asia - Limited potential
For much of the last decade Japan, Korea and Taiwan have accounted for a
combined 35% of thermal-coal imports. Limited growth prospects both in the
energy intensive parts of their economies, combined with rising
environmental pressures, mean that their contribution to thermal-coal
demand is unlikely to change much in the future.
Japan is the largest single import country for thermal coal. After growing at a
near 7% pa pace over 2000-05, Japans thermal-coal imports have been
steady since 2006. Japans total power generation over the 2000-09 period
experienced a sub 1% Cagr, but thermal generation managed a 2% Cagr as it
benefitted from liberalisation of the market in 2000 and problems with
nuclear generators in the following years.
Figure 63
Japanese thermal-coal demand in power generation
0
10
20
30
40
50
60
70
80
90
100
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Total power coal consumption Coal imports ('000 tons)
Source: Ministry of Finance, Ministry of Trade and Industry (METI), CLSA Asia-Pacific Markets
Power-consumption growth should continue to track the subdued pace of
economic growth for the next few years. In addition to anaemic total demand
growth, thermal generation is also likely to lose market share as the rising
environmental focus encourages a shift towards cleaner fuels. Consequently,
we are expecting Japans thermal-coal imports to actually contract slightly
over the next decade.
Domestic infrastructure
constraints make imports
more attractive
Japan, Korea and Taiwan
account for 35% of
coal demand
Thermal generation in
Japan has outpaced total
power demand
Japanese thermal
generation has been flat
since 2005
We dont expect any growth
in Japanese imports



Figure 64
Korea power generation by fuel
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
2002 2003 2004 2005 2006 2007 2008 2009
Thermal Other (Gwh)
Source: Kepco, CLSA Asia-Pacific Markets
Korea has a similar story to Japan, in that thermal-generation growth has
outstripped total generation growth through the 2000s, but will lag from now
on. Between 2002-09 total power generation in Korea had a 5% Cagr, but
thermal generation had a 7% Cagr. Thermal-generation capacity in Korea has
risen from 16GWh to 24GWh, but there is very little expected in the way of
further capacity addition. Instead, investment in power generation is being
focused on nuclear and renewable, although the latter will be growing from a
low base. Given the relatively strong economic GDP forecasts for Korea of
5.5% pa for the next two years, will still have thermal-coal imports rising
over the next five years despite these relative trends against the industry.
Europe - Downtrend to continue
As with Northeast Asia, limited growth prospects in energy-intensive sectors
of the economy provide for an unexciting demand environment. In fact we
expect demand for thermal coal to decline over time as more aggressive
environmental policies encourage a switch to cleaner energy sources, while
plentiful gas supply from the CIS will serve to keep thermal-coal consumption
in electricity generation under pressure in the years ahead.
Figure 65
European energy consumption by fuel
Hydro
7%
Nuclear
10%
Gas
34%
Oil
33%
Coal
16%
Source: BP, CLSA Asia-Pacific Markets
European coal demand will
continue to decline amid
environmental pressures
Korean coal demand will
still grow on the back of
economic strength
Korean power demand
growth has been rapid in
line with the economy
Coal is a relatively small
share of European
energy consumption



According to the BP statistical review, European and CIS coal consumption
peaked in 1979 and has been declining ever since, by a total of 40% through to
2008. Over the same time period gas consumption has increased 80%. Since
2003 coal consumption has been declining at a 2.5% annualised rate. While
2009 was depressed by economic weakness, we would expect a continuation of
the trend in declining coal consumption, which will put pressure on the regions
thermal-coal imports, although these may be offset to some degree as coal
mines within Europe come to the end of their useful lives and rising
environmental pressures limit the possibility for output expansion.
North America - Absent from the market
Except for Canadian thermal imports from Columbia, North American coal
markets are largely self contained. Cheap gas prices and the abundance of
shale gas in the USA, combined with rising environmental pressures, could
actually lead to reduced demand for coal over the years ahead despite
economic growth. We therefore dont consider the North American market to
have any influence in growth on the demand side of the thermal-coal market.
Emerging markets - Plenty of potential
Asean thermal-coal consumption achieved a 5% Cagr in the five years to
2009, according to the BP statistical review. We expect economic growth in
this region to stay above a 5% pace for the next few years, and on this basis,
we would expect an acceleration in the regions thermal-coal demand.
Thermal coal has a relatively smaller share of power supply in this region
however. In particular, coal only provides 7% of Malaysias energy and 15% of
Thailands. For the region as a whole, coal only accounts for 23% of energy
consumption, with oil taking 43% and gas 29%.
Figure 66
Asean energy consumption by fuel
Gas
29%
Oil
43%
Hydro
5%
Coal
23%
Excluding Indonesia and Vietnam, coal supply in the region has achieved a
4% Cagr over the period. We expect the region to increasingly be supplied
with coal from Indonesia and Vietnam in the future, and thus have import
demand rising by a 4.5% Cagr through 2015.
Latin America is not very significant for coal, given that the region as a whole
only sources 4% of its energy consumption from coal. Hydro has a 28% share
of energy for the region as a whole and a 40% share in Brazil alone. With a
significant volume of oil and gas reserves in the region, we expect future
energy needs to be less coal intensive. Consequently, our growth forecasts for
thermal coal in the region are quite subdued.
North America has
little bearing on the
seaborne market
Latin America uses
little coal

European coal demand has
been falling since 1979
Emerging markets will
see accelerating growth
Import growth in Asean
region will accelerate
Coals share of energy
consumption lower than
oil and gas



The Middle East is another region which will be dependent on non-coal
sources of energy to feed its economic growth, while African consumption
(outside of South Africa), is growing from an extremely low base as to be
insignificant in our forecasts.
Coking coal
China - Import requirement rising strongly
Steel production accounts for more than three-quarters of Chinas coking-
coal consumption, with other coking-coal consumers being other
metallurgical industries.
Figure 67
Chinas coal consumption by sector
Fertilizer
(incl other coal-based
chemicals)
4%
Cement
(incl other construction
materials like glass)
14%
Steel
16%
Other
17%
Power
generation
49%
Total coal consumption
in 2009 = 3.2bn tonnes

Used by households, steam locomotives and other end-users. Source: CCTD, CRR
While steel production rose from 130 million tonnes in 2000 to more than 500
million tonnes in 2008, China remained largely self sufficient in coking coal,
importing only 6.9 million tonnes in 2008. China also managed to sustain
coke exports over that time, with exports peaking at 15 million tonnes in
2007, and declining to 12.1 million tonnes in 2008.
The year 2009 saw a major shift in Chinas coking-coal trade position, as the
world steel industry shut steelmaking capacity causing coal and coke prices to
collapse. Chinas coke exports dropped to only 540,000 tonnes in 2009, but
have since recovered, running at a five million tonnes annualised rate in
3Q10. Chinas coking-coal imports rose from 6.9 million tonnes in 2008 to
34.5 million tonnes in 2009.
Figure 68
China steel and coking-coal production growth
(20)
(15)
(10)
(5)
0
5
10
15
20
25
30
1992 1994 1996 1998 2000 2002 2004 2006 2008
China crude steel production YoY
China coking coal production YoY
(%)
was sufficient to support
steel growth until 2008

Steel production drives
Steel accounts for 16% of
Chinas coal consumption
China became a major
coking-coal importer
in 2009
The Middle East is another
region which doesnt use
much coal
Coking-coal production
kept pace with steel
demand until 2008



We expect China to continue the trend of moving towards larger blast
furnaces, which would translate to a higher consumption growth rate for
HCC over semi soft. It is also likely that we will see more steel mills in
China invest to take more PCI as a substitute for HCC. Around 10% of
Chinas current net coal consumption is PCI, and this has been increasing
over the past decade. According to one industry estimate, PCI injection
rates in blast furnaces have risen from under 130kg/tonne of steel in 2000
to near 160kg/tonne currently.
As Chinas domestic sources of coking coal have been suffering amid industry
consolidation (see supply section from page 79 for details), and seaborne
coking-coal prices collapsed in 2009, China began to turn to the global
market to feed its furnaces. Initially industry participants thought China was
just importing surplus global coal supplies as Western world steel producers
suspended purchases, but these import levels have remained surprisingly
resilient even as seaborne coking-coal prices have reaccelerated.
Figure 69
China coking-coal trade balance
(20,000)
(10,000)
0
10,000
20,000
30,000
40,000
2004 2005 2006 2007 2008 2009 2010
Jan-Sep
Net import from coke trade
Net import from coking coal trade
(kt)
Chinas coking-coal imports over the first three quarters of 2010 were 33
million tonnes, up 25% YoY. We believe domestic coking-coal output will
struggle to meet demand growth from steel mills in the years ahead, and
China will see rising coking-coal imports as a result. With Chinas steel mill
expansions being based on larger furnaces, structurally demand for hard
coking coal will outpace that for semi soft. The continuing increase in
technical requirements for the industry, with the industry policy now being for
a minimum 300-metre furnaces, also contribute to this structural shift in
demand towards higher grades. Additionally, despite steel demand gradually
shifting inland, major steel expansions are still planned largely on the coast,
such as the Baosteel and Wuhan projects in Guangdong, meaning imports will
have favourable logistics costs versus domestic coal supply.
Import of coking coal will
rise in China due to more
large blast furnaces and
coastal mills
Chinas PCI consumption
will continue to advance

The swing in Chinas trade
balance is structural



Figure 70
China crude-steel production breakdown
Non-coastal
32%
Costal
68%
We believe Chinas steel consumption still has significant growth potential for
the rest of this decade, albeit at a slowing pace (see Appendix 3 on Chinas
long-term steel demand). Chinas steel consumption only looks like growing
11% in 2010, a sharp slowdown from the 21% growth seen in 2009. We
expect steel consumption growth of only 5% in 2011, as stimulus-related
consumption, which has been the driver of demand in 2009 and 2010,
gradually comes off.
With this solid foundation for consumption growth, we forecast Chinas crude
steel output to achieve a 5.8% Cagr over the next 10 years. The growth rate
in coking-coal consumption will be slightly lower, but still above 5%, as scrap
recovery in China will rise later this decade.
Figure 71
China crude steel production versus coking-coal imports
0
100
200
300
400
500
600
700
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Coking coal consumption
Coking coal domestic
Coking coal imports
(%)
Source: NBS, CLSA Asia-Pacific Markets
One threat to demand growth for the premium coals could be the prevalence of
alternative steel-making technology, such as Finex or HIsmelt. Finex plants
aim to utilise lower grade raw materials to still produce a decent grade of steel
and raise environmental efficiencies. While they have achieved some success
with their small plants, it is debateable whether this will be replicable for larger
furnaces. Overall, we do not expect a switch to alternative steel-making
technologies being of a large enough scale to change the fundamental demand
picture in China for HCC imports, at least not within the next five years.
A 5.8% Cagr in Chinese
steel production
through 2020

Alternative technology in
steel-making is a long-
term threat

Two-thirds of Chinese
steel is produced in
coastal provinces

China steel consumption
still has significant
growth potential

Coking-coal imports will
feed most demand growth




Post 2020, coking-coal demand in China will suffer the same fate as iron ore,
that steel scrap will begin to emerge as a serious supply of iron units towards
the end of this decade, at a time when Chinas steel consumption has peaked,
thus negating the need for virgin iron units. From then on, the coking-coal
market will have to rely on new markets to maintain any consumption
growth. For more on scrap, see Appendix 3.
India - Slow pace of steel expansions limiting growth
We see Indian steel demand growing strongly in the years ahead as we have
a bullish outlook on Indias economic growth and particularly steel-intensive
infrastructure spending which we expect to step-up over the next few years.
While some projects remain mired in issues relating to land acquisition and
financing, the maturing of the huge pipeline of infrastructure investment,
the policy thrust in areas like roads and the achievement of critical mass in
term of private-sector participation are key positives. A recent mid-term
appraisal of the 11th Five-Year Plan (FY08-12) highlighted that infrastructure
spend in the first three years was broadly in line with target and that the
private sector had, in fact, executed above target. Over next five years, we
estimate infrastructure spending in India at a huge US$680bn.
Momentum is clearly building in the economy and in steel consumption. India
was the only market outside of China which saw steel consumption grow in
2009, and is now the worlds fifth-largest steel market. Unfortunately for India
the pace of expansion in the domestic steel industry looks likely to lag demand.
Land-access issues continue to hamper most producers plans for building
new steel mills in India. Arcelor Mittal and Posco are two of the highest-profile
steel producers whove had difficulty progressing with their Indian investment
plans, but there are many others besides. Despite these difficulties, we still
expect Indian steel production to rise over time, from 60 million tonnes in
2010 to 88 million tonnes in 2015.
Our demand forecast sees Indian steel consumption rising from 56 million
tonnes in 2010 to 98 million tonnes in 2020, meaning India will become a net
importer of steel in the next few years. Eventually, we expect the Indian
government to take the view that steel imports are wasteful given the country
has abundant iron-ore reserves, and thus make it easier for investment in the
sector, but we wouldnt get our hopes up on this happening until after 2015.
Figure 72
Indian steel demand versus domestic steel supply
30
40
50
60
70
80
90
100
04 05 06 07 08 09 10 11CL 12CL 13CL 14CL 15CL
Finished steel demand
Finished steel production
(mt, y/e March)
Source: CLSA
Indian steel demand
to be boosted by
infrastructure spending
Indian steel production
will lag demand
India will become a net
steel importer

Steel demand will
outpace supply
Scrap is another threat to
coking-coal consumption,
but not until 2020




Most incremental Indian steel capacity will be from large blast furnaces, which
will require HCC. There will also be improved demand growth for HCC from
existing steel capacity as it is upgraded. Indian steel mills have among the
highest coke rates of any steel industry in the world, averaging over 550kg per
tonne of steel. This is because many steel plants such as those at SAIL (which
accounts for 20% of Indias production) were set up decades ago and are very
inefficient. However, many of these are now being upgraded or will be replaced
with larger furnaces. While this will improve the coking-coal efficiency rates,
the demand will be increasingly biased towards higher-quality coals.
Figure 73
Indian hard coking-coal demand
30
35
40
45
50
55
60
65
70
75
80
07 08 09 10 11CL 12CL 13CL 14CL 15CL
(mt, y/e March)
Given that India is lacking in quality coking-coal reserves, most of this
demand growth will be fed by imports. While we have HCC demand rising
70% over the next five years, we expect domestic output will struggle to
grow 25%. We therefore expect HCC imports to nearly double over the next
five years.
Figure 74
Indian HCC imports
(mt) 08 09 10CL 11CL 12CL 13CL 14CL 15CL
HCC consumption 37 40 46 52 57 66 75 78
HCC domestic output 15 16 15 17 17 18 18 19
HCC imports 22 24 31 34 40 48 57 59
North East Asia - Moderate growth to continue
For much of the last decade Japan, Korea and Taiwan have accounted for a
combined 40% of seaborne coking-coal imports.
For coking coal, there are a few steel mill expansions planned for the near
term. In Korea, Hyundai Steel opened its first four million tonne blast furnace
in April 2010 and will open the second four million tonne furnace in
December. Posco is also expanding, although mostly through the traditional
blast furnace route than by using its own Finex technology. In total, we
expect Korean coking-coal imports to rise to 28.6 million tonnes by 2015 from
19.3 million tonnes in 2009.
growth prospects
are limited
Upgrading of blast
furnaces will require more
hard coking coal
HCC demand in India will
almost double in five years
This HCC will mostly be
supplied by imports
Imports will supply most of
Indias HCC requirements
Steel output expansion
will be limited to Korea



Outside of Korea, Dragonsteel is expanding in Taiwan, while in Japan there
are no capacity additions planned. Debottlenecking and blast furnace relines
may lead to some capacity creep, but on the whole steel production will be
steady over time, in line with lacklustre economic growth.
In total, we expect demand for 98 million tonnes of coking coal in North Asia in
2015, of which 57 million tonnes will be HCC. This compares to demand of 77.1
million tonnes and 45.9 million tonnes in 2009, against the peak of 94 million
tonnes coking coal and 53.5 million tonnes HCC imports in 2008.
Europe - Holding steady
For coking coal, Europe remains the leader in PCI consumption from a
technical perspective. The most technologically advanced PCI consumer is the
Corus plant at Ijmuden, which manages to use over 220kg of PCI per tonne
of steel production, thus reducing their HCC requirement to only around
250kg per tonne of steel. This is viewed by many as being the structural limit
for PCI consumption, but could be used as a model for the rest of the world to
follow as HCC premiums widen.
Growth in European steel consumption will mainly come from East European
countries which will still see a decent pace of economic growth. Demand in
Western Europe will likely be flat for the next five years.
If environmental pressures and associated costs grow in Europe at a faster
pace than elsewhere, European steel furnaces may be closed and production
moved to places with good raw materials access such as Brazil. Thus absolute
coking-coal consumption in Europe could decline over time, although we
expect this risk to only arise post 2015.
North America - Absent from the seaborne market
North American coal markets are largely self contained. For metallurgical
coal, there is not much in the way of demand growth given our expectation
for steel demand to remain largely depressed in the years ahead. We
therefore dont consider the North American market to have any influence in
growth on the demand side of the coking-coal markets.
Emerging markets - Nothing outside of Brazil
Our expectations for steel demand in emerging markets are quite positive,
with an 8% Cagr during 2010-13, but the feed through effect to coking-coal
seaborne trade is quite limited. Outside of Brazil there are no other emerging
markets which import much more than a million tonnes of coking coal,
excluding the CIS countries which basically trade between themselves.
We expect steel production in Latin America to have a 9% Cagr through 2013,
and most of these expansions will be blast furnace based, especially in Brazil.
Brazil already imports almost all its 18 million tonnes coking-coal requirement
as the country has little domestic supply, so almost all the growth in
steelmaking demand will be fed by coking-coal imports. While North America
would be the main logical supply source for coking coal to Brazil, the country
will actually benefit from cheap logistics from Australia and Africa. As iron-ore
vessels carry cargoes into Asia and return empty, they will charge only a
small fee to carry a return cargo of coal into Brazil. This is something Vale has
highlighted for their Mozambique project.
North America is largely
self contained for
coking coal
Brazil is the only
significant importer of
coking coal
No expansions planned
in Japan
coking-coal imports
overall will be flat
European mills are
technically advanced,
having high PCI rates
Eastern Europe will
provide the only steel
demand growth
in EU may fall after 2015
Steel demand outlook for
emerging markets
is positive

Section 4: Swing supply factors Coal outlook


Swing supply factors
Coal is the most widely available and well distributed fossil fuel in the world.
The USA has the largest proven coal reserves, followed by Russia, China,
Australia and India.
Figure 74
Global coal reserves
(Bn tonnes) Coal reserves
US 238,308
Russian Federation 157,010
China 114,500
Australia 76,200
India 58,600
Ukraine 33,873
Kazakhstan 31,300
South Africa 30,408
Others 85,802
Total world 826,001
Given that most countries are at least partly self sufficient in coal supply, the
traded seaborne coal market only accounts for about 11% of total coal
consumption. This ratio is very small in comparison to other commodities. For
iron ore, over half of the material is consumed in a different country to where
it is mined, while for copper, lead and zinc over three-quarters of consumed
material is acquired from overseas.
Figure 75
Percentage of traded market in total consumption by material type
0
10
20
30
40
50
60
70
80
90
100
Iron ore Copper ore Coal Lead ore Zinc ore
(%)
Source: UN, CLSA Asia-Pacific Markets
World coal production will exceed seven billion tonnes for the first time this
year, but total exports of coal will be under one billion tonnes. Of this export
volume, a considerable proportion is exported overland by railcar, such as
between the CIS and Europe. For the purposes of this report, we are only
interested in the seaborne coal trade, which is around 800mtpa for thermal
coal, and under 250mtpa for coking coal. We are also interested in the
overland trade between Mongolia and China, as the viability of this coal trade
will be extremely dependent on seaborne coal market prices.
Seaborne traded coal
market is relatively small
World coal production will
exceed seven billion
tonnes in 2010
Coal is the most widely
available fossil fuel
Coal reserves are
very dispersed
Coal is one of the least
traded commodities



Australia and North America will remain the key countries of supply for coking
coal, with Mongolia, Mozambique and the CIS countries providing new tonnes
to the market. For thermal coal, Indonesia is already the largest supplier to
the seaborne market and will see considerable growth even from these levels
in the two years before Australia sees a significant increase in infrastructure
capacity. In the long run, Mongolia could become a serious supplier to China.
While we expect China to be a highly price sensitive swing buyer in the
seaborne market, we view China as no longer significant as a supplier into the
seaborne coal market. It is quite clear that Chinas rising focus on health,
safety and the environment means that it is no longer willing to export cheap,
low value products such as coal when it needs so much of the stuff for itself.
Government policy reflects this view quite clearly, with the government
having cut export quotas for thermal coal and coke and significantly increased
export taxes in recent years.
The view that China will not be a major supplier of coal is also reflected in
trade policy in other sectors. As China becomes richer, it has less need to rely
on low value exports, particularly of materials which provide pollution or
safety risks to the domestic market, and for which China will require to
consume itself in the longer term.
Thermal coal
Indonesia is the largest supplier to the seaborne thermal-coal market, but will
see its share of supply shrink over the next five years as tougher geology and
logistics for mine expansions mean it is increasingly difficult to expand
production at the same pace seen in recent years, while rising domestic
demand limits export volumes. Australia will gain the most market share as
infrastructure expansions in New South Wales see an aggressive increase in
exports from 2012. Elsewhere, expansions in South Africa and Colombia will
be enough for them to maintain current market shares, but other countries
will become increasingly less important to the seaborne market over time.
Figure 76

Figure 77
Thermal-coal export share, 2010

Thermal-coal export share, 2015
China
2%
Other Asia
3%
South
Africa
8%
Russia
12%
USA
3%
Colombia
9%
Others
12%
Australia
18%
Indonesia
33%

USA
1.9%
Colombia
7.8%
Others
6.5%
Russia
8.2%
South
Africa
6.7%
China
0.4%
Other Asia
3.1%
Australia
35.3%
Indonesia
30.1%
Indonesia - Strong growth to continue
Indonesian coal exports have surprised on the upside for the past few years,
with a seemingly endless growth in supply. Indonesia is largely absent from
the coking-coal market. Only a handful of mines produce coking coal, and
they lack the reserves to expand production. Consequently, we do not
separate out Indonesia in our coking-coal supply model.
Australia and North
America important for
coking coal, Indonesia
for thermal
China will no longer be a
coal exporter
China is pulling out of many
low value export sectors,
coal is part of this trend
Australia to gain market
share, Indonesia to lose



Indonesian production has had a 12% Cagr over the past five years. This is
arguably the fastest in the world, faster than Chinas 9%, Australias 3%,
Indias 6% and the worlds 5%. This has underpinned Indonesias rise to
become the worlds largest thermal-coal exporter, overtaking Australia.
Figure 78
The coal industrys rate of production growth 2005-10
3
5
6
8
9
12
0
2
4
6
8
10
12
14
Indonesia China Asia Pacific India World Australia
(2005-10 Cagr, %)
Source: CLSA Asia-Pacific Markets, BP
Figure 79
Indonesias production growth trajectory
231
249 249
290
320
170
160
180
200
220
240
260
280
300
320
340
2005 2006 2007 2008 2009 2010F
(mt)
Source: CLSA Asia-Pacific Markets, BPS, Ministry of ESDM
Going forward, we believe the rate of production will slow from a 12% Cagr in
2005-10 to an 8% Cagr over 2010-15. A higher base is one of the reasons, as
it is now more difficult for coal producers to increase production versus five
years ago, plus more heavy equipment is needed. A 1% of production growth
now implies nearly double the tonnage from five years ago, not to mention
the higher strip ratio compared to five years ago which means greater
overburden needs to be removed. This brings us to the second reason, that
lead-times for heavy equipment delivery are increasing. This has typically
been around six to eight months during good times, but in the high demand
period like today it could be as long as 12-18 months. During such high
demand period too, the typical equipment shortages such as tyre shortages
could re-emerge again, further limiting the upside in production.
Indonesia thermal-coal
production has grown the
fastest for five years
Production growth likely
to weaken in 2010-15
Indonesia has seen the
fastest pace of coal
production growth
Production growth in
2010 held back by heavy
rains in 2H




Figure 80
Indonesia's production profile 2005-15
Cagr (%) (mt) 2005 2006 2007 2008 2009 2010F 2011F 2012F 2013F 2014F 2015F
2005-10 2010-15 2005-15
Bumi Resources 45 52 54 53 63 66 73 85 96 109 113 8 12 20
Adaro 27 34 36 38 41 42 47 52 57 63 69 9 11 21
Kideco 18 19 19 22 25 28 31 34 37 40 40 9 7 17
ITM 14 21 20 20 21 23 26 27 26 25 25 10 2 13
Berau 9 11 12 13 14 17 20 24 28 30 30 13 12 27
Bukit Asam 9 9 9 10 11 14 17 19 22 27 32 10 18 30
Others 48 86 100 93 111 131 148 156 154 157 159 17 3 21
Total Indonesia 170 231 249 249 286 320 361 396 422 450 468 12 8 21
Source: CLSA Asia-Pacific Markets, Ministry of ESDM
Figure 81
Contract-miners strip ratio increases
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
2005 2006 2007 2008 2009
(x) Pama Buma

Figure 82
Production growth of 1% suggests a lot of additional coal and overburden now
2005 2010 % growth
Production (mt) 170 320 88
Estimated industry strip ratio (x) 7.0 8.1
1% growth implies:
Coal production (mt) 2 3 88
Overburden removal (m bcm) 11 21 98
Worth highlighting too is the fact that a lot of small mines opened up in 2007,
which drove a large portion of the total production growth over the past five
years. This smaller mines have grown in importance from less than 20% of
Indonesias production pre-2005, to now some 30%, but we expect this to
revert back to 25% over the next five years. We see stagnant production
from the small mines for the next five years. Not only is the industry (East
and South Kalimantan to be exact) more saturated now compared to five
years ago, a lot of new small mines opening going forward would likely
replace those small mine reserves which are now depleting. Investment cost
Small mines production
ramp-up is now limited by
their depleting reserves

Both investment and
production cash cost for
new small mine
is going up
Strip ratios are rising,
leading to higher costs




for new mine opening as well as the production cash cost going forward are
also arguably higher than five years ago. This is largely due to longer hauling
distances and costlier infrastructure, as strategically-located assets (close to
the port and infrastructure) have become scarcer. Hence, new mine openings,
particularly those smaller mines, would be more remotely located and thus
would have costlier transhipment costs.
Arguably, the investment cost of new mine opening for the larger firms will be
more benign as typically their source of growth will be brownfield expansion,
although higher production cash cost is inevitable due to higher strip ratio
and longer in-pit hauling distances. We thus expect these larger mines, which
now form some 75% of Indonesias total production, will lead the growth
going forward. We do not foresee port capacity in East and South Kalimantan
as production growth bottlenecks.
Figure 83
Small versus large mines as % of production
20
30
40
50
60
70
80
2005 2006 2007 2008 2009 2010F 2011F 2012F 2013F 2014F 2015F
Large mines
Small mines
(%)
Source: CLSA Asia-Pacific Markets, Ministry of ESDM
We highlight that future upside will be coming from the underdeveloped
Sumatra production. However, this entails a lot of railway and infrastructure
investment which takes a lot of amount of time and money. Once this railway
infrastructure has been developed, we will see a substantially more coal
output from Indonesia. South Sumatra still has the biggest coal reserve in
Indonesia after all. We currently only expect Kereta Api Indonesias (KAI)
debottlenecking on existing railway and PTBA-Transpacifics railway project to
go ahead and start commercial operation by 2015. Central Kalimantan could
also offer upside to Indonesias coal production, but more on coking-coal
output, to a lesser extent to the thermal-coal output. That said, similar to
South Sumatra, major development in this region would also entail a huge
amount of railway and infrastructure investment.
Figure 84
Prospective coal railway projects in 2010-15
Project's owner Project type Capacity
KAI (Kereta Api Indonesia) de-bottlenecking from 11.6mtpa in 2010 to 22.7mtpa in 2014
PTBA-Transpacific greenfields 25mtpa by 2014-15
Adani greenfields 35mtpa by 2014-15
Reliance greenfields 50mtpa by 2015
Investment cost for new
mine opening for the larger
boys will be more benign
Future production upside
to come from Sumatra, as
Kalimantan is saturated
Large mines will take share
from small mines



Figure 85
Sumatra still has the biggest untapped coal reserves in Indonesia after all; the future of Indonesian coal?

Source: Ministry of ESDM
Indonesian exports
Indonesia will continue to be a key net exporter in the global seaborne
thermal-coal market. However, Indonesian exports are likely to grow at even
a much slower pace than production, at only a 6% Cagr in 2010-15, which is
a significant reduction from a 15% Cagr registered in 2005-10. Domestic
demand will be growing at an increasingly rapid pace, a 14.5% Cagr in 2010-
15 versus a 7.8% Cagr in 2005-10. Thanks to Perusahaan Listrik Negaras
recent efforts to bolster the nations electricity capacity which are finally
coming to fruition over the next five years. We have seen more evidence that
the additional capacity is starting to come into the market. Against a
softening production growth going forward and soaring domestic demand, a
slowing export volume growth seems inevitable over the next five years.
Figure 86
Indonesias production versus domestic demand and exports
0
50
100
150
200
250
300
350
400
450
500
2005 2006 2007 2008 2009 2010F 2011F 2012F 2013F 2014F 2015F
Total production
Export
Domestic consumption
(mt)
Source: CLSA Asia-Pacific Markets, Ministry of ESDM, BPS
Indonesia to remain a key
exporter, but export growth
will slow in 2010-15
Domestic consumption
will take an increasing
share of coal production



Figure 87
Export as a % of Indonesia thermal-coal production
72
73
74
75
76
77
78
79
80
81
82
2005 2006 2007 2008 2009 2010F 2011F 2012F 2013F 2014F 2015F
(%)
Source: CLSA Asia-Pacific Markets, Ministry of ESDM, BPS
Figure 88
Additional power capacity (including existing IPP projects) and resulting coal demand
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
2010F 2011F 2012F 2013F 2014F 2015F
(mt) (MW)
0
4
8
12
16
20
24
Additional power capacity (LHS)
Additional coal demand for power, incl existing IPP projects
Source: CLSA Asia-Pacific Markets, PLN
Figure 89
Indonesian export growth forecasts
129
183
195
200
231
260
286
304
318
334
350
0
50
100
150
200
250
300
350
400
2005 2006 2007 2008 2009 10CL 11CL 12CL 13CL 14CL 15CL
(mt) (mt)
0
10
20
30
40
50
60 Export (LHS) Change YoY
Exports to decline as
percentage of production
Significant additional
power capacity planned
Pace of export growth
to slow



As the domestic market needs to be prioritised due to Domestic Market
Obligation (DMO), we view there is more downside rather than upside to
Indonesias expected export volumes going forward. Although delays in the
power plant projects could still happen, the ultimate amount of additional
power capacity and the resulting coal volumes over the next five year
period is unlikely to vary much from our current expectation. In fact, this
has not factored in upside for the second phase of 10GW project, which
would be 30-40% coal-fired as well as any upcoming IPP projects. That
said, we believe it will be down to the production volumes. In other words,
production upside and downside would bring upside and downside to
Indonesian export volumes, respectively.
Weather also brings downside risks to the forecasts, as seen this year. East
and South Kalimantan in particular are prone to suffer in the wet season,
though our forecasts always account for some seasonality, the outcome will
be variable year by year.
Meanwhile, export tax will not be a threat for Indonesia, in our view. Even if it
is passed, it will not be effective because 75% of Indonesias production is
coming from the first generation of CCoW holders which are legally not
affected by any new regulations or taxes or duties, unless stated in their
CCoWs. Therefore, we see little incentive for the Indonesian government to
pass such a tax going forward.
Any means to secure domestic demand has been articulated via DMO
regulation. If the company breaches this, it will face an export and production
quota the following year. Although not yet enforced, it is likely that those with
higher rank coal production could trade with the lower rank peers to meet
their DMO volume obligations
Australia - All about infrastructure
Australia supplies about 20% of the seaborne thermal-coal market, but is set
to aggressively expand its share as infrastructure becomes available.
Australias thermal-coal exports mainly come from New South Wales. Rail
Infrastructure Corporation (RIC) owns NSWs rail infrastructure and leases the
non-metropolitan rail network to Australian Rail Track Corporation (ARTC)
under a 99-year lease. RailCorp runs the metropolitan lines, including that
from Wollongong to Newcastle.
Coal haulage in NSW occurs on the Hunter Valley Rail Network, which is an
interconnected system between the coal mines in Hunter Valley, Gunnedah
and Western Basins and the ports in Newcastle and Port Kembla. Tonnage is
dominated by Asciano-owned Pacific National, which transports an estimated
80% of NSWs export coal. The other major player is QR, which handles the
remaining 20% of tonnage in the ARTC system.
Ports
NSW has three operating coal ports in Newcastle, Port Waratah Coal Services
(PWCS) Kooragang and Carrington terminals and Newcastle Coal
Infrastructure Groups (NCIG) terminal, and one terminal in Port Kembla, Port
Kembla Coal Terminal. Newcastle is currently the dominant port, transporting
90.5 million tonnes of the 103.7 million tonnes exported from NSW in 2009.
The NCIG coal terminal will eventually be expanded to 66mtpa. The 30mtpa
first-stage expansion was completed in February 2010. Stage 2 will see
production capacity increase by 36mtpa to 66mtpa. A 20mtpa expansion of
There is more downside
to export than upside
going forward
Export tax is not a
concern for Indonesia
Domestic market security
is via DMO regulation
Australia supplies 20% of
the thermal-coal market
Newcastles three ports
dominate export volumes
Hunter Valley Rail is
the backbone of NSW
coal exports
Port expansions are
underway



PWCS Kooragang is likely to be completed in mid-2012 at a cost of A$570m.
The addition of a fourth shiploader at PWCS Kooragang terminal could lift
port capacity by a further 12mtpa by 2013.
Capacity forecasts
Port capacity will continue to constrain NSWs coal exports in the medium
term. The Hunter Valley rail network has a theoretical capacity of 162mtpa
and the inclusion of additional rail loops could lift this beyond 200mtpa. The
66mtpa NCIG and a further 15mtpa third-stage expansion plus stage 4 will
need to be completed before current rail capacity is reached. Given the time
required to achieve this, we believe ARTC will be able to plan further
expansions to ensure rail capacity continues to exceed port capacity in NSW.
Figure 90
NSWs coal rail and port capacity
0
50
100
150
200
250
300
350
400
450
500
08/09 09/10 10/11 11/12 12/13 13/14 14/15 15/16
(mtpa) Port Capacity Rail Capacity
Source: ARTC, PWCS, NCIG, Port Kembla Coal Services, CLSA Asia-Pacific Markets
In total Australias thermal-coal exports will triple over the next five years as
infrastructure becomes available. Thermal coal will also be seen in increasing
quantities from Queensland ports as coking-coal capacity grows at a slower
pace than infrastructure there. Thermal coal will see its share of Australian
coal exports grow from under 50% now to near 70% by 2015.
Figure 91
Australian coal exports
(mt) 2009 10CL 11CL 12CL 13CL 14CL 15CL
Total port/rail capacity 280 300 320 400 450 550 630
Coking-coal exports 139 154 171 179 181 185 187
Thermal-coal exports 134 137 140 180 240 330 410
Thermal share (%) 49 47 45 50 57 64 69
CIS - Struggling to grow
Russia produces more than 300mtpa of coal, and has 20% of global coal
reserves, or 157 billion tonnes, according to the BP statistical review. Russia
accounts for more than 10% of supply into the internationally traded thermal-
coal market. While CIS countries are significant producers of coal, for the
purpose of this report we are only interested in coal shipments into the
globally traded market.
Port capacity is the
limiting factor in
the short and long term
Further expansions likely
Russia accounts for 10% of
seaborne thermal supply
As infrastructure becomes
available, coal exports
could treble
Australian share of
thermal coal exports to
grow strongly



Russian exports have been growing at no more than 3% pa in recent years,
and last year totalled 90 million tonnes for thermal coal. Most of Russias
exports go to Ukraine, Turkey and Europe, with 15-20 million tonnes going by
rail, and the remainder by sea. Given that most demand growth for coal is in
Asia, the Russian east coast ports are the main growth focus these days.
Exports are likely to reach 30 million tonnes from its east coast ports this
year, with about 80% being thermal coal.
Figure 92
Russian coal exports by port
(mt) 2008 2009 10CL
Far East 20 26 30
Baltic & Northern 43 48 32
Black Sea 24 20 22
Total 87 95 83
Sources: Metaldata, CLSA Asia-Pacific Markets
Mining costs in Russia are quite high given that three quarters of mines are
underground, while the extremely long distances on the trans-Siberian rail,
given most of the mines are in the centre of the country, makes their total
FOB cost relatively high. At the beginning of 2010, the government raised rail
tariffs for coal by 9.4%.
Even if miners can afford the high rail tariffs, the rail network is the main
bottleneck for exports according to miners. Railing from mines in the western
areas to export to Europe via rail or ports has reasonable capacity, but trying
to rail coal to the east coast ports is very capacity constrained. Additionally
there is little investment planned by the government in expanding the trans-
Siberian, so the situation is unlikely to improve soon.
Another cost disadvantage for the Russian coal exporters is that their ports
are generally shallow draft, meaning they can only use small vessels. This
makes it prohibitively expensive to export coal from west coast ports to Asia,
though given the geographical proximity of east coast ports to North Asian
markets, its not a significant disadvantage for east coast exports.
The high production and logistics costs, combined with the growth markets
for thermal coal being in South China and South Asia, mean coking coal is the
only product worth expanding for export from Russia, so we dont foresee
thermal-coal exports rising much over the next five years.
South Africa - Waiting for infrastructure
South Africa mostly exports thermal coal, having more than 30 billion tonnes
of reserves, and currently producing 250mtpa. However, despite the
abundance of coal, export volumes have seen no growth at all over the past
five years due to a lack of infrastructure expansions. The Richards Bay coal
terminal has export capacity of 91 million tonnes, but due to a lack of rail
capacity, exports have been stuck at 61-62 million tonnes in recent years.
The rail network in South Africa is owned and operated by Transnet. As a
state owned company, Transnet has strict requirements to maintain debt at
low levels in order to retain its credit rating, and this has prevented it raising
finance for expansions in recent years.
However, investment is finally underway to expand Transnets network
capacity to 81 million tonnes by 2014, although there are proposals to take it
all the way up to RBCTs capacity of 91 million tonnes under review. Given
South African exports
have struggled to grow
Russian exports have
grown very slowly
Growth has been focused
on the Far East ports to
feed Asian markets
Thermal coal exports
wont see much growth
Transnet has been slow
to invest
Expansions are finally
happening, but are
relatively small scale



that Transnet has struggled to move as much coal as its stated 71 million
tonnes capacity in recent years, we believe it will struggle to reach the full 81
million tonnes of exports from the expansion unless there are significant
improvements in operations management.
Colombia - Strong growth to continue
Colombian coal exports, which include very little coking coal, have nearly
doubled since 2002. Significant investment is underway in the country to
further expand production, and this should feed through to a further 25% rise
in export volumes through 2015.
Figure 93
Colombian exports to rise
Source: MPX Colombia
North America - Highest cost seaborne supplier
The US coal industry has had some rocky times over the last several years as
oversupply in the steam market has put a damper on prices only being offset on
the positive side by higher coking-coal prices. Over the past several years coal
producers have become more disciplined when it comes to supply demand
compared to their predecessors. Historically, coal producers have not had the
wherewithal to keep production off line as their balance sheets would not allow
them to keep their assets in the ground. However, the recent commodity boom
has allowed the major players the flexibility, as their financial situation has
improved, to keep coal out of the market. The key in the short and long term is
on the demand side, coming from the competition of natural-gas prices. With gas
prices being as low as they are, and the environmental impacts not only on
production, but on consumption, we believe the historical growth rate of coal
consumption will be closer to 1% compared to the historical Cagr of nearly 2%.
However, we still see a tighter steam coal market heading into the second half of
2011 as inventories will have been cut sufficiently to keep the market in balance.
Coal production, exports
Total coal production in the US for 2010 is expected to be about one billion tonnes
down almost 10% from 2008 levels. We are looking for steam coal production to
increase in the Powder River Basin and in the Illinois Basin to offset some of the
loss seen in Central Appalachia due to environmental and grade concerns and as a
result do not see significant production growth in the US over the next five years.
Colombian exports will
see some growth
US coal markets have
been depressed by
gas prices
We dont expect much
growth in US coal
production



Figure 94
Supply and demand
(mt) Production Consumption Net exports
East West Total Utility Coking Other Total Imports Exports
Net
exports
Coking coal
(included in
exports)
1980 573 251 824 569 67 67 703 1 92 91
1985 559 325 884 694 41 83 820 2 93 91
1990 630 399 1,029 781 39 83 903 3 106 103
1995 542 491 1,033 850 33 79 969 7 89 81
2000 510 565 1,076 995 29 70 1,094 13 58 46 33
2001 526 596 1,121 973 26 67 1,066 20 49 29 25
2002 489 601 1,090 978 24 65 1,066 17 40 23 21
2003 468 601 1,069 1,005 24 66 1,095 25 43 18 22
2004 485 627 1,112 1,015 24 66 1,105 27 48 21 27
2005 493 640 1,133 1,039 23 66 1,129 30 50 19 29
2006 491 668 1,159 1,026 24 66 1,116 37 49 12 28
2007 482 664 1,147 1,045 22 61 1,128 37 59 22 32
2008 492 678 1,170 1,042 22 58 1,122 34 83 49 43
2009 458 627 1,086 943 14 51 1,008 23 59 36 37
10CL 444 632 1,076 997 20 53 1,070 19 80 61 58
11CL 455 660 1,115 1,007 20 53 1,080 22 82 60 60
12CL 460 670 1,130 1,017 20 53 1,090 23 85 62 60
Source: EIA, Credit Agricole (USA)
We do not expect the US to increase thermal-coal export volumes, as high
logistics costs will be insufficient to make exports to growth markets in Asia
viable despite our high price forecasts.
China - Domestic supply growth to slow
China is by far the worlds largest coal producer, and has reserves of more
than 1.1 trillion tonnes, 80% of which is thermal coal. Wood Mackenzie
estimates total economic coal resources in China to be 221 billion tonnes.
Figure 95
China coal reserve by province
Basic coal reserve (bn tonnes)
National total 326.1
Shanxi 106.2
Inner Mongolia 78.9
Shaanxi 27.8
Xinjiang 14.7
Henan 11.6
Anhui 8.6
Yunan 7.9
Hebei 6.1
Gansu 6.0
Ningxia 5.8
Sichuan 5.0
Qinghai 2.0
Hunan 2.0
Jiangsu 1.5
Guangxi 0.8
Jiangxi 0.8
Beijing 0.7
Hubei 0.3
others 39.5
Over 80% of Chinas coal
reserves are thermal



Coal sector reforms created incentives to produce more coal
Chinas coal-sector administration has been undergoing reforms since the
1990s. These took an important step in 1999, when the ownership and
operation of the central government-owned mines was transferred to the
provinces. This change in the ownership structure also coincided with reforms
in the countrys coal-pricing structure.
Figure 96
Chinas coal prices
200
300
400
500
600
700
800
900
1,000
1,100
Jan 04 Feb 05 Apr 06 Jun 07 Aug 08 Sep 09 Nov 10
(Rmb/tonne)
Datong blend
Shanxi blend
According to a Stanford University paper Evolution of Chinas coal institutions,
by 2002 all the prices, even for power generation were relaxed and since then
central government has no longer directly controlled any coal price. In 2002,
about half of Chinas power coal was sold by term contracts through the
annual National Coal Ordering Conference and half was sold in spot markets
with the Qinhuangdao port increasingly acting as the leading benchmark.
The coal-price reform created the incentive for provincial governments to
produce more coal. It was also a way for provincial governments to boost tax
revenue. Another factor spurring coal production was fast-rising coal demand
from the power-generation sector, which was witnessing an unprecedented
growth due to recent reforms.
Figure 97
Chinas coal production trend
(m tonnes)
0
500
1,000
1,500
2,000
2,500
3,000
3,500
1980 1984 1988 1992 1996 2000 2004 2008
Cagr over 1980-2002 = 3.9%
Cagr over 2002-2008 = 11.4%
Coalmine ownership
transfer to provinces
spurred production growth
All coal prices, even for
power generation, were
relaxed by 2002
In 2002 half of coal was
sold by term contract and
half sold in spot markets
Coal-price reform created
incentive for provinces to
produce more coal
Coal production
Cagr increased
drastically after 2002



Chinas total unwashed coal output has grown from 1.25 billion tonnes in 2000
to three billion tonnes in 2009. SOEs have provided the bulk of the growth,
with their output rising from 730 million tonnes in 2000 to 2.15 billion tonnes in
2009. Private output (town and village enterprises, or TVEs) has grown from
520 million tonnes in 2000 to a peak of 925 million tonnes in 2008. In 2009
their output fell to 833 million tonnes, and will this year likely be about 800
million tonnes, given the ongoing consolidation trend in the industry.
The 11
th
Five-Year Plan was the trigger point for the consolidation of Chinas
domestic coal industry. This outlined a plan to create several large-scale
(100mtpa) SOE producers, while reducing the proportion of coal from small
private mines. This is essentially a reversal of the policy which prevailed from
1999 and encouraged private coal production. This trend has been replicated
across industries, as China looks to improve safety and environmental focus.
The move to concentrate ownership of coal assets has not slowed overall coal
production growth however. Over the past two years, the major growth provinces
for output have been Inner Mongolia, which has raised output by 70% from 360
million tonnes in 2007 to 617 million tonnes, or 20% of Chinas total coal output
in 2009. Shaanxi has seen its share of Chinas coal production rise from 2% to
10%, with output raised by 58% from 181 million tonnes in 2007 to 286 million
tonnes in 2009, while Xinjiang has almost doubled output from 40 million tonnes
to 78 million tonnes. Seven of the top 10 fastest-growing provinces for coal
output are in west China, and this trend is likely to continue.
Figure 98
China raw-coal production by province
Henan
8%
Shandong
5%
Guizhou
5%
Anhui
4%
Sichuan
4%
Others
24%
Shaanxi
10%
Shanxi
20%
Inner Mongolia
20%
With greater population density in the central and eastern provinces, any
additional growth in coal output will be focused on the western provinces. The
western provinces have combined reserves of 140 billion tonnes, out of Chinas
total 326 billion tonnes according to NBS data. Shanxi has 106 billion tonnes
followed by Inner Mongolia with 79 billion tonnes. With their large unexplored
land area, the western provinces are also most likely to yield increased reserves.
In 2009 Inner Mongolia surpassed Shanxi as Chinas largest thermal-coal-
producing province. Nearly all of Inner Mongolias coal production is thermal coal,
but the quality is not as good as from Shanxi. Much of Inner Mongolias coal
output is lignite, with a calorific value of only about 4,000kcal. In addition to its
Inner Mongolian coal is
much lower quality

Western provinces have a
lot of potential
Private mine output has
been falling since 2008
Consolidation efforts have
not stopped supply from
new areas
The 11
th
Five-Year Plan
triggered consolidation
Coal supply concentrated
in the north



poor energy content, lignite is also harder to transport as it is structurally weaker.
VIU (value-in-use) adjustments to reflect these issues are the drivers for its
higher equivalent production costs of Rmb275/tonne for Inner Mongolian coal.
Mining costs for thermal coal in China are quite high in relation to the rest of
the world. More than 80% of Chinas thermal-coal mines are underground, and
on average the costs of underground mines are at least twice that for open-pit
mines. The most efficient thermal mines in China have a cash mining cost as
low as Rmb150/tonne, while the least efficient can be as much as Rmb200-
230/tonne. Adding in washing costs, non-mining operating costs and rail
loading fees, and the average mining cost comes in about Rmb230-240/tonne,
with the highest-cost mines being at Rmb280-320/tonne free on rail/truck.
Figure 99

Figure 100
Cost breakdown of middle-cost mine

Cost breakdown of high-cost mine
0
100
200
300
400
500
Mining,
washing and
loading
Non-ming
cost and rail
loading fee
Taxes Logistics
(Rmb/t)

0
100
200
300
400
500
600
700
Mining,
washing and
loading
Non-ming
cost and rail
loading fee
Taxes Logistics
(Rmb/t)
Source: Industry source, CLSA Asia-Pacific Markets
Taxes are a more significant cost for thermal-coal mines than coking-coal
mines, given they have substantially lower sales prices but most costs are
levied on a per-tonne basis, albeit slightly lower for thermal than coking
coal. Taxes are explained in more detail in the next section, but in
summary the total tax and related cost for thermal mines is Rmb25-
35/tonne depending on location. Private mines in particular have to pay
significant revenue to local authorities to allow them to operate amid
increasingly strict environmental and safety regulations.
The final cost segment is logistics. In many cases the total cost to
truck/rail/ship coal from a mine in Inner Mongolia or Shanxi down to a southern
power plant exceeds Rmb300/tonne. In total, the highest-cost mines have a
delivered cost to a southern power plant in excess of Rmb600/tonne or
US$90/tonne, hence the growing attraction of thermal-coal imports.
Chinas reserves of thermal coal are very extensive, but the focus of
investment is clearly moving to the west. We do not expect Inner Mongolia
to raise output much further as logistics are very constrained, quality is
poor, the province lacks water resources for coal washing, and the
provincial government has introduced a rule requiring 50% of coal
production to be consumed within the province. Until the power grid is
improved, it is not very feasible to generate power for export, and industry
capacity restrictions in industries such as steel and aluminium make heavy
industry less likely to succeed in expanding. There are many proposals for
coal to liquids plants in the region, but so far China only has three plants
and given their dirty environmental record, the central authorities appear
reluctant to allow much expansion.
Chinese mining costs are
high compared to the
world average
Taxes have been rising
Logistics costs are high
Potential for further mine
expansions are limited



Given the troubles for private mine owners in Shanxi, many investors in the
coal sector are actively looking at assets in Xinjiang and western China for
future investment, as these are areas where coal mining is likely to receive a
warmer welcome. After 2015, we would expect almost all growth in coal
production to be coming from the western provinces as logistics
improvements come through.
Infrastructure - Barrier to growth
In many cases for southern power plants one of the largest cost contributors
in coal purchases can be logistics. Chinas rail network currently has capacity
to carry less than half the countries coal.
Figure 101
Railway transportation of coal in China
(mt) 2003 2004 2005 2006 2007 2008 2009 1H10
Coal transported by railway 886 992 1,071 1,120 1,121 1,345 1,326 757
Total coal production 1,608 1,956 2,113 2,325 2,523 2,716 3,050 1,577
Share of railway transportation (%) 55 51 51 48 44 50 44 48
According to NBS statistics, in 2008 56% of Chinas coal consumption was in
the central, southern and eastern regions, which only produces 33% of coal
output. Thus, nearly 25% of Chinas coal has to be transported from the north
to the south, in many cases a journey of more than 1,000km to its customer
base, and mostly going by ocean vessel around the coast.
Railway transportation for coal is tighter in Inner Mongolia than Shanxi, as
evidenced by the recent reports of 100km traffic jams from Inner Mongolia to
Beijing. Less than half of Inner Mongolias coal is moved by rail, compared to
nearly two-thirds from Shanxi.
Figure 102

Figure 103
Shanxi coal transportation

Inner Mongolia coal transportation
Shanxi coal
transported by
others
39%
Shanxi coal
transported by
railway
61%

Inner
Mongolia coal
transported by
others
55%
Inner
Mongolia coal
railway
transportation
45%
Despite the considerable investment in expanding Chinas rail network, the
pace of growth in coal production has meant that infrastructure bottlenecks
continue to cause problems in moving coal from production bases in the north
to consumption centres in the east and south.
The rail network for coal transportation consists of three groups:
North channel - Daqin, Fengshada, Jingyuan, Shenhuang and Tongji (blue
lines)
Middle channel - Shitai and Hanchang (green lines)
South channel - Houyue, Taijiao, Longhai, Xikang and Ningxi (yellow lines)
Production growth will be
focused on new mining
areas in the west
Rail only carries half of
Chinas coal
Nearly 25% of coal
production is transported
over 1,000km



Figure 104
Current China major coal railway network
Source: MoR, CLSA Asia-Pacific Markets
Figure 105
Coal transportation from the major three channels, history and forecast
(mt) 2008 2009 2010F 2011F 2012F
North tunnel 541 568 662 702 722
Daqin 321 330 400 420 420
Shenhuang 120 143 160 180 200
Fengshada 60 60 60 60 60
Jingyuan 20 20 27 27 27
Jitong 20 15 15 15 15
Middle tunnel 170 170 170 190 190
Shitai 90 90 90 110 110
Hanchang 80 80 80 80 80
South tunnel 190 190 250 250 250
Houyue 120 120 170 170 170
Taijiao 70 70 80 80 80
Total 901 928 1,082 1,142 1,162
Northern channel is most
congested and thus has
biggest expansion plans



It is the northern corridor which is most congested, and thus the focus of
most investment in the rail network and the main area which will see capacity
expansion. One key area is the expansion of the Shanxi to Shandong railway,
which will allow producers there to bypass some of the busier Bohai basin
ports and take coal out from Rizhao, near Qingdao.
The cost for railing on the main Datong-Qinhuangdao line is Rmb0.12 per
tonne per kilometre. Shanxi contacts suggested the cost of railing from
Shanxi to Qinhuangdao totalled Rmb80-90/tonne for 600km, plus Rmb20-
30/tonne port fees. Smaller miners have to pay an additional Rmb40-
50/tonne to get access to the rail.
Shanxi is estimated to have no more than 600mtpa capacity to export coal by
rail at present, with the rest going by truck into other provinces. Trucking
costs have risen in recent years given the crackdown on overloading since
2007 which was destroying the road network.
Trucking is economically viable for moving coal shorter distances, say under
300km, but costs vary a lot by province depending on the number of toll
roads and local police enforcement of vehicle loading regulations. Inner
Mongolia tends to have the cheapest trucking fees of Rmb0.25-.40/tonne per
kilometre, with Shanxi as high as Rmb0.45-0.5/tonne per kilometre. In many
cases the transport cost for mines from Shanxi to a coastal power plant is in
excess of Rmb300/tonne.
The Ministry of Railway (MoR) expects railway capacity for coal to be raised to
more than 1.2 billion tonnes by 2013. It is expected that railway bottlenecks will
be greatly reduced from 2014 as many new lines come into operation. Some of
the bigger projects aimed at relieving congestion in Inner Mongolia include:
Figure 106
New railways under construction or planned in northeast coal area
Timeframe Note
Jugar to Caofeidian Start construction from 2011 Link Inner Mongolia to Hebei port
Erdos to Machanghao Started construction from Nov 2009 Link railways inside Inner Mongolia
Chefeng to Suizhong Started construction from Jun 2009 Link Inner Mongolia to Liaoning
Chifeng to Jinzhougang To be completed by 2012 Link Inner Mongolia to Liaoning
Xilinhot to Ulanhot Started construction from Oct 2008 Link railways inside Inner Mongolia
Xilinhot to Duolun Link railways inside Inner Mongolia
Ba Yan Siniora to Chu Engadabu Started construction from Jun 2009 Link railways inside Inner Mongolia and to Mongolia
Zhenglan Qi to Zhangbei Start construction from 2010 Link Inner Mongolia to Hebei
Inner Mongolia has plans for three major railways projects: A 256km railway
linking Xilin Hot in central Inner Mongolia south to Duolun in the regions south
central area and north of Hebei province, to be built by 2012 and have a freight
capacity of 125mtpa; A 247km railway from Zhenglan Qi in central south Inner
Mongolia to Zhangjiakou in northern Hebei province, to be completed by 2013
and have a carrying capacity of 30mtpa; A 923km railway from Jining near
Hohhot, the autonomous regions capital, to Tongliao, a terminal city from
which other networks connect with Jilin province in northeast China, to be
completed by 2014 and have a carrying capacity of 80mtpa.
Smaller miners have to
pay a premium to get
access to the rail network
Trucking is economically
viable for short distances



Figure 107
Inner Mongolia new railways for coal transportation
Source: MoR, media reports, CLSA Asia-Pacific Markets
The MoRs long-term target for railway coal transportation capacity is 2.3 billion
tonnes, to be achieved through separating passenger and cargo transportation in
major rail lines once the addition of high speed rail for passenger services is
completed, which will free up existing routes entirely for cargo. The build out of
Xinjiang and other western coal railways will also be a major contributor.
Figure 108
China middle and long-term coal railway plan
Source: MoR
Three new rail
projects underway in
Inner Mongolia
Chinas rail network has
major expansion plans



Taxes and trade - Swinging the balance
Taxes represent a significant and rising cost for coal mines. As the
government has clearly moved to restrict private coal mine production and
improve safety standards in recent years, this has encouraged local
authorities to levy an increasing number of taxes and fees on the mines.
A resource tax on coal has been speculated about for many years, but most
industry players now expect this to be introduced next year, in the first year of
the 12
th
Five-Year Plan. Resource taxes for thermal coal vary by province, but are
generally between Rmb2.5-3.6/tonne. The resource tax is widely speculated to
be moving to between 3-5% of sales price. The net impact of this move would be
to raise costs around Rmb15-20/tonne for thermal mines.
Other charges that mines incur include environmental taxes/sustainable
development fund contributions, which in Shanxi are Rmb13/tonne but are likely
lower elsewhere. The mineral resources compensation fund is applied nationally
at 1% of sales revenue, while the safety fund is charged at Rmb2-10/tonne. The
safety fund money is not paid to the government however, but kept by the mine
to reinvest in safety equipment. Further additional taxes which are levied by
some cities/provinces include relocation compensation expenses, price
adjustment funds, city/infrastructure construction taxes and education
supplementary taxes. All in all these additional taxes can easily exceed
Rmb50/tonne for mines located in a built up or environmentally sensitive area.
In terms of trade taxes, China has gradually increased these over the years to
dissuade exports. Prior to 2004, coke, coking coal and thermal coal all
received generous tax rebates. After gradually reducing, eliminating, and then
introducing export taxes, since 2008 coking and thermal coal have been
subject to a 10% export tax, while coke is subject to a 40% export tax.
Figure 109
Thermal coal
January 2004 11% export rebate
September 2006 export rebate removed
August 2008 10% export tax

Figure 110
Chinese export quota changes
(mt) Coal export
quota
Actual coal
exports
Coke export
quota
Actual coke
exports
2003 100 94 12
2004 80 87 13 16
2005 80 72 14 13
2006 80 63 14 14
2007 70 53 12 15
2008 48 45 12 12
2009 51 22 12 1
2010 1
st
batch 26 1Q-3Q 15 1
st
batch 4 1Q-3Q 2
Source: Media reports, Ministry of Finance, CLSA Asia-Pacific Markets
Not only are these taxes a significant barrier to export volumes, but the trend
of rising taxes over time clearly illustrates the Chinese governments rising
desire to not be a serious exporter of low value, highly polluting products.
Taxes have increased
a lot
Resource tax likely to
be introduced
Additional taxes
are payable
Chinas coal trade
taxes have moved
against exports



Should exports of coke or coals become attractive in the future, we would
expect to see further tax hikes to make it unattractive again. Consequently,
we have very little in the way of exports of any coal products from China in
our forecasts.
In total we look for Chinese thermal-coal production to grow only 3% pa for
the next five years. This growth rate will require imports to more than double
to 255 million tonnes in 2015.
Figure 111
Import penetration - Base case
(mt) 2008 2009 2010 2011 2012 2013 2014 2015
South/east coast consumption 301 319 347 366 377 397 398 400
Coal imports 34 92 119 130 150 180 230 255
Coal exports 43 22 19 10 5 5 5 5
Numbers refer to washed coal. Source: CLSA Asia-Pacific Markets
India - Plenty of coal but not the best quality
India is the third-largest coal-producing country in the world, with most
production in the central eastern area. It has the worlds fifth-largest
reserves, of which 86% are contained in only five provinces. Only 13% of the
reserves are coking coal, which are generally of low quality, hence the need
for imports.
Figure 112
Geological resources of coal (mt)
State Proved %of
total
Indicated % of
total
Inferred % of
total
Total % of
total
Andhra Pradesh 9,194 8.7 6,748 5.5 2,985 7.9 18,927 7.1
Arunachal Pradesh 31 0.0 40 0.0 19 0.1 90 0.0
Assam 348 0.3 36 0.0 3 0.0 387 0.1
Bihar 0 0.0 0 0.0 160 0.4 160 0.1
Chhattisgarh 10,910 10.3 29,192 23.6 4,381 11.6 44,483 16.6
Jharkhand 39,480 37.3 30,894 25.0 6,338 16.7 76,713 28.7
Madhya Pradesh 8,041 7.6 10,295 8.3 2,645 7.0 20,981 7.9
Maharashtra 5,255 5.0 2,907 2.4 1,992 5.3 10,154 3.8
Meghalaya 89 0.1 17 0.0 471 1.2 577 0.2
Nagaland 9 0.0 0 0.0 13 0.0 22 0.0
Orissa 19,944 18.8 31,484 25.5 13,799 36.4 65,227 24.4
Sikkim 0 0.0 58 0.0 43 0.1 101 0.0
Uttar Pradesh 866 0.8 196 0.2 0 0.0 1,062 0.4
West Bengal 11,653 11.0 11,603 9.4 5,071 13.4 28,327 10.6
Total 105,820 100.0 123,470 100.0 37,920 100.0 267,212 100.0
Source: Ministry of Coal, CLSA Asia-Pacific Markets
India lacking in
quality coal
Slower domestic
production will
encourage imports



Figure 113
Break-up of production between coking and non-coking coal
376
399
423
458
488
32
32
34
35
44
0
100
200
300
400
500
600
FY06 FY07 FY08 FY09 FY10
Non-coking Coking
(mt)

Figure 114
State-wise production of coking and non-coking coal
(mt) FY06 FY07 FY08 FY09 FY10 % of total
Coking
Chattisgarh 0.2 0.2 0.2 0.1 0.2 0.3
Jharkhand 30.3 31.1 33.6 33.9 43.5 98.3
Madhya Pradesh 0.9 0.8 0.7 0.7 0.5 1.2
West Bengal 0.1 0.1 0.1 0.1 0.1 0.1
Total 31.5 32.1 34.5 34.8 44.3 100.0
Non coking
Andhra Pradesh 36.1 37.7 40.6 44.5 50.4 10.3
Arunanchal Pradesh 0.1 0.1 0.3 0.1
Assam 1.1 1.1 1.1 1.0 1.1 0.2
Chattisgarh 76.2 83.1 90.0 101.8 109.8 22.5
J&K 0.0 0.0 0.0 0.0 0.0 0.0
Jharkhand 55.1 57.7 57.3 62.4 62.4 12.8
Madhya Pradesh 54.6 59.0 67.2 70.6 73.5 15.1
Maharashtra 36.1 36.2 36.4 38.7 41.0 8.4
Meghalaya 5.6 5.8 6.5 5.5 5.8 1.2
Orissa 70.5 81.2 89.5 98.4 106.4 21.8
Uttar Pradesh 15.7 12.2 11.4 12.0 14.0 2.9
West Bengal 24.3 24.9 22.5 22.8 23.1 4.7
Total 375.5 398.7 422.6 457.9 487.8 100.0
According to data provider Credit Rating Information Service of India, 46% of
coal in India is moved by rail, with the remainder moved by truck or sea
routes. Coal is the largest single commodity carried by Indian Rail, but has a
preferential tariff rate. This is the opposite of iron ore, for which Indian Rail
charges a very high tariff rate in order to take its fair share of the profits
from exporting iron ore. Coal transportation is closely linked to iron ore
exports, as in many cases the rake (railcars) which are used to export iron
ore from mine to port, are then used to bring coal in from that port to a local
power station, before returning to the iron-ore mine.
As the future trends will be towards less iron-ore exports and more coal
imports, we expect the preferential tariff which coal currently benefits from in
India will be increased more in line with general market rates.
Over 90% of Indias coal
production is thermal
Coal production is
concentrated in five states
Indian rail capacity
cannot meet demand for
coal transportation



Indian Rail is seeing significant investment levels presently. The flagship
investment is the golden quadrilateral linking Delhi, Kolkata, Chennai and Mumbai,
covering a distance over 2,000km. More importantly for coal transportation will be
improved links between ports, mines and the cities which are seeing growing
power demand, for which 2,800km of rail track is now being laid.
India is also seeing investment of Rs1tn in ports, with 387 projects identified
under the National Maritime Development Programme.
Mining costs in India are cheap compared to elsewhere in the world. Given the
abundant reserves, nearly 90% of Indias coal production comes from open-pit
mines. These have an operating cost of no more than US$15/tonne
(Rs600/tonne), though according to Coal India there has been significant cost
inflation in the past four years, of about 25% over that timeframe. Underground
mining costs are significantly higher, up to US$80/tonne, but most underground
mines are coking coal and hence are still economically viable.
Coal India is the largest coal supplier in India and in the world. It supplied
295 million tonnes to the power sector in FY10 against the target of 312
million tonnes in FY10.
Most thermal-coal power generation expansions are relying on Coal India to
supply their coal, but this is likely to disappoint. Some 74% of projects under
the 11
th
Five-Year Plan are depending on coal linkages from Coal India. Thus,
we might see coal shortages in the coming years which will either lead to
lower utilisation rates of power projects or higher imports which implies a
high power tariff or a mix of both.
Figure 115
Sources of coal for capacity addition under in the 11
th
Five-Year Plan
Linkage
74%
Imported coal
13%
Captive coal
13%
The alternative which a number of power plants are relying on is to develop their
own captive coal blocks. However, progress on these, even after securing an
allocation which itself takes years, has been extremely slow to date. Securing
land acquisition and gaining local permits for mine developments and related
infrastructure are the main barriers to development of captive coal blocks. Of the
122 coal blocks allocated since 1993, only 20 are now in operation.
Coal linkages remain the
dominant source of fuel
Considerable investment
in ports means there
wont be a bottleneck
Coal India is the largest
coal miner in the world



Figure 116
Sources of coal for capacity addition in the 11
th
Five-Year plan
400
500
600
700
800
900
1,000
2010 2011 2012 2013 2014 2015
Non-coking coal demand
Non-coking coal supply
(mt, y/e March)
Figure 117
Status of coal blocks allocated
Year No. of
blocks
allocated
Target year
of starting
production
No. of blocks that
have started
production
Pending milestones
1993-
2003
40 1996-2007 20 Forest clearance, land acquisition and
environment management plans
2004 5 2008 0 Land acquisition and forest clearance
2005 24 2008-11 0 Forest clearance, land acquisition and
environment management plans
2006 53 2009-12 0 Prospecting licence not yet granted in many
cases. Almost all lagging on timelines
Source: Coal India, CLSA Asia-Pacific Markets
By the end of the 11
th
plan the captive coal blocks are expected to contribute
80mtpa of coal. However, given the lack of progress on most of the blocks it
is expected that their contribution will be only about 42 million tonnes. Even
that target will be hard to reach, and over the next two years we only expect
the supply of coal to the power sector from the captive blocks is likely to
remain at 22 million tonnes for the next two years.
It is this lack of potential for growth in domestic coal supply which drives our
forecast for thermal-coal imports in India. We forecast domestic coal
production to grow at a healthy pace of 6.9% through to 2015, but this
production expansion will still require imports to see its share of Indian coal
consumption grow from 12% in FY10 to 26% in FY11, or 189 million tonnes.
Figure 118
Demand 426 451 542 603 657 711
Domestic supply 374 387 432 473 489 522
Imports 52 64 110 132 168 189
Coking coal - All about Australia
Coal has been a major part of Australias exports for decades. Australia supplies
60% of the seaborne coking-coal market. With abundant reserves and numerous
mining companies active in the country, the only barrier to higher exports from
Australia in recent years has been infrastructure. Unlike the major iron ore ports,
which are run by individual producers and thus an integrated part of their entire
supply chain, the coal ports and rail networks in Queensland and New South
Wales are mostly run by local authorities or have shared ownership.
Coal is a major part of
Australias exports
No production has
Domestic supply will
struggle to keep pace
with demand
Imports will fill the
domestic supply deficit
Captive coal mines will
struggle to be built



Figure 119
Map of main global coking-coal supply
Source: Teck, McCloskey
Infrastructure bottlenecks have been plaguing Australias coal industry over
the past few years. Governments and the sector had underestimated the
strong surge in demand for coking and thermal coal in Asia. Major coal ports
of Dalrymple Bay and Newcastle have seen queues of up to 100 ships over
the past three years. Although port delays eased in 2009, it was largely a
result of demand-related decrease in export volumes. In early 2010, a
recovery in demand led to queues expanding again, with up to 60 ships at
Dalrymple Bay and lengthening lines at Newcastle.
There is light at the end of the tunnel, with some expansion plans nearing
completion. The first stage of a new coal terminal at Newcastle (NCIG) was
commissioned earlier this year. An expansion at Dalrymple Bay was also
completed in the past year, although rail bottlenecks continue to restrict
export volumes there. Ramp-ups are underway at Newcastle, Brisbane and
Gladstone, while the approval of the Northern Missing Link by the Queensland
government should pave the way for a major port expansion at Abbot Point
over the next two to three years.
Despite these impressive developments, infrastructure bottlenecks will
continue to constrain coal exports from Australia. The industrys production
forecasts continue to exceed available rail and port capacity. Project delays
seem inevitable despite stronger-than-ever demand for Australian coking and
thermal coals. Queensland and NSW still need to invest a significant amount
on rail and port infrastructure to meet the production aspirations of miners.
Queensland is key for coking coal
Queensland supplies over 80% of Australias coking-coal exports, and nearly
60% of the global seaborne market. Australian metallurgical coals consist of
hard coking coal, semi-soft and semi-hard coking coal, and PCI coal. Asian
countries dominate the export sales of these resources, with Japan, Korea,
Taiwan, China and India accounting for nearly 80%.
Railways
State-owned Queensland Rail (QR) operates Queenslands rail network. It
owns the infrastructure and has a dominant position in coal haulage in the
state. However, having commenced haulage operations in Queensland and
won a number of significant haulage contracts, Pacific National is challenging
QRs leading position.
Rail and port bottlenecks
have subdued exports
Completion of new
infrastructure projects
Further investment
needed to meet mine-
expansion plans
Queensland accounts for
80% of Australias coking
coal exports

Queensland Rail is
the dominant player
Known potential sources
of new supply necessary
to meet forecast demand
are limited and challenged



The Queensland government has commenced a sale process for the QR
assets, which could result in either an IPO, or an asset sale to an industry or
financial investor.
Queenslands rail infrastructure has capacity of about 224mtpa, comprising
five separate rail systems. The proposed Northern Missing Link and Surat
Basin Railway will further extend and connect the current network. The most
significant systems are Goonyella and Blackwater.
Goonyella accounts for more than half of all transported coal tonnages in
Queensland and is used by all the major industry participants, including BHP
Billiton Mitsubishi Alliance (BMA), Xstrata Coal, Anglo Coal, Peabody Pacific,
Rio Tinto and Macarthur Coal. Goonyella primarily delivers coal to the Hay
Point and Dalrymple Bay coal terminals. It also supplies modest tonnage to
the Abbot Point terminal. The proposed Northern Missing Link will enable
significant increases in tonnage to Abbot Point on the Goonyella rail system
by linking it with the Newlands system.
The Blackwater system is the second-largest rail-haulage system in
Queensland. It delivers coal into the RG Tanna and Barney Point terminals in
Gladstone and will also service Wiggins Island once it is constructed. Major
users of the system include BMA, Rio Tinto, Xstrata and Wesfarmers.
Figure 120
Queensland Rail - Coal throughput and forecast capacity
(mt) 2005-06 2006-07 2007-08 2008-09 12-13CL 13-15CL 15CL+
Blackwater System 45 50 52 51 70 83 107
Moura System 10 12 12 11 15 31 41
Goonyella System 82 88 83 87 145 186 228
Newlands System 11 11 12 14 50 80 105
Western System 5 4 6 6 10 13 14
Surat (proposed) 42 67
Total 154 165 164 169 290 435 495
Note: June year-end. Source: QR 2009 Master Plan, CLSA Asia-Pacific Markets
Ports
Dalrymple Bay Coal Terminal (DBCT), Hay Point Coal Terminal (HPCT), Abbot
Point Coal Terminal (APCT) and the RG Tanna Coal Terminal at Gladstone
handle a majority of Queenslands coal exports. DBCT is operated by Prime
Infrastructure, HPCT by BHP Billiton Mitsubishi Alliance (BMA), APCT by
Xstrata and RG Tanna by the state-owned Gladstone Ports. Queenslands coal
export capacity is likely to increase from 192 million tonnes in 2010 to 217
million tonnes in 2011. A majority reflects expansions at HPCT and APCT.
DBCT has a stated capacity of 85mtpa, but we believe infrastructure and
design constraints are likely to see capacity limited to 68mtpa.
In the medium term, the bulk of port-capacity growth is likely to come
from APCT and Wiggins Island. An expansion to 25mtpa took place at
APCT in mid-2009 and a doubling of capacity to 50mtpa is due to come on
stream in mid-2011. Further ramp-ups to 80mtpa and 110mtpa are
planned but will require significant investment in rail infrastructure, which
is unlikely to occur until the privatisation of QR is completed. The
expansion to 110mtpa will probably cost upwards of A$4bn and completion
is unlikely before 2015.
The state government
plans to privatise QR
Five rail systems
have a combined
capacity of 224mtpa
Tonnages on Blackwater
will increase once
Wiggins Island is built
Four major export
ports in Queensland
Expansions planned at
APCT and Wiggins Island
All major coal
players use Goonyella



Wiggins Island Coal Terminal (WICT) is a new development at Gladstone.
Development will be in three stages. Stage 1 will have 25mtpa of loading
capacity with the subsequent Stage 2 and Stage 3 expansions lifting loading
capacity to 70mtpa. Cost of the expansion will be about A$3.0-4.0bn.
Completion of the first stage is likely to occur in 2012-13.
Capacity forecasts
Port capacity constrains coal exports in Queensland, although it could be
argued that the inefficiencies at Dalrymple Bay are more related to both
port and rail design limitations. Post 2014, completion of the APCT
expansion and the new WICT will place significant pressure on rail
infrastructure, even though QRs current forecasts suggest that rail
capacity will continue to outpace port capacity. An acceleration of the
110mtpa expansion at Abbot Point or a delay in the privatisation of QR
could see rail become the bottleneck.
Figure 121
Queenslands coal rail and port capacity
0
50
100
150
200
250
300
350
400
450
500
08/09 09/10 10/11 11/12 12/13 13/14 14/15 15/16
(mtpa) Port Capacity Rail Capacity
Source: Queensland Rail, Gladstone Ports, Ports Corporation of Queensland, CLSA Asia-Pacific Markets
Costs - Mining costs very competitive but capex is rising
Coal production costs in Australia on an FOB basis are very competitive in the
world market as three-quarters of production comes from open pit mines.
Coking coal costs average about US$70/tonne FOB, given their generally
higher stripping ratios than thermal coal.
A significant barrier to rising investment in coal capacity in Australia is the
rapid appreciation in capex costs in recent years. While there was a pause in
investment in 2008 amid the financial crisis, investment in coal and iron-ore
projects in Australia is back at record highs, and this is resulting in significant
cost inflation for labour, materials and contractors, while the appreciating
Australian dollar means costs for mine expansion in US dollar terms is now
significantly higher than almost anywhere else, for most Greenfield mines in
excess of US$100/tonne of capacity, and thats excluding port infrastructure.
Despite Australias very competitive position in terms of resources and
geographical proximity to Asian markets, expansions in coal exports will be
substantially slower than for iron ore due to the lack of captive logistics.
Miners have to be patient with the slow pace of growth in publicly owned
infrastructure, which will remain the limiting factor in exports for the
foreseeable future.
WICT could be
expanded to 70mtpa
Port capacity remains
the limiting factor
in the long term
Risks: acceleration of
Abbot Point expansion or
QR privatisation delay
Australian mining costs
are among the lowest in
the world
Capex costs are
rising rapidly
Public ownership of
infrastructure will slow
expansion growth



We foresee total Australian coking-coal exports rising only 20% over the next
five years. There are no significantly large projects contributing to this growth,
rather all suppliers are increasing their exports by a few million tonnes. PCI
exports will rise 40% over the period, with HCC up 20% and semi-soft up
15%. BHPB/Mitsubishi alliance will maintain a steady 55% share of Australian
HCC exports through 2015.
Figure 122

Figure 123
Coking-coal export share, 2010

Hard coking-coal export share, 2010
Rio Tinto
8%
Xstrata
11%
Anglo
12%
Other
31%
BMA
38%

Other
6%
Peabody
7%
Gujarat
2%
Anglo
11%
Xstrata
10%
Rio Tinto
11%
BMA
53%
Figure 124

Figure 125
Coking-coal export share, 2015

Hard coking-coal export share, 2015
Xstrata
9%
Rio Tinto
9%
Anglo
11%
Other
37%
BMA
34%

Other
10%
Peabody
8%
Gujarat
5%
Anglo
10%
Rio Tinto
10%
Xstrata
9%
BMA
48%
With capacity growth split between the producers, the main downside risks to
export volumes comes from any delay to the infrastructure plans, rather than
any individual mine expansions.
North America - Highest cost seaborne supplier
The US coal industry has had some rocky times over the last several years as
oversupply in the steam market has put a damper on prices only being offset
on the positive side by higher coking-coal prices. Coking-coal exports from
the USA have risen strongly in 2010 as weak domestic steel production has
allowed suppliers to switch capacity to the export market, incentivised by
high seaborne prices. While coking-coal production costs in the USA are
among the highest in the seaborne market, our forecast of sustained prices
above US$200/tonne for the next few years will incentivise increasing exports
from the USA as a number of producers bring on small capacity expansions.
Canada has struggled to raise exports in recent years, but capacity
expansions at the major producer Teck, combined with a few smaller
expansions at other producers, will see Canadian coking-coal exports rise
50% over the next five years.
Coal production, exports
Total coal production in the US for 2010 is expected to be approximately 1bn
tonnes, down almost 10% from 2008 levels. We see incremental coking-coal
production coming on line, from companies like Walter Energy and Teck
Resources in 2011, but for the most part the incremental coking-coal supply
US coking-coal costs are
high, but exports have been
incentivised by high prices
US coking-coal exports are
constrained by logistics
Coking coal exports will
only rise 20% through
2015
BMA has the largest share
of coking coal exports
Market shares wont
change much through 2015
Canadian exports will rise
50% in the
next five years



will be to replace depleted mine production and will come from cross over
tonnes. We look for a continued tight market as production remains
constrained and North American exports of coking coal are maintained.
Coking-coal exports in 2010 are expected to be around 50 million tonnes in
2010 excluding Canada. We believe that exports above 60 million tonnes
could be limited for coking coal due to port limitations.
Figure 126
Supply and demand
(mt)
Production Consumption Net exports

East West Total Utility Coking Other Total Imports Exports
Net
exports
Coking coal
(included in
exports)
1980 573 251 824 569 67 67 703 1 92 91
1985 559 325 884 694 41 83 820 2 93 91
1990 630 399 1,029 781 39 83 903 3 106 103
1995 542 491 1,033 850 33 79 969 7 89 81
2000 510 565 1,076 995 29 70 1,094 13 58 46 33
2001 526 596 1,121 973 26 67 1,066 20 49 29 25
2002 489 601 1,090 978 24 65 1,066 17 40 23 21
2003 468 601 1,069 1,005 24 66 1,095 25 43 18 22
2004 485 627 1,112 1,015 24 66 1,105 27 48 21 27
2005 493 640 1,133 1,039 23 66 1,129 30 50 19 29
2006 491 668 1,159 1,026 24 66 1,116 37 49 12 28
2007 482 664 1,147 1,045 22 61 1,128 37 59 22 32
2008 492 678 1,170 1,042 22 58 1,122 34 83 49 43
2009 458 627 1,086 943 14 51 1,008 23 59 36 37
2010CL 444 632 1,076 997 20 53 1,070 19 80 61 58
2011CL 455 660 1,115 1,007 20 53 1,080 22 82 60 60
2012CL 460 670 1,130 1,017 20 53 1,090 23 85 62 60
Source: EIA, Credit Agricole (USA)
Environmental impact
The EPA has issued a statement blocking Arch Coals Spruce mine. The
controversy stems from the Clean Water Act which prevents companies from
discharging rock, dirt or other debris into streams and rivers unless it can be
proven that it will not cause permanent damage to the waterway or
surrounding ecosystem. The EPA has the authority to review and veto any
permit granted by the Corp of Engineers, but until recently has rarely
exercised the right. This potentially could impact all surface production in
Central Appalachia, which equates to around 120 million tonnes (half of 2008
CAPP production). This decline in production will not come in one fell swoop,
but over time. Costs will rise for companys in the region as they have to go
underground to continue to produce coal in the region.
Costs
US coal costs are relatively high on an FOB basis. Mining costs are higher
than world averages given that many mines are old and suffering from rising
stripping ratios. High labour, energy, safety and environmental costs also
contribute to the higher cost base. Logistics costs are a significant barrier to
higher export volumes, as in many cases these outweigh mining costs.
US coking-coal exports are the highest cost seaborne supply into Asia, with
some of the smaller mines having a total cost of US$150/t CFR China after
adjusting for quality. A significant proportion of this cost comes from
infrastructure, as coal production is concentrated in the centre of the country.
Increasing environmental
pressures will limit
export growth
Infrastructure is a
major cost
US coal-production costs
are high



Canada is the worlds third-largest metallurgical coal exporter. Despite its
considerable railing distances, large scale Canadian coal costs on an FOB
basis are more competitive that the smaller US mines, at about US$80/tonne
FOB, or under US$120/tonne CFR China. Mine expansions in Canada are not
logistically constrained, and there is potential for producers there to respond
to higher prices with further expansions beyond current plans.
CIS - Struggling to grow
Russia produces more than 300mtpa of coal, and has 20% of global coal reserves,
or 157 billion tonnes, according to the BP statistical review. Russia accounts for
fewer than 5% of seaborne coking-coal exports as most sales are overland. While
CIS countries are significant producers of coal, for the purpose of this report we
are only interested in coal shipments into the globally traded market.
Russian exports have been growing at no more than 3% pa in recent years,
and last year totalled 15 million tonnes for coking coal, half of which is hard
coking coal. Most of Russias exports go to Ukraine, Turkey and Europe, with
15-20 million tonnes going by rail. Given that most demand growth for coal is
in Asia, the Russian east coast ports are the main growth focus these days.
Exports are likely to reach 30 million tonnes from its east coast ports this
year, with about six million tonnes of this being coking coal.
Figure 127
Russian coal exports by port
(mt) 2008 2009 10CL
Far East 20 26 30
Baltic & Northern 43 48 32
Black Sea 24 20 22
Total 87 95 83
Source: Metaldata, CLSA Asia-Pacific Markets
Mining costs in Russia are quite high given that three quarters of mines are
underground, while the extremely long distances on the Trans-Siberian
railway, given most of the mines are in the centre of the country, makes their
total FOB cost relatively high. At the beginning of 2010, the government
raised rail tariffs for coal by 9.4%.
Even if miners can afford the high rail tariffs, the rail network is the main
bottleneck for exports according to miners. Railing from mines in the western
areas to export to Europe via rail or ports has reasonable capacity, but trying
to rail coal to the east coast ports is very capacity constrained. Additionally
there is little investment planned by the government in expanding the Trans-
Siberian railway, so the situation is unlikely to improve soon.
Another cost disadvantage for the Russian coal exporters is that their ports
are generally shallow draft, meaning they can only use small vessels. This
makes it prohibitively expensive to export coal from west coast ports to Asia,
though given the geographical proximity of east coast ports to north Asian
markets, its not a significant disadvantage for east coast exports.
The only significant growth in Russias exports is likely to come from Mechels
Elga coking-coal deposit. Mechel has constructed their own rail spur line, and
controls their own port on the east coast, which should enable their new mine
to reach its planned 9mtpa export capacity by 2014. Apart from the Mechel
project, we do not expect to see much growth in Russian coking-coal exports
in coming years.
Russia accounts for only
5% of seaborne coking
coal trade
Lack of rail capacity
constrains exports
Most Russian ports are
shallow draft
Exports have only grown
slowly in recent years
Canada is the third-
largest met coal exporter
East coast ports have
seen the most growth,
driven by Asian markets
Russian costs are high,
driven by infrastructure
Mechels Elga mine will
provide all the growth in
coking coal exports



Mongolia - New supplier but captive to China?
For the next few years Mongolia will largely be a coking-coal story. Mongolia
has an estimated 12.1 billion tonnes of coal reserves, of which two billion
tonnes are coking coal. Despite its geographical proximity to China, logistics
costs for Mongolian exports are high, and given that Inner Mongolia is Chinas
largest thermal-coal-producing province, then until there are significant
infrastructure improvements, there is little competitive advantage for Mongolia
to export thermal coal to China. About 80% of Mongolias coal exports to China
in 2010 will be coking coal, but only 50% hard coking coal. Tavan Tolgoi is the
only deposit providing HCC at present, which should export about seven million
tonnes to China this year from MCC and Energy Resources.
Mongolia currently has five main operating coal companies, with South Gobi
and MCC the only listed ones of the five. Total Mongolian coal exports over 1H
were reported at 7.9 million tonnes, though Chinese import data suggests a
figure of 6.9 million tonnes. Mongolia surpassed Australia as Chinas largest
supplier of coking coal in June 2010, and volumes continue to grow at a
significant pace. Mongolia will export about 15 million tonnes of coking coal to
China in 2010, accounting for 40% of Chinas coking-coal imports. Mongolia
has about 20 million tonnes of coking-coal production capacity, and this will
rise to 60 million tonnes by 2015. However, logistics will be the main barrier
to this growth, as all of Mongolias coal exports enter China by truck, so rail
capacity is much needed on both sides of the border.
Given that most of Mongolias coal deposits currently being mined are close to
the surface, this supports large scale open pit mining, which means its
absolute mining cost is very cheap. CRR estimates average mining costs are
around US$15-17/tonne, around half the mining costs in China. However, all
coal from Mongolia is currently sold in raw, unwashed form, as the lack of
water in the country means washing coal is economically infeasible. MCC has
plans to construct a washing plant based on ground water, and given its scale
and recent fund raising it may work, but the other producers are unlikely to
be successful in following with similar developments. Shipping unwashed coal
raises the overall coal cost as the logistics costs to the wash plant, the main
one being 150km into China are thus included in the yield loss in washing.
Rail infrastructure, or lack of it, is the major barrier to faster growth in
Mongolian coal exports. Until extensive rail networks are built out, Mongolian
coal producers remain at the mercy of a handful of buyers given their lack of
sales options. Trucking coal is about three times more expensive than railing
it, so the lack of rail capacity also pushes Mongolian coal up the cost curve.
CRR survey work shows that it costs around US$20/tonne to truck coal from
the Tavan Tolgoi mining area to the Ganq Mod border crossing, a distance of
only 255km. Even trucking only 50km, such as from the Narlin Sukhait mine
to the Ceke border crossing, costs US$6/tonne. Mongolian border fees are
around US$2.90/tonne, however China customs fees and other costs bring
the total to US$17/tonne.
The Mongolian government has recently announced a decision to build a
450km Russian guage rail from the large Tavan Tolgoi coal deposit to link with
the sole existing rail line at Saynshand. This decision comes as a
disappointment to the Chinese, who were hoping for a more direct 250km rail
line into China, which would also have passed Ivanhoes Oyu Tolgoi mine.
Mining costs in Mongolia
are low, but there are no
washing facilities
Border crossing fees are
also high
Most of Mongolias
exports are coking coal
Mongolia recently
displaced Australia as the
largest source of Chinas
coking coal imports
Rail infrastructure is
lacking, so trucking is the
only (expensive) option
Mongolian government
to continue building
Russian rail



Figure 128
Mongolia map and railway
Source: map website
Politically the Mongolians are used to balancing the interests of the Russians
and the Chinese, and dont want to be too reliant on either. While almost 80%
of Mongolias exports go to China, 90% of Mongolias oil is imported from
Russia, together with 30% of its power needs. The Russians already own 50%
of the existing rail line and are keen to be involved in any expansions.
Another idea recently suggested by the Mongolians is to build a further rail
link to northwest Mongolia and into Russia, in order to give rail access to
Russias Far Eastern ports, and the option to export to Japan and South
Korea, though the near 2,000km rail journey would not be cheap. The
Mongolians are keen to develop as much optionality for their exports as
possible, in order to ensure the Chinese pay close to market prices for their
exports, rather than being the sole sales option. The Mongolians have bad
memories of the Chinese closing the border in 2002, and giving preferential
treatment to Chinese cargos over Mongolian ones on the rail network.
This recent decision to build further Russian gauge rail, which is wider and
incompatible with Chinese gauge rail, doesnt rule out the prospect for more
direct rail links into China. If anything the latest announcement is more to do
with the political manoeuvring around the construction of Chinese gauge rail,
to try and encourage the Chinese into offering more investment in the
Mongolian economy, as the Mongolians are keen to add value and industrial
capacity within Mongolia, rather than just providing basic resources for China.
Once the coal enters China, to reach most steel mill customers it has to be
transported through one of the most congested areas in Chinas rail network
to get to Qinhuangdao port. There are currently only two border crossings
which handle coal, though another three are under construction, all of which
will be majority owned and operated by Winsway.
Currently, coal from the Gang Mod border crossing is trucked 150km for a
US$10 cost to the Winsway washing plant, where after processing it is
trucked another 150km to the nearest rail head in Baotou. From there the
coal takes a 1,100km rail journey to Qinhuangdao, at a cost of US$45/tonne.
Port handling fees plus shipping costs total US$20/tonne delivered to
Shanghai. Baosteel estimates the total cost of transporting Mongolian coal to
its steelworks in Shanghai is US$140/tonne, but that includes profit margins
Mongolia is used to
balancing the influences
of Russia and China
Chinese rail could still
ultimately be built
Transport of Mongolian
coal to Chinese ports
is expensive
Total delivered costs to
Shanghai are over
US$155/t
Infrastructure is very
sparse in Mongolia



for various players through the supply chain. Nonetheless, with the current
lack of rail infrastructure, we estimate the total cost of Mongolian coking coal
on a delivered Shanghai basis at US$155/tonne.
Figure 129
Mongolian delivered costs to Chinese steel mill
0 20 40 60 80 100 120 140 160
Mining
Truck 1
Border fees
Truck 2
Washing
Truck 3
Rail to port
Port fees
Shipping
Port fees
(US$/t)
Source: Queensland Rail, Gladstone Ports, Ports Corporation of Queensland, CLSA Asia-Pacific Markets
In Chinas Inner Mongolia, three new rail projects began at the end of August.
The three projects are located in the east of the province, and will contribute to
reducing congestion for coal exports to Hebei and Caofeidian port. The province
badly needs new infrastructure as its coal production has risen at a phenomenal
pace. Production in 2010 will near 700 million tonnes, up from under 300 million
tonnes in 2006. The recent traffic jam which saw trucks queuing for 100km from
Inner Mongolia to Beijing was largely caused by the volume of trucks carrying
coal for which there was no space on the rail network.
While much of the rail capacity build out in Inner Mongolia is focused on
carrying domestic coal, there are some projects underway which will provide
rail access near the Mongolian border. Northwest of Baotou, in central Inner
Mongolia, a rail line is under construction which will reach the Mongolian
border south of the major coal deposit at Tavan Tolgoi.
Further west, a rail link is also under construction which will extend near the
border south of the deposit mined by South Gobi and MAK. Once completed,
this should reduce trucking costs for those producers by about US$25/tonne
as they save an 800km truck journey to the existing rail head. Until
significant rail infrastructure is in place on both sides of the border, Mongolia
will struggle to fulfil its potential for coal exports. See the China thermal-coal
supply section for more details on Chinas rail capacity build out.
An additional negative for Mongolian coking coal is that it generally trades at
a VIU (Value in Use) discount. It has lower volatility and higher porosity, but
generally has a higher ash content than good Chinese or Australian coal.
Mongolian thermal coal only averages a 5,000kcal/kg calorific value, which
means it is poorly placed to compete with Chinese thermal coal, though as
Chinese grades deteriorate and logistics options improve, Mongolia could
become a significant source of thermal coal later this decade.
An upside risk to coal export volumes from Mongolia could come from a trade
treaty which greatly reduces customs and other tariffs at the border, and
allows for more seamless exports. Should this occur, it could reduce
Mongolian coal costs delivered to China by up to US$15/tonne.
Logistics account for most
of the cost of Mongolian
coal to coastal mills
Inner Mongolia is
expanding rail capacity
Inner Mongolian rail will
ultimately connect to
the border
Closer cooperation between
Mongolia and China could
lower border fees
Mongolian coal also
suffers from a VIU
discount
More rail will reduce
logistics costs



Mozambique - The great hope for coking coal
Mozambique has seen significant investment in coking-coal projects over the
past few years. Riversdale and Vale will begin production from their coal
mines in late 2011, while Coal India and others are also actively assessing
projects in the country.
The countries infrastructure is in a pretty poor state after the country was
ravaged by civil war for over a decade prior to 1992, but upgrades are well under
way over the +600km line from the mines in Tete province to the port at Beira.
Significant additional investment in infrastructure will be needed for producers to
achieve planned exports above their first stage expansions, but given the
profitability of the mines and amount of investment already undertaken, we
wouldnt expect there to be too many difficulties in building this infrastructure.
Mozambique is competitively positioned to become a major coking-coal
exporter. The Tete province is undeveloped with the low hanging fruit
unpicked. Coal deposits, which consist of layers of thin seams at very low
strip ratios, should enable low cost mine development to be undertaken in
country, more than offsetting the higher infrastructure and coal transport
costs. The low strip ratios and flat lying nature of the coal seams have
enabled both Riversdale and Vale to report large coal resources and reserves.
Additionally, the countrys location on the southeast coast of Africa makes it
the closest supplier to India. It is also well positioned to ship to Brazil, as
many empty ships move past the country heading from the Pacific back to the
Atlantic market to pick up Brazilian iron ore for shipment into Asia.
China - Lacking in hard coking coal
China is by far the worlds largest coal producer, and has reserves of over 1.1
trillion tonnes, but only about 20% of this is coking coal. China is however
lacking in low volatility, high-fluidity hard coking coal. Wood Mackenzie
estimates total economic coal resources in China to be 221 billion tonnes,
with only 22% being coking coal.
Figure 130
China coal reserve by province
Basic coal reserve (bn tonnes)
National total 326.1
Shanxi 106.2
Inner Mongolia 78.9
Shaanxi 27.8
Xinjiang 14.7
Henan 11.6
Anhui 8.6
Yunan 7.9
Hebei 6.1
Gansu 6.0
Ningxia 5.8
Sichuan 5.0
Qinghai 2.0
Hunan 2.0
Jiangsu 1.5
Guangxi 0.8
Jiangxi 0.8
Beijing 0.7
Hubei 0.3
others 39.5
Only 20% of Chinas
reserves are coking coal
Mozambique is a big focus
of investment
Infrastructure needs a lot
of investment
Mozambique is
competitively positioned
Chinas reserves are
concentrated in the north
and west



In 2009 China produced 2.7 billion tonnes of coal, of which 18% was coking
coal. Shanxi provides the vast majority of Chinas coking-coal output. The
consolidation efforts in Shanxi are the main factor causing a rise in Chinas
imports for coking coal, especially hard coking coal.
Figure 131

Figure 132
China coal output by type

Shanxi coal output by type
Thermal
coal
63%
Coking
coal
37%

Thermal
coal
49.8%
Coking
coal
50.2%
Between 2000 and 2008 Chinese coking-coal mines, mostly in Shanxi, were able
to keep up with demand from a booming steel industry that saw steel production
rise from 129 million tonnes in 2000 to over 500 million tonnes in 2008. Since
2008 however, Chinas coking-coal output has struggled to grow further.
The consolidation process and drives to improve mine safety in Shanxi has
seen many small mines there close. The number of mines in the province has
been reduced from more than 4,500 to only 1,053, of which 136 are SOEs
and 927 are local mines, of which 30% of those are truly private and the rest
have mixed ownership. Output from small and medium mines has declined
from over 30 million tonnes per month in 2007 to only 22 million tonnes per
month in 1H10. The minimum size for the mines post consolidation is about
300ktpa, and most of the still operating small mines are relatively new ones
which were built to a decent safety standard.
Figure 133
Shanxi coal mine consolidation
0
200
400
600
800
1,000
1,200
1,400
2003 2004 2005 2006 2007 2008 post
consolidation
(mtpa)
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000 (No.) Capacity (LHS) No. of mines
Source: Fenwei, CLSA Asia-Pacific Markets
Recent visits to Shanxi give the impression that mine output will recover in the
coming years, albeit at rather a slow pace. The SOE consolidators complain that
with so many small scale, often illegal, mine shafts scattered around the now
consolidated large deposits, the new owners are struggling to come up with
supported steel production
up to 500 million tonnes
Some deposits have been
ruined and will struggle
to be mined
Shanxi produces most
coking coal
Half of Shanxi production
is coking coal
Number of mines in Shanxi
has been sharply reduced
Capacity is planned to
grow post consolidation



viable mine plans. In many cases the remaining deposit looks like Swiss cheese
with multiple holes through the best bits, so the SOE owners are unlikely to even
try to restart production from some deposits as it looks unsafe to do so.
In terms of Chinese costs, these have already jumped by over 30% in the past
two years as the rising focus on safety and environmental issues have combined
with a need for mines to go deeper and deeper underground into more complex
geology as resources are increasingly consumed. Some mines now extend so
deep and wide that it takes miners up to two hours to get to the active coal face.
Cash costs of production in Shanxi are still low compared to current prices. The
pre-tax cost for mining, washing and loading coking coal is between Rmb350-
400/tonne for most mines in the province, with SOE mine costs generally
higher than the smaller ones as the only existing small ones now are newer,
more efficient ones. We expect structural mining issues will cause real mining
costs to inflate at least 5% a year, based on advice from industry experts.
Figure 134
Shanxi coking coal total cost delivered to Shanghai, 2010
0 100 200 300 400 500 600 700 800
Mining cost
Overheads
Taxes and fees
Railway loading
Railway
Port handling
Other
Ship to Guangdong
Port unloading
(Rmb/t)

Figure 135
Shanxi high cost mine delivered to Shanghai, 2010
0 200 400 600 800 1,000
Mining cost
Overheads
Taxes and fees
Railway loading
Railway
Port handling
Other
Ship to Guangdong
Port unloading
Port unloading
(Rmb/t)
Shanxi costs are low
compared to current prices
Safety issues have
contributed to a 30%
jump in mining costs
Current cost for Shanxi
coal to costal steel mills is
around US$120/t
High cost mines mainly
suffer higher mining cost
and logistics charges



In terms of total costs, logistics can easily add up to more than
Rmb250/tonne from Shanxi to a coastal steel mill, (see logistics section in
main report). Royalties add another Rmb12/tonne currently, but under the
likely resource tax reforms could well exceed Rmb35/tonne. There are many
other taxes payable for mines in Shanxi, including environmental fees, safety
fund and mineral resource compensation fund contributions among others.
After adding in other non-mining costs such as sales and management of
Rmb60-70/tonne the total cost base for an average Shanxi coking-coal mine
is easily above Rmb750/tonne or US$115/tonne at current exchange rates.
The highest cost mines with washing yields below 60%, which by some
industry estimates account for 20% of production, have a cost of over
Rmb900/tonne delivered to a coastal steel mill, or US$135/tonne.
Infrastructure - Barrier to growth
Chinas rail network currently has capacity to carry less than half the
countrys coal.
Figure 136
Railway transportation of coal in China
(mt) 2003 2004 2005 2006 2007 2008 2009 1H10
Coal transported by railway 886 992 1,071 1,120 1,121 1,345 1,326 757
Total coal production 1,608 1,956 2,113 2,325 2,523 2,716 3,050 1,577
Share of railway transportation (%) 55 51 51 48 44 50 44 48
Shanxi is one of the better serviced provinces in terms of rail access, and
higher value coking coal has traditionally taken preference over thermal-
coal shipments.
Figure 137

Figure 138
Shanxi coal transportation

Inner Mongolia coal transportation
Shanxi coal
transported by
others
39%
Shanxi coal
transported by
railway
61%

Inner
Mongolia coal
transported by
others
55%
Inner
Mongolia coal
railway
transportation
45%
Despite the considerable investment in expanding Chinas rail network, the
pace of growth in coal production has meant that infrastructure bottlenecks
continue to cause problems in moving coal from production bases in the north
to consumption centres in the east and south.
Chinas rail infrastructure investment plans are discussed in more detail in the
thermal-coal section of the report, but briefly it is the northern corridor which
is most congested, and thus the focus of most investment in the rail network
and the main area which will see capacity expansion. One key area is the
expansion of the Shanxi to Shandong railway, which will allow producers there
to bypass some of the busier Bohai basin ports and take coal out from Rizhao,
near Qingdao.
Highest cost mines above
US$135/tonne
Rail network will expand
Inflation and renminbi
will drive rising costs

Resource tax could add
cost pressure
Coking coal generally takes
preference over thermal
Shanxi is relatively well
serviced by rail
Coal production continues
to outpace infrastructure
development



The cost for railing on the main Datong-Qinhuangdao line is Rmb0.12 per
tonne per kilometre. Shanxi contacts suggested the cost of railing from
Shanxi to Qinhuangdao totalled Rmb80-90/tonne for 600km, plus Rmb20-
30/tonne port fees. Smaller miners have to pay an additional Rmb40-
50/tonne to get access to the rail.
Shanxi is estimated to have no more than 600mtpa capacity to export coal by
rail at present, with the rest going by truck into other provinces. Trucking
costs have risen in recent years given the crackdown on overloading since
2007 which was destroying the road network. Trucking is economically viable
for moving coal shorter distances, say under 300km, but costs vary a lot by
province depending on the number of toll roads and local police enforcement
of vehicle loading regulations. Inner Mongolia tends to have the cheapest
trucking fees of Rmb0.25-0.40/tonne per kilometre, while in Shanxi trucking
costs are as high as Rmb0.45-0.50/tonne per kilometre.
In many cases the transport cost for mines from Shanxi to a coastal steel mill
is in excess of Rmb300/tonne.
The Ministry of Railway (MoR) expects railway capacity for coal to be raised to
over 1.2 billion tonnes by 2013. It is expected that railway bottlenecks will be
greatly reduced from 2014 as many new lines come into operation.
Taxes and trade - Swinging the balance
Taxes represent a significant and rising cost for coal mines. As the
government has clearly moved to restrict private coal mine production and
improve safety standards in recent years, this has encouraged local
authorities to levy an increasing number of taxes and fees on the mines.
A resource tax on coal has been speculated about for many years, but most
industry players now expect this to be introduced next year, in the first year
of the 12
th
Five-Year Plan. Resource taxes for primary coking coal are
currently Rmb8/tonne, while the tax for other coals varies by province, but is
generally between Rmb2.5-3.6/tonne.
The resource tax is widely speculated to be moving to between 3-5% of sales
price. The net impact of this move would be to raise costs around Rmb20-
25/tonne for coking-coal mines.
Other charges which mines incur include environmental taxes/sustainable
development fund contributions, which in Shanxi is Rmb13/tonne but is likely
lower elsewhere. The mineral resources compensation fund is applied nationally
at 1% of sales revenue, while the safety fund is charged at Rmb2-10/tonne.
The safety fund money is not paid to the government however, but kept by the
mine to reinvest in safety equipment. Further additional taxes which are levied
by some cities/provinces include relocation compensation expenses, price
adjustment funds, city/infrastructure construction taxes and education
supplementary taxes. All in all these additional taxes can easily exceed
Rmb50/tonne for mines located in a built up or environmentally sensitive area.
In terms of trade taxes, China has gradually increased these over the years to
dissuade exports. Prior to 2004, coke, coking coal and thermal coal all
received generous tax rebates. After gradually reducing, eliminating, and then
introducing export taxes, since 2008 coking and thermal coal have been
subject to a 10% export tax, while coke is subject to a 40% export tax.
Rail costs vary according
to additional fees
Taxes have increased a lot
Trucking costs are high,
but viable over short
distances
Resource tax likely to
be introduced
Expected to be 4% of sales
price, net impact Rmb20-
25/tonne cost rise
Additional taxes
are payable
Export taxes have risen to
dissuade exports



Figure 139
Coke
May 2004 Export rebate removed
November 2006 5% export tax
June 2007 15% export tax
January 2008 25% export tax
Coking coal
May 2004 Export rebate removed
November 2006 5% export tax
Source: Ministry of Commerce, media reports, CLSA Asia-Pacific Markets
Figure 140
Chinese export quota changes
(mt) Coal export
quota
Actual coal
exports
Coke export
quota
Actual coke
exports
2003 100 94 12
2004 80 87 13 16
2005 80 72 14 13
2006 80 63 14 14
2007 70 53 12 15
2008 47.7 45 12 12
2009 51 22 12 1
2010 1
st
batch 26 1Q-3Q 15 1
st
batch 4 1Q-3Q 2
Source: Ministry of Commerce, CLSA Asia-Pacific Markets
Not only are these taxes a significant barrier to export volumes, but the trend
of rising taxes over time clearly illustrates the Chinese governments rising
desire to not be a serious exporter of low value, highly polluting products.
Should exports of coke or coals become attractive in the future, we would
expect to see further tax hikes to make it unattractive again. Consequently,
we have very little in the way of exports of any coal products from China in
our forecasts.
In 2010 Chinese coking-coal production has finally managed to surpass the
pre consolidation peak of 2007. After struggling for the past two years, we
are forecasting Chinas coking-coal production growth recovering to a 5.5%
Cagr over the next five years.
Figure 141
Chinese coking-coal supply - Base case
(mt) 2007 2008 2009 10CL 11CL 12CL 13CL 14CL 15CL
Crude steel prod 489 503 568 630 665 716 772 835 897
Pig iron prod 477 469 544 609 641 686 746 807 863
CC consumption 334 328 381 426 448 480 522 565 604
Domestic CC 350 339 347 382 387 401 434 469 498
Imported CC 6 7 35 45 62 80 89 97 107
Exported CC 22 18 1 1 1 1 1 1 1
Import share (%) 2 2 9 11 14 17 17 17 18
Import penetration will
rise from 11% to 18%
by 2015
The government is
increasingly against export
of low-value products
Coking coal production
finally passed 2007 levels
in 2010
Exports used to be
encouraged, but are now
discouraged
Quotas have been a good
way of limiting exports



Indian coking coal - Domestic production concentrated in one area
India has two major problems in terms of its domestic coking-coal supply.
First, its coking coal is generally of lower grade, with higher sulphur and
higher ash than average Australian coking coals. Second, over 95% of Indias
coking-coal production comes from one province, Jharkhand, which while only
a few hundred kilometres from the coast, is one of the main areas for
Naxalite activity, which often provides a threat to the logistics and mines.
Figure 142
State-wise production of coking and non-coking coal
Coking (mt) FY06 FY07 FY08 FY09 FY10 % of total
Chattisgarh 0.2 0.2 0.2 0.1 0.2 0.3
Jharkhand 30.3 31.1 33.6 33.9 43.5 98.3
Madhya Pradesh 0.9 0.8 0.7 0.7 0.5 1.2
West Bengal 0.1 0.1 0.1 0.1 0.1 0.1
Total 31.5 32.1 34.5 34.8 44.3 100.0
An additional problem from Jharkhand in expanding its coking-coal production
is that there is so much local competition for infrastructure access. Together
with the surrounding provinces that region accounts for over 60% of Indias
thermal-coal output, and around half of its iron ore production too. This
means demand for infrastructure expansions is very high and coal cannot be
guaranteed priority.
A significant proportion of coal is consequently moved by truck. This remains
very cheap in India, though very slow given the lack of major highways. The
cost of trucking coal from Jharkhand even to steel mills near the west coast
would be no more than Rs1,500/tonne (US$35/tonne), which combined with
cheap mining costs means Indian coking coal is very cost competitive with
imports on a delivered basis even after accounting for VIU adjustments.
The reason we look for Indian coking-coal imports to rise strongly in coming
years is more to do with the technical limitations of Indian coal than their
costs. As discussed in the demand section, most of Indias existing steel
capacity is old and inefficient, and thus India has the worlds highest coke
rates. A number of existing steel plants are being upgraded however, which
combined with demand from new steel mills which are following the global
trend in favour of larger furnaces, will raise the demand for structurally
stronger HCC rather than the lower quality coking coal which India has itself.
Figure 143
Indian HCC imports
(mt) 08 09 10 11CL 12CL 13CL 14CL 15CL
HCC consumption 37 40 46 52 57 66 75 78
HCC domestic output 15 16 15 17 17 18 18 19
HCC imports 22 24 31 34 40 48 57 59
Source: Trade data, CLSA Asia-Pacific Markets
India lacks quality domestic
coking-coal reserves
Trucking is not expensive
Coking coal production is
concentrated in one state
Coking coal imports will
account for 75% of HCC
consumption in 2015
Jharkhand is badly
located for infrastructure


Appendices Coal outlook


Appendix 1: Data tables
Chinese coal demand supply balance
(mt) 09CL 10CL 11CL 12CL 13CL 14CL 15CL
Production
Key SOE 1,518 1,738 1,895 2,065 2,231 2,364 2,483
Local SOE 366 391 391 391 391 391 391
TVEs 1,166 1,189 1,178 1,166 1,154 1,120 1,086
Total 3,050 3,319 3,463 3,622 3,776 3,785 3,960
Incremental supply 334 269 145 159 154 99 85
YoY (%)
Key SOE 10.3 14.5 9.0 9.0 8.0 6.0 5.0
Local SOE 6.0 7.0 0.0 0.0 0.0 0.0 0.0
TVEs 17.3 2.0 (1.0) (1.0) (1.0) (3.0) (3.0)
Total 12.3 8.8 4.4 4.6 4.2 2.6 2.2
Consumption
Power generation 1,450 1,616 1,702 1,796 1,891 1,943 1,998
Heating 150 154 157 160 164 167 170
Coke making 476 533 560 600 653 705 755
Industrial end use 590 649 675 702 723 738 745
Non-industrial end use 134 137 139 142 145 148 151
Gas making 15 17 18 19 20 21 21
Lost in washing 338 358 387 416 437 472 475
Total 3,154 3,463 3,639 3,836 4,033 4,193 4,316
Thermal trade
Imports 92 119 130 150 180 230 255
Exports 22 19 10 5 5 5 5
Net exports (70) (101) (120) (145) (175) (225) (250)
Coking trade
Imports 35 45 57 70 83 94 107
Exports 1 1 1 1 1 1 1
Net exports (34) (44) (56) (69) (82) (93) (106)
Net trade
Imports 127 164 187 220 263 324 362
Exports 23 20 11 6 6 6 6
Net exports (104) (145) (176) (214) (257) (318) (356)
Source: CCTD, NBS, CLSA Asia-Pacific Markets
Global thermal-coal seaborne import market
(mt) 2007 2008 2009 10CL 11CL 12CL 13CL 14CL 15CL
Seaborne total 693 706 736 816 861 923 983 1,069 1,123
China 45 34 92 119 130 150 180 230 255
Japan 121 126 110 121 124 122 123 123 122
Korea 67 78 84 93 93 95 97 99 101
Taiwan 58 58 54 55 56 56 57 58 58
India 33 37 47 59 80 120 145 175 200
Other Asia 51 55 49 55 57 59 62 64 67
EU27 187 185 179 184 186 184 182 180 178
Other Europe 34 38 34 35 35 35 35 35 35
North America 50 49 39 44 48 49 50 51 52
South America 22 22 24 25 26 26 27 28 29

(mt) 2007 2008 2009 10CL 11CL 12CL 13CL 14CL 15CL
Seaborne total 684 716 730 782 845 910 977 1,075 1,161
Indonesia 193 198 231 260 286 304 318 334 350
Australia 111 121 134 137 140 180 240 330 410
China 51 43 22 19 10 5 5 5 5
Other Asia 16 21 24 26 28 30 32 34 36
South Africa 68 68 67 66 69 70 73 77 78
Russia 85 86 91 93 98 95 95 95 95
US 24 35 19 21 28 26 24 22 22
Colombia 65 69 63 68 76 82 85 88 90
Other 71 75 78 93 110 118 105 90 75
Asia Pacific Markets



Global coking-coal seaborne import market
(mt) 2007 2008 2009 10CL 11CL 12CL 13CL 14CL 15CL
Seaborne total 229 233 217 272 299 325 348 370 387
China 6 7 35 45 62 80 89 97 107
Japan 65 65 52 63 61 58 59 59 58
Korea 21 22 19 22 26 28 29 30 31
Taiwan 8 8 6 8 8 8 8 9 9
India 24 28 29 35 38 42 49 59 61
Other Asia 1 2 2 2 2 2 2 2 2
EU27 67 67 48 63 64 65 68 70 70
Other Europe 7 8 5 7 6 7 8 8 9
North America 8 7 5 7 7 7 8 8 8
South America 17 16 13 17 19 22 23 24 26

Global coking-coal seaborne export market
(mt) 2007 2008 2009 10CL 11CL 12CL 13CL 14CL 15CL
Seaborne total 220 231 226 271 309 338 362 382 395
Australia 139 139 139 154 171 179 181 185 187
Mongolia 3 4 6 13 19 25 33 41 43
China 3 2 1 1 1 1 1 1 1
Other Asia 2 2 2 3 4 7 8 10 12
Canada 26 27 24 27 32 36 39 40 40
US (ex Canada) 26 35 32 48 55 59 62 62 62
Mozambique 0 0 0 0 0 3 5 10 16
CIS 11 13 13 15 17 19 23 24 25
Other 11 9 8 10 11 10 10 10 10
Apparent deficit 9 2 (9) 1 (10) (13) (14) (12) (8)

Global hard coking-coal seaborne import market
(mt) 2007 2008 2009 10CL 11CL 12CL 13CL 14CL 15CL
Seaborne total 153 137 166 186 216 238 257 279 288
China 5 5 26 35 52 66 73 79 86
Japan 36 37 31 34 35 33 33 33 33
Korea 12 12 12 13 15 17 17 18 19
Taiwan 5 5 4 5 5 5 5 5 5
India 19 22 24 28 34 40 48 57 59
Other Asia 1 1 1 1 1 1 1 1 1
EU27 49 36 45 45 48 48 50 55 52
Other Europe 6 4 5 5 4 4 4 5 5
North America 6 4 6 6 6 6 6 7 7
South America 11 10 11 11 13 15 15 16 17

Global hard coking-coal seaborne export market
(mt) 2007 2008 2009 10CL 11CL 12CL 13CL 14CL 15CL
Seaborne total 144 155 148 185 211 234 248 263 273
Australia 76 77 75 86 95 100 100 103 103
Mongolia 2 2 3 8 11 14 18 22 23
China 1 1 1 0 0 0 0 0 0
Other Asia 3 3 3 4 5 8 9 11 13
Canada 23 24 22 24 28 32 35 36 36
US (ex Canada) 26 35 32 48 55 61 62 62 62
Mozambique 0 0 0 0 0 3 5 10 16
CIS 6 7 7 8 9 10 12 12 13
Other 8 6 6 7 8 7 7 7 7
Apparent deficit 8 (18) 18 1 5 4 9 16 15
North America and Russia
contribute some growth



Appendix 2: Technical terms
In terms of coal geology, there are four types of coal:
Anthracite. Least common of the coals, at less than 1% of worlds coal
reserves. It contains 86-97% carbon with a slightly lower heating value
than that of bituminous coal.
Bituminous. The worlds most commonly found coal (52% of worlds
reserves), containing 45-86% carbon content. This includes all
metallurgical coal grades.
Sub-bituminous. Sub-bituminous coal generates less heat per tonne
compared to bituminous coal, but also has lower sulfur content and only
35-45% carbon content.
Lignite. This is the lowest grade of coal. It is crumbly, has high moisture
content, generates the least heat content per tonne of all the coal types,
and has only 25-35% carbon.
Coal types
Sales
High Moisture content of coal
Carbon/Energy content of coal High
% of world reserves
% of world reserves
Uses
Uses
Sales
Sales
Power generation
Cement manufacture
Industrial uses
Power generation
Cement manufacture
Industrial uses
Power generation
Cement manufacture
Industrial uses
Power generation
Cement manufacture
Industrial uses
Manufacture of iron &
steel
steel
Domestic/industrial
including
smokeless fuel
Domestic/industrial
including
smokeless fuel
Largely power
generation
Largely power
generation
Thermal
Steam coal
Thermal
Steam coal
Metallurgical
Coking coal
Metallurgical
Coking coal
Bituminous
52%
Bituminous
52%
Anthracite
1%
Anthracite
1%
Lignite
17%
Lignite
17%
Sub-
bituminous
30%
Sub-
bituminous
30%
Hard coal
53%
Hard coal
53%
Low rank coals
47%
Low rank coals
47%
Sales Sales
% of world reserves
% of world reserves
Uses
Uses
% of world reserves
% of world reserves
Uses
Uses
Sales
Sales
Power generation
Cement manufacture
Industrial uses
Power generation
Cement manufacture
Industrial uses
Power generation
Cement manufacture
Industrial uses
Power generation
Cement manufacture
Industrial uses
steel
steel
Domestic/industrial
including
smokeless fuel
Domestic/industrial
including
smokeless fuel
Largely power
generation
Largely power
generation
Sales
Sales
Power generation
Cement manufacture
Industrial uses
Power generation
Cement manufacture
Industrial uses
Power generation
Cement manufacture
Industrial uses
Power generation
Cement manufacture
Industrial uses
steel
steel
Domestic/industrial
including
smokeless fuel
Domestic/industrial
including
smokeless fuel
Largely power
generation
Largely power
generation
Thermal
Steam coal
Thermal
Steam coal
Metallurgical
Coking coal
Metallurgical
Coking coal
Thermal
Steam coal
Thermal
Steam coal
Metallurgical
Coking coal
Metallurgical
Coking coal
Bituminous
52%
Bituminous
52%
Anthracite
1%
Anthracite
1%
Lignite
17%
Lignite
17%
Sub-
bituminous
30%
Sub-
bituminous
30%
Bituminous
52%
Bituminous
52%
Anthracite
1%
Anthracite
1%
Lignite
17%
Lignite
17%
Sub-
bituminous
30%
Sub-
bituminous
30%
Hard coal
53%
Hard coal
53%
Low rank coals
47%
Low rank coals
47%
Hard coal
53%
Hard coal
53%
Low rank coals
47%
Low rank coals
47%
Source: World Coal Institute
Two main types of coal are used to make coke for steelmaking:
Hard coking coal (HCC)
This type of coal is used to make coke, by heating in the absence of oxygen.
HCC is structurally very strong and is layered in the blast furnace between
iron ore to provide the energy to melt the iron and also an escape valve for
gasses in the furnace. The volume of HCC required in a furnace depends on
the size of the furnace, with more HCC required in larger furnaces as the
weight of the burden is relatively higher.
Semi-soft coking coal
This type of coal is similar to HCC but does not have the same physical
strength, and is thus unable to hold up the burden in a blast furnace. It can
be blended with HCC however, and can be used in a larger proportion in
smaller furnaces where the structural properties are not so key. SSCC is used
in the coke blend but results in a weaker coke and more impurities.



Coking coal is valued according to the following properties:
Coke Strength (CSR)
This indicates the physical strength of the resulting coke. Coke is layered
with iron ore in the blast furnace and has to be strong enough to support
the iron ore. The larger the furnace, the greater the weight the coke has
to support.
Ash
Ash is the unburnt, inorganic
residue left behind after coal is
completely incinerated. The
more ash, the lower the coke
yield and the more slag (waste)
is produced from the furnace,
meaning more coke is
consumed per tonne of pig iron.
Plasticity
This refers to the melting and
bonding behaviour of the coal.
Volatile Matter
Indicates the amount of coal
that will be gasified and given
off during the coking process,
impacting the coke yield.
Pulverised coal injection (PCI)
This coal is crushed into a powder to be injected into the bottom of a blast
furnace to provide energy to melt the iron ore into iron. However, as PCI doesnt
provide any structural benefits, only energy, there is a technical limit to how
much can be used. The most advanced plants, such as Ijmuiden in Holland, use
round 220-230kg PCI to produce one tonne of pig iron, and a similar amount of
HCC. From this level it would be impossible to reduce HCC usage any further else
the burden would collapse on itself. The global average PCI consumption is
around 150-170kg/t.
Thermal coal
This is any other coal without coking properties. Coal is mostly used for
thermal power generation, and by the cement and other industries which
require energy. Thermal coal is valued based on its energy content (Kcal/kg),
ash content and sulphur content.
Others
There are numerous other grades of coal, which mostly have a lower calorific
(Kcal) value than thermal coal. This market sector is relatively small however,
and given the problem with data classifications in trade and production data
from most countries, it is impossible to separate these smaller market
segments with any accuracy. Consequently, we just include all non-coking
coals in thermal coal.
Washing and yield losses
Most coal is washed at the mine site, which removes impurities and thus
raises the value of the product to be transported. However, in China many
mines lack washing facilities, and washing may be done in larger facilities
which gather tonnes from many smaller producers. Consequently most
Classification of coking coal
Source: BMA



international statistics on coal production and trade are reporting washed, ie
consumable, grades, but Chinese production data refers to raw, unwashed (or
Run of Mine) coal. Mongolian coal is also mostly unwashed due to the lack of
water in the country which is the main input for a washing plant.
Wash yields vary, but in some instances can lose up to 40% of ROM coal. This
means the Chinese production data is substantially greater than the
calculated consumption data. Inner Mongolia is a particular problem, as a
significant volume of its coal production is low grade, unwashed lignite, which
has a substantially lower calorific (energy) value than bituminous coal from
other provinces such as Shanxi, and thus we have to make a significant
upgrade to their relative production cost to reflect this value in use (VIU).
The blast furnace process

Coking-coal demand in the steel-making process
Source: Steel Technology Primer, Prudential Securities; BMA/BHP Billiton
Steel production
process outline
Coking coal feeds into the
blast furnace with iron ore



Appendix 3: Long-run Chinese steel
The debate surrounding Chinas potential steel consumption tends to focus on
whether China can achieve per capita rates similar to other East Asian
economies, or whether the fact that 60% of Chinas population lives in
landlocked provinces and hence should be immune from the influence of
export industries will limit consumption to a similar level to the US or Europe.
We firmly believe China can achieve a per capita rate of consumption greater
than the US and Europe for a number of reasons:
Increasing urbanisation - Urbanisation may increase rather than slow over the
next few years, as a way to achieve the governments aims of social harmony.
Concern over the widening wealth gap can only be alleviated by raising the
wealth of rural people, and one of the key ways to achieve this is to
encourage more people to move to the cities and for the remaining people to
increase productivity on the farms. The government has already eliminated all
agricultural taxes, which has helped to raise rural net incomes over the past
decade at a similar pace to urban dwellers. However, given the low base, rural
incomes need to grow much faster to begin to close the gap and this will
require significant investment in productivity improvements.
Chinas urbanisation rate
0
10
20
30
40
50
60
1990 1994 1998 2002 2006 2010 2014 2018
(%)
Source: Global Insight, CLSA Asia-Pacific Markets
Population density - Given ongoing urbanisation trends and Chinas
determination to prevent urban sprawl to maintain much needed agricultural
land, Chinas cities will have to grow upward rather than outward. With most
of the population ultimately living in high rise apartments, this will also
require better public transport infrastructure which is also steel intensive.
Steel-exporting sectors - While Chinas economy will gradually rebalance from
export driven to domestic driven demand, China will continue to be a major
exporter of steel intensive goods such as ships, appliances and eventually
cars, as with Korea, Taiwan and Japan. However, only 40% of Chinas
population lives in coastal provinces where these industries are prevalent, so
exports on a per capita basis should be somewhat lower than in other East
Asian countries.
Urbanisation will continue
for many years
Trends towards taller
cities will continue
Exports will continue to
form a large part of the
economy
There are many reasons
why Chinas steel
consumption will grow



Chinas steel containing export sectors, January to May 2010 YTD
0
10
20
30
40
50
60
70
80
90
100
Machinery Appliances Automotive Shipbuilding Containers
Export Domestic (%)
Economic development - China will continue to have high investment rates as
infrastructure and apartments continue to be built. With 75% of the
population still living in housing given to them by the government near 20
years ago, there is still a significant volume of construction activity to come.
With the build quality of some of the recent buildings, it can also be argued
there will be shorter replacement cycles in China versus Japan and Korea,
though this will add to the scrap pool, which will be the ultimate downfall of
iron ore prices in the 2020s.
While we believe Chinas structural urbanisation trends and population density
will result in an average 700kg/cap eventually, it wont occur until China
surpasses an upper-middle income level, ie, US$10,000 GDP per capita. With
reference to other economies development, Japan only reached 600kg/cap in
1987 when GDP/cap was US$14,400, and peaked in 1990 at 752kg/cap when
GDP was US$18,800. Taiwan only exceeded 600kg/cap when GDP was
US$9,800/cap, while Korean GDP was US$10,200/cap before 600kg/cap was
reached.
Global per-capita steel consumption
0
200
400
600
800
1,000
1,200
1,400
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000
China India
Japan Korea
Taiwan Germany
Italy China forecast
(kg/cap)
Source: Worldsteel.org, IMF, CLSA Asia-Pacific Markets
Chinas steel intensity
looks too high for its level
of economic development
FAI rates will remain high
for many years



The key to China reaching a 700kg/cap rate is economic development in the
centre and west. Three coastal cities, Shanghai, Beijing and Tianjin already
have a steel consumption rate of around 1,000kg/cap, similar to Korea and
Taiwan, but their GDP/cap is also much higher than average at over
US$10,000 per cap for Beijing and Shanghai. They also benefit from heavily
export dependent industries and the presence of heavy steel consuming
shipyards and car factories, similar to Korea and Taiwan. Obviously the land
locked provinces will not be able to replicate these rates of steel consumption
as they will struggle to develop any export related industries. Nonetheless,
they should still be able to achieve consumption rates of around 500kg/cap
just based on urbanisation, infrastructure requirements and general
industrialisation.
Key areas are provinces, such as Hubei and Hunan, with populations of
around 60 million each, a GDP rate of little more than US$3,000/cap and an
urbanisation rate in the low 40%s. As these provinces with larger populations
reach the acceleration points in the development s-curves they will spur
Chinas growth to its potential 700kg rate.
Chinas GDP per province and population
Population 70m~90m
Population > 90m
Population 40m~70m
Population 20m~40m
Heilongjiang
GDP 121
Jilin
GDP 105 Inner Mongolia
GDP 142
Sichuan
GDP 207
Qinghai
GDP 16
Tibet
GDP 6
Xinjiang
GDP 63
Gansu
GDP 50
Population < 20m
Shanxi
GDP
108
Hebei
GDP
249
Shaanxi
GDP 120
Ningxia
GDP 20
Yunnan
GDP 90
Hubei
GDP 188
Jiangxi
GDP 111
Hunan
GDP 189
Guizhou
GDP 57
Guangxi
GDP 113
Shandong
GDP 495
Jiangsu
GDP 499
Zhejiang
GDP 334
Hainan
GDP 24
Fujian
GDP 175
Liaoning
GDP 221
Henan
GDP 284
Guangdong
GDP 572
Anhui
GDP 147
Tianjin
GDP 110
Beijing
GDP 174
Shanghai
GDP 218
Chongqing
GDP 96
GDP (2009) Unit: US$bn
Population 70m~90m
Population > 90m
Population 40m~70m
Population 20m~40m
Heilongjiang
GDP 121
Jilin
GDP 105 Inner Mongolia
GDP 142
Sichuan
GDP 207
Qinghai
GDP 16
Tibet
GDP 6
Xinjiang
GDP 63
Gansu
GDP 50
Population < 20m
Shanxi
GDP
108
Hebei
GDP
249
Shaanxi
GDP 120
Ningxia
GDP 20
Yunnan
GDP 90
Hubei
GDP 188
Jiangxi
GDP 111
Hunan
GDP 189
Guizhou
GDP 57
Guangxi
GDP 113
Shandong
GDP 495
Jiangsu
GDP 499
Zhejiang
GDP 334
Hainan
GDP 24
Fujian
GDP 175
Liaoning
GDP 221
Henan
GDP 284
Guangdong
GDP 572
Anhui
GDP 147
Tianjin
GDP 110
Beijing
GDP 174
Shanghai
GDP 218
Chongqing
GDP 96
GDP (2009) Unit: US$bn
Coastal provinces already
nearing Korean levels of
steel intensity
Inland provinces, with 60%
of the population, are the
key to sustained growth



With this solid foundation for consumption growth, we forecast Chinas crude
steel output to grow at a 7.3% rate over the next five years, and a 5.5%
Cagr over the next ten years. The growth rate in coking-coal consumption will
be slightly lower, but still above 5%, as scrap recovery in China will rise later
this decade.
Scrap will displace coking-coal demand in the long run
As Chinas steel demand only began to surge in the early 2000s, the countrys
current scrap pool is rather small compared with the size of its steel industry,
and Electric Arc Furnace (EAF) steel production has seen little growth,
remaining at 40-50 million tonnes for the past 10 years.
The pool of scrap steel in an economy generally lags steel consumption by
10-20 years. While steel from consumer-related usage (autos, appliances etc)
may be scrapped in five to 10 years, most steel consumption tends to be in
construction projects that have a useful life of up to 50 years. On average,
most economies tend to see their scrap pool grow significantly only 20 years
after their steel consumption accelerated. Koreas obsolete scrap generation
has been around 10-12 million tonnes over the past five years, which
represents 25-33% of steel production lagged 10 years, or 50-75% of
production lagged 20 years. Japans obsolete scrap generation is a similar
proportion at 25-33% lagged 10 years, but given its steel output peaked in
1980, it is also only 25-33% of steel output lagged 20 years.
Assuming a similar obsolete scrap generation ratio for production lagged 10
years in China, which would be an increase from the 15-20% rates seen
recently, the countrys obsolete scrap generation could be 150-200mtpa by
2020, up from 25 million tonnes in 2009. Should Indias steel demand
accelerate in the next decade, it is likely that China would become a
significant exporter of steel scrap (there is now a 40% export tax on scrap
to keep all available supply within China, but we would expect this to be
eliminated once supply is more than sufficient to meet domestic demand at
the end of this decade). Nonetheless, it is still quite feasible that EAF steel
production could rise by more than 100 million tonnes over the next decade,
thus reducing the market for seaborne coking coal by 70 million tonnes from
where it might otherwise be.
Chinas potential scrap production
0
200
400
600
800
1,000
1,200
1980 1984 1988 1992 1996 2000 2004 2008 12CL 16CL 20CL
Steel consumption Scrap generated (mt)
Scrap is a serious
long-run threat to iron
ore in China
Scrap generation lags
steel consumption by
up to 20 years
China could be generating
150mtpa of scrap from
2020, up sixfold
Chinas scrap generation
will take off later
this decade



Appendix 4: Indian thermal demand
India - Rising power
India will see a strong rise in thermal generating capacity in coming years,
and this will translate into significant demand for imports as domestic supply
will struggle to keep up with demand growth (see supply section). While India
will also import a growing volume of coking coal, its relative impact will not be
as significant as for the thermal market.
Coal consumption pattern of India
0
100
200
300
400
500
600
FY07 FY08 FY09 FY10
Power Steel Cement Others
(mt)
utilities; provisional. Source: CLSA Asia-Pacific Markets
Thermal-coal demand to surge
Demand for thermal coal in India will grow very strongly over the next few
years, as a recent spate of investment in thermal generation plants come into
operation. Nearly 75% of Indian thermal-coal consumption is by power
utilities, with the remainder mostly from heavy industrial plants.
India power consumption by sector
Power - Utility
75%
Other
7%
Cement
6%
Power - Captive
8%
Steel (non-coking)
4%
Indian thermal power
capacity to rise strongly
Thermal-coal demand will
surge in line with
generation capacity




Indias power demand basket - End-user breakdown
Domestic
27%
Commercial
8%
Irrigation
22%
Industry
35%
Others
8%
Breakup of Indias GDP
0
20
40
60
80
100
F
Y
7
5
F
Y
7
7
F
Y
7
9
F
Y
8
1
F
Y
8
3
F
Y
8
5
F
Y
8
7
F
Y
8
9
F
Y
9
1
F
Y
9
3
F
Y
9
5
F
Y
9
7
F
Y
9
9
F
Y
0
1
F
Y
0
3
F
Y
0
5
F
Y
0
7
F
Y
0
9
Agri Industry Services (%)

Source: Ministry of Finance, Government of India, CLSA Asia-Pacific Markets
Electricity-demand and real-GDP growth
0
2
4
6
8
10
12
F
Y
9
4
F
Y
9
5
F
Y
9
6
F
Y
9
7
F
Y
9
8
F
Y
9
9
F
Y
0
0
F
Y
0
1
F
Y
0
2
F
Y
0
3
F
Y
0
4
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
Demand Real GDP
Average demand Average GDP
(%)
Share of services in
GDP has increased
progressively . . .

. . . which is not as
energy-intensive as
industry and agriculture

Thus, elasticity of power
demand has declined

Share of industry and
agriculture has fallen
in the GDP . . .

. . . but still constitutes
more than 50% of
power consumption
Growth in power
demand has lagged
behind that in GDP



We expect power demand to grow more or less at the same rate as GDP, as
India has a substantially smaller share of industrial output to GDP than China.
Industry is the largest part of the pie in overall power consumption in the
country. However the higher (and growing) share of services in GDP (which is
less energy-intensive than industry and agriculture) could lead to a continued
drop in elasticity of power demand. On the positive side, increasing industrial
activity, electrification of villages and rising power supply over the next couple
of years should all create additional demand for power.
To support the countrys strong GDP growth, the power sector will need to
continue its aggressive capacity expansion beyond the 13
th
Five-Year Plan.
CEAs 17
th
Electric Power Survey (EPS) forecasts energy demand to increase
from 745TWh in FY08 to 969TWh in FY12 - a Cagr of 6.8%. Peak demand is
likely to increase from 113GW to 153GW (7.9% Cagr) over the same period.
Peak-demand forecast

Energy-demand forecast
113
122
131
142
153
100 115 130 145 160
2007-08
2008-09
2009-10
2010-11
2011-12
(GW)

745
795
848
906
969
600 700 800 900 1,000
2007-08
2008-09
2009-10
2010-11
2011-12
(TWh)
India already suffers from a considerable power deficit, estimated around
11%. With a large proportion of the population with no/inadequate electricity
supply, India needs to continue adding capacity aggressively for many years.
Energy deficit
0
2
4
6
8
10
12
14
FY93 FY97 FY01 FY05 FY09 FY13E FY17E
(%)
We believe power shortages in India are understated. In many cases, they
are reported by states that do not have adequate means to measure demand
and supply. These states are disincentivised politically to report high loss
levels. Moreover, a study by the National Council for Applied Economic
Research (NCAER) shows Indian consumers - especially in smaller towns and
villages - will buy more consumer goods that use electricity if power supply
were to improve. We believe the same is true for a number of industries.
Many manufacturing units have shied away from expanding capacity due to a
Both energy and
peak deficit were in
double digits in FY09
Power shortages
are understated
A 6.8% Cagr in energy
demand over FY08-12 and
7.9% in peak demand
We expect demand
to grow at the
same rate as GDP



lack of regular power supply. As this changes, we should expect a virtuous
upward spiral in demand when rising availability allows manufacturers to
invest in factories to consume more power and thus inspire further power
capacity expansion and so on.
To meet this strong demand, generating capacity is already seeing massive
investment, spurred by reforms earlier in the decade. In 2003, India passed
the Electricity Act, which ushered in a new era of reforms, leading to a
massive increase in new investment especially from the private sector.
Capacity addition over FY10-13 should exceed that in the past 10 years with
US$50bn being invested in the sector. In total India is likely to add about
50GW of total power capacity over the next three years.
Capacity-addition targets
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
F
Y
9
3
F
Y
9
4
F
Y
9
5
F
Y
9
6
F
Y
9
7
F
Y
9
8
F
Y
9
9
F
Y
0
0
F
Y
0
1
F
Y
0
2
F
Y
0
3
F
Y
0
4
F
Y
0
5
F
Y
0
6
F
Y
0
7
F
Y
0
8
F
Y
0
9
F
Y
1
0
F
F
Y
1
1
F
F
Y
1
2
F
11
th
plan 10
th
plan 9
th
plan 8
th
plan
12,282MW 19,015MW 21,095MW ~50,000MW
India has not finalised the capacity targets in its 12
th
Five-Year Plan yet, but
preliminary studies indicate 100GW. GDP growth over this period is likely to
be 7-8%.
Coal based power generation capacity (86GW) is 53% of the total installed
capacity (162GW) in the country and it contributes 66% of the generation (in
kWh). We have identified 105 thermal generation plants currently in operation
throughout India, and another 59 which we expect to come into production
over the next three years.
Demand 426 451 542 603 657 711
Domestic supply 374 387 432 473 489 522
Imports 52 64 110 132 168 189
Indias thermal-coal capacity expansions have struggled to deliver in recent
years and we believe they are unlikely to accelerate in line with demand (see
supply section). Consequently, the ramp up in Indian thermal power
generation will lead to a surge in import demand for thermal coal, heavily
weighted towards the next two years.
Better performance in
achieving targets under
11
th
plan than in the past
The 12
th
plan would
most likely target
addition of 100GW
We expect 50GW
addition in the 11
th
plan
No production has



Dependence on imports to increase
The Ministry of Power expects coal imports for the power sector to increase
from 16 million tonnes in FY09 to 68 million tonnes in FY12. We expect the
imports to exceed these estimates significantly in FY12. For FY11, 35 million
tonnes of imports have been targeted for blending purposes for power
projects. The imports of dedicated imported coal-based power projects alone
would be over and above this.
Demand/supply balance for coal for power in FY11 and FY12
(mt) FY11 FY12
Demand
Coal requirement for existing capacity 426 451
Coal requirement for FY11 additions 25 91
Total demand 451 542
Supply
Coal India 335 355
SCCL 31 33
Captive mines 22 22
Total supply 388 410
Gap 63 132
Imports required to fill the gap 43 90
Calculations are done for 85% PLF. Source: CLSA Asia-Pacific Markets
Actual and expected imported coal requirements (for power sector)
90
43
28
16
10 10
10
5
3 3 4
0
10
20
30
40
50
60
70
80
90
100
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11CL FY12CL
Actual imports (mt) Requirement
This is only for utilities and does not include captive power projects. Source: Ministry of Power, CLSA
We believe it is too simplistic to assume that all gaps in domestic coal
production would be filled up by imports, for example; there are many
project locations in the country where it would be uneconomical to transport
the imported coal from the ports. Thus, the utilisation rates for the projects
where imported coal is not an option would be going down.
Coal imports are likely to
increase significantly over
the next three years



Coal requirement for capacities commissioned in FY10
Thermal power station Agency/
Utility
Capacity
(MW)
Coal
requirement
Imported Domestic
Torrangallu U-1 JSW Energy 300 0.9 0.9
Torrangallu U-2 JSW Energy 300 0.9 0.9
Lanco Amarkantak U-1 Lanco
Amarkantak
300 1.5 1.5
Bakreswar U-5 WBPDC 210 1.1 1.1
Kahalgaon U-7 NTPC 500 2.5 2.5
Bhilai U-2 NTPC/SAIL (JV) 250 1.3 1.3
Mundra Adani U-1 Adani Power 330 1.3 1.3
Suratgarh Ext. U-6 RRVUNL 250 1.3 1.3
Kota U-7 RRVUNL 195 1.0 1.0
Budge-budge U3 CESC 250 1.3 1.3
Vijayawada Ext. U-l APGENCO 500 2.5 2.5
Chabra U-1 RRVUNL 250 1.3 1.3
Dadri U-5 NTPC 490 2.5 2.5
New Parli Ext. U-2 MAHAGENCO 250 1.3 1.3
Rosa U-l Reliance Power 300 1.5 1.5
Chandrapura (DVC) U-7 DVC 250 1.3 1.3
Paras Ext. U-2 MAHAGENCO 250 1.3 1.3
Lanco Amarkantak U-2 Lanco
Amarkantak
300 1.5 1.5
Mundra Adani U-2 Adani Power 330 1.3 1.3
Grand total 5,805 27.4 4.5 22.9
With demand for imported coal clearly set to soar, Indian companies have
been using a variety of strategies for securing imported coal:
Equity stakes in coal mines abroad. Tata Power has been the first mover
in this field by taking up equity stakes in the Arutmin and KPC mines of Bumi
Resources in Indonesia. The company has acquired a high quality coal asset
with this move and is also assured of the off-take for its 4,000MW Mundra
power project. Coal India is also considering the same strategy of taking
equity stakes and in turn having an off-take agreement. The positives in this
strategy are that the Indian company need not have operations in the foreign
land and is assured of an off-take agreement. However, the risk is too much
dependence on the foreign player and a possible lack of transparency.
Long-term coal purchase agreements. Some companies have entered
into long-term contracts with the coal mining companies/coal traders to
supply coal for the life of the projects. Lanco has entered into this kind of
arrangement for its Nagarjuna project of 1,025MW. The coal prices in such
contracts usually have a base coal price and a variable part which is linked
to standard coal indices.
Back to back agreements with entities having mining licences.
This is a strategy chosen by a number of Indian players, including Adani
Power and JSW Energy. The mining licence in this case is held by a
Tata Power owns a 30%
stake in KPC and Arutmin
mines in Indonesia
Change in mining laws
is the biggest risk



foreign partner (company or an individual) who transfers his rights to a
company owned by the Indian company which will do the mining as well
as use the coal.
Risks common to all strategies are:
A change in mining laws in the foreign countries is a risk for all the above
strategies.
The direction of coal prices could impact the second and the third strategy
more than the first.
Ocean freight costs are also a key variable for importing large volumes of
coal. Some companies have entered into long-term charters or purchased
ships to mitigate this risk.
India has a number of geographical advantages to becoming a significant coal
importer. Given the volume of iron ore and other materials imported in China
from Brazil, there is a considerable surplus of empty ships making the return
journey. Thus ship owners will charge very low rates for vessels to carry a
coal cargo from Australia or Indonesia into India, en-route back to the
Atlantic market. Also, India is positioned significantly closer to Indonesia and
South Africa than Europe and North Asia, so will see much cheaper landed
cost of coal. For energy this is not so important given energy is not traded
across borders, but for steel this is a significant advantage for the Indian steel
industry in turning increasingly toward coking-coal imports.
Other reasons why we are positive on Indias prospects to become a major
thermal-coal importer are that Indias coal is mostly located in the north and
northeast, and the logistics troubles of moving coal to the coast to ship
around the coast is very problematic, especially when that area is also one of
the major iron ore production bases. The presence of Naxalite rebels is also a
major barrier to further infrastructure investment in the area. Additionally,
India has an extensive coastline, so seaborne imports make considerable
sense for power plants located in the south and west of India as imported
coal does not need to travel too far inland. We believe these factors
contribute upside to our thermal-coal import volume forecasts.



Appendix 5: Chinese power demand
Chinas thermal-coal imports have risen from 13 million tonnes in 2007 to 39
million tonnes in 2009, and an annualised 60 million tonnes over 1H10. On a
net basis, China has switched from being an exporter of 32 million tonnes in
2007 to net imports of 20 million tonnes in 2009. Thermal coal accounts for
approximately 30% of Chinas coal imports.
China thermal-coal import and export
(40,000)
(30,000)
(20,000)
(10,000)
0
10,000
20,000
30,000
40,000
50,000
2007 2008 2009 2010 Jan-Sep
Thermal coal import Thermal coal export Net import ('000 t)
Source: CCTD, CLSA Asia-Pacific Markets
Unlike coking-coal demand, which we expect to see solid growth in the years
ahead, for thermal coal we expect demand to slow significantly, as the
economy rebalances away from investment driven growth.
One of the key drivers of Chinas rising energy intensity since 2002 has been
the structural change in its economy. There was a spike in FAI as a proportion
of GDP from 2003 onwards. Prior to that in 1990-02, the ratio of FAI rose by
12ppts or on an average 1ppt per annum. However, during 2002-09 this went
up by 31ppts or 4.4ppts per annum, growing from Rmb4,350bn in 2002 to
Rmb22,484bn in 2009 - a 26% Cagr.
Chinas FAI as percentage of GDP
67
55 53
52
48
44
41
34
33 33 34
32
32 33
35
37
30
26
24
36
0
10
20
30
40
50
60
70
80
1
9
9
0
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
(%)
1990-2002 = 12ppt increase
2002-09 = 31ppt increase
Chinas FAI increase
jumped from 1ppt per
annum to 4ppts
Higher FAI drove rising
energy intensity



China FAI rose to Rmb22tn in 2009
0
5,000
10,000
15,000
20,000
25,000
1
9
8
9
1
9
9
0
1
9
9
1
1
9
9
2
1
9
9
3
1
9
9
4
1
9
9
5
1
9
9
6
1
9
9
7
1
9
9
8
1
9
9
9
2
0
0
0
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
(Rmbbn)
Deng's southern tour
China joins WTO
This led to unprecedented growth in high energy-consuming sectors like
ferrous and nonferrous metals, cement and chemicals. These sectors share in
industrial energy consumption rose from 47.8% in 2002 to 55.7% in 2007.
China joined the WTO in 2001, and won the 2008 Olympics bid in the same
year. Accession to the WTO had a big impact on exports, which in turn played
a part in energy consumption growth.
Another way to look at the phenomenon of rising investments as a proportion
of GDP is through gross capital formation (GCF). Our economist Eric Fishwick
points out that this is a measure more comparable to other economies as the
way land transactions are measured overstates the FAI figure.
During 1980-01, GCF as a percentage of GDP was up only 1.6ppt (despite a
lot of volatility). From 2003 onwards there was a marked increase in the
capital investment driven growth and GCF as a percentage of GDP rose by
11ppts to reach 47.5% in 2009.
There has been a high correlation between Chinas energy consumption and
Chinas GCF growth However, it is also apparent that while a pick up in GCF
was one of the causes of higher energy intensity the ratio of energy
consumed to GCF also rose. This is because the share of higher energy-
consuming sectors - ferrous and nonferrous metals, cement and chemicals
rose very sharply during this period.
Gross capital formation as % of GDP

Growth in energy use vs GCF growth
30
35
40
45
50
1980 1989 1998 2007
Increase over 1980-2001 = 1.6ppt
Increase over 2001-2009 = 11ppt
(%)

(10)
(5)
0
5
10
15
20
25
1981 1990 1999 2008
GCF growth
Growth in energy consumption
(%)
Source: CEIC, NBS, CLSA Asia-Pacific Markets
FAI has increased sixfold
since China joined the WTO

Increase in GCF as
percentage of GDP
accelerated from 2002
Growth in GCF and energy
consumption have
high correlation
Chinas share of high-
energy consuming sectors
rose with share of GCF
Sharp growth in energy
consuming sectors - metals,
cement and chemicals



Manufacturing sector drove growth in energy demand
We have analysed Chinas energy demand growth during the five-year period from
2002-07 and the preceding five years 1997-02. The overall energy consumption
during the latter period grew by 176% (versus 117% in the previous five-year
period). While in 1997-02 energy-consumption growth by the manufacturing
sector was lower than overall energy growth; during 2002-07 it was significantly
higher. The highest rate was in the ferrous and nonferrous metal sectors.
Growth in energy consumption in China across sectors
103
94
88
137
108
117
176
238
243
187
184
194
0
50
100
150
200
250
300
Manufacturing Raw
Chemicals
Non metallic
minerals
Non ferrous
metals
Ferrous
metals
Total
1997-02 2002-07 (%)
Power demand growth
Analysis of power demand growth by segments reveals an even starker picture.
Reliable data for power consumption was available for a longer time and hence
we have compared power consumption trends during 2002-09 with those during
1995-02. Overall growth in power consumption in the later period was almost
double. However, growth in power consumption in the manufacturing sector was
almost three-fold and in nonferrous metals more than four-fold.
Growth in electricity consumption in China across sectors
55
32
47
94
46
64
125
212
208
142
112
145
0
50
100
150
200
250
Manufacturing Raw
Chemicals
Non metallic
minerals
Non ferrous
metals
Ferrous
metals
Total
1995-2002 2002-09 (%)
Growth in power demand from manufacturing shot up
Between 1985 and 2002 power demand growth in the manufacturing sector
was lower than the overall power demand growth in most years. However,
this changed from 2003 onwards with the manufacturing sector accounting
for much higher growth.
Manufacturing sector was
an important driver of
growth post 2002
Metals, cement and
chemicals drove most of
the growth in energy use
Post 2002 power demand
growth in manufacturing
jumped nearly three-fold
Pre-2002 power demand
growth from manufacturing
was less than total growth
High-energy consuming
industries grew faster



Total vs manufacturing power demand

Total vs ferrous metal power demand
0
5
10
15
20
1986 1993 2000 2007
Total power demand
Manufacturing
(%)

0
4
8
12
16
20
24
28
1986 1993 2000 2007
Total power demand
Ferrous Metals
(%)
This trend is even more evident in the growth of power demand for ferrous
metals where the power demand growth was almost twice as high as the
average power demand growth during some years.
Sharp increase in production of energy intensive goods
The spike in energy and power consumption in these sectors was driven by an
unprecedented production growth of steel, nonferrous metals, cement,
chemicals, autos, power-generation equipment, and mining equipment.
Steel production in China

Production of sulphuric acid in China
0
100
200
300
400
500
600
700
1980 1984 1988 1992 1996 2000 2004 2008
Cagr over 1980-2002 = 9.3%
Cagr over
2002-2009 = 20.2%
(m tonnes)

0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
1980 1984 1988 1992 1996 2000 2004 2008
Cagr over 1980-2002 = 6.5%
Cagr over
2002-2009 = 10%
(mt)

Cement production in China

Mining equipment production in China
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
1980 1984 1988 1992 1996 2000 2004 2008
Cagr over 1980-2002 = 10.6%
Cagr over 2002-2009 = 12.5%
(mt)

0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
1980 1984 1988 1992 1996 2000 2004 2008
Cagr over 1980-2002 = 7.8%
Cagr over 2002-2009 = 22.1%
(mt)

Chinas motor vehicle production growth

Key drivers of power-demand growth
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
1980 1984 1988 1992 1996 2000 2004 2008
Cagr over 1980-2002 = 13%
Cagr over 2002-2009 = 22.9%
(mt)

6.3 6.1
4.2
5.9
8.5
13.4
6.1
7.4
0
2
4
6
8
10
12
14
16
Raw
Chemicals
Non metallic
minerals
Non ferrous
metals
Ferrous
metals
1994-2002
2002-2009
(%)

Power demand for ferrous
metals jumped sharply
after 2002
A turning point was 2002
with growth in high
energy-intensive sectors
Post 2002 growth in
manufacturing power
demand exceeded total
Ferrous metal power
demand grew rapidly
from 2000-07
Steel production growth
in China rose from 9% to
20% in 2002-09
Sulphuric-acid production
growth rose by 3.5ppts
Rate of growth in cement
production rose too
Growth in mining
equipment production
trebled in China
Motor-vehicle production
growth has nearly
doubled in recent years



We have looked at the key sectors contributing to incremental power demand
during 1994-02 and 2002-09, in the first period total incremental power
demand from raw chemicals, ferrous and nonferrous metals and nonmetallic
mineral products was around 22.5%, in the later period these four sectors
accounted for 35.5% of Chinas incremental power demand growth.
Chinas energy consumption versus the rest of the world
Chinas investment-led growth and consequent boom in energy consumption
has meant that there is a big difference in the composition of its energy use
and economic structure compared with the rest of the world - including
developing countries like India.
Chinas industrial use is huge with a 72% share of energy consumption last
year, compared with less than half that figure for India, Russia, OECD Europe,
the US and Japan.
Energy consumption in 2009
72 32 33 28 20 33
8
12
24
30 44
27
21
56
42 43
35
39
0
10
20
30
40
50
60
70
80
90
100
China India Russia OECD Europe US Japan
Industry Transport Residential, Commercial & AG (%)
Source: CEIC, Datastream, CLSA Asia-Pacific Markets
This is due to Chinas unusually high dependence on industry, which
accounted for 46% of Chinas economy last year, compared with 28% for
India and 24-33% for the US, EU, Japan and Russia. The high share to a
large extent explains Chinas high-energy consumption per unit of PPP GDP.
GDP by industry in 2009
46
28
24
19
28
33
43
55
74
80
71
62
5
1
1
2
17
10
0
10
20
30
40
50
60
70
80
90
100
China India EU US Japan Russia
(%) Industry Agriculture Services
Source: CEIC, Datastream, CLSA Asia-Pacific Markets
Chinas energy use and
economic structure
is unique
In 2009, 72% of Chinas
industrial energy use was
more than double most
other countries
Compared to others China
has a much higher share
of industry in GDP
Next closest country is
Russia, 13ppts less
than China
Share of metals, cement
and chemicals rose from
22.5% to 35.5%



While Chinas energy consumption on a whole has surpassed expectations,
the main surprise has come from sharper growth in coal consumption. Around
half is used for power generation and the share of power generation in coal
consumption has risen over time.
Electricity has been the fastest growing energy form, with growth
accelerating since 2002. The sharp increase in FAI is only half of the story.
In reality the sharp rise in electricity availability (and coal) has also
contributed to the sharp higher FAI creating a virtuous cycle leading to
more use.
Growth in the consumption of various forms of energy in China
0
100
200
300
400
500
600
700
800
900
1,000
1982 1986 1990 1994 1998 2002 2006
Energy Coal Oil Gas Electricity
(%)
What led to more power and coal availability since 2002 has been reforms in
both the sectors, which created incentives for players to add more mining and
generation capacity (as outlined in the supply section of this report).
Future growth in coal consumption will be reduced
The three challenges China faces are reducing the energy consumption per
unit of economic output, changing the mix of that energy towards greener
energy and reducing the environment pollution from energy being consumed.
Achieving these objectives involves economic, legal, political and social
reforms, but as they are achieved the pace of demand growth for coal will
slow substantially.
Moving away from investment-led growth
In 2007, Premier Wen Jiabao issued a dire warning that is worth repeating.
The biggest problem in Chinas economy is still the imbalances in the
structure - that economic development is not stable, balanced,
harmonious and sustainable.
Investment growth is too high, credit growth is too fast, liquidity is
excessive and trade and international payments are not balanced.
All these problems facing us need to be urgently addressed and will need
our continued efforts to solve them.

Electricity use has grown
10x since 1980s - higher
than other energy forms
The key surprise was
sharp growth in coal use -
mostly for electricity
Electricity is the fastest
growing form of energy
use in China
Three challenges are
energy intensity, energy
mix and pollution



Our economist Eric Fishwick and China strategist Andy Rothman agree that
over the medium to long term China will reduce its reliance on investment for
growth but both also believe it will not be easy and hence will happen only
gradually. The relative importance of consumption versus investment as a
growth driver will continue, though at a gradual pace. This also ties in with
the World Bank view expressed in its report China through 2020 - A
macroeconomic scenario.
In the report the authors argue that Chinas investment growth is likely to
decline from 2010 onwards, after the massive expansion in 2009 and in line
with the objective to rebalance the pattern of growth, towards less
investment and industry and more consumption and services.
Our economist Eric Fishwick also expects the growth in gross fixed capital
formation (GFCF) to slow down from 21-23% levels in 2008 and 2009 to
18.4% in 2010, 13.4% in 2011 and 15.6% in 2012. He expects the GCF as a
percentage of GDP to continue to rise until 2012 and fall after that.
This is good news for China as experience of other economies shows that the
growth in energy and power consumption falls (quite sharply in some cases)
once the gross capital formation as a percentage of GDP peaks.
Experience of other economies
So what happens once gross capital formation as a percentage of GDP peaks
out? We have analysed the experience of Japan, Korea and Mexico once GCF
as a percentage of GDP peaked out for these countries. The vertical line in
the chart below reflects the peak year (for China the vertical line represents
2009) and energy demand growth rates 10 years before and after for each
country.
Energy consumption growth before and after GCF as a percentage of GDP peaked out
(10)
(5)
0
5
10
15
20
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
(YoY %)
China Japan Korea Mexico
GFC Peak
Source: CEIC, World Bank, CLSA Asia-Pacific Markets
The results are pretty unanimous - the energy consumption growth rates in
all these economies fell in the decade post-GCF peak from the decade pre-
GCF peak. Even a five-year analysis pre- and post-peak gives similar results.
Investment growth likely
to decline from
2010 onwards
CLSA expects GCF growth
to fall in 2010 and 2011
China will reduce its
reliance on investment
for growth
Energy consumption
growth rates fall around
the time as GCF as a
percentage of GDP peaks
GCF trend has been
observed in a
number of economies
Energy consumption
growth before
and after GCF



Energy consumption growth 10 years before and after GFCF share peaked
(%) Energy consumption growth Electricity consumption growth
Japan peak - 1990
10 years prior 2.2 3.8
10 years after that 1.8 2.6
% change (15.4) (32.8)
Korea peak - 1991
10-years after that 6.5 10.5
% change (28.3) (9.4)
Mexico peak - 1981
10 years prior 9.0
10 years after that 2.3
% change (74.7)

Energy consumption growth five years before and after GFCF share peaked
(%) Energy consumption growth Electricity consumption growth
Japan peak - 1990
% change (35.4) (35.5)
Korea peak - 1991
% change (16.5) (9.7)
Mexico peak - 1981
10 years after that (1.0) 2.2
% change (154.6) (43.9)
Source: CEIC, World Bank, CLSA Asia-Pacific Markets
Implications for China - A sharper decline in energy use
As we have seen for some other major economies the energy consumption
growth rates fell (in some cases pretty sharply) as GCF as a percentage of
GDP peaked out. We expect a drop in Chinas case. However, there are a few
important differences. First, Chinas economy is far more investment driven
than Japan, Korea and Mexico when the investment as a percentage of GCF
peaked out in those economies. China is likely to be close to 50% at the peak,
compared to 40% for Korea, 33% for Japan and 27% for Mexico.
Secondly, Chinas economy is far more coal driven than any of the other three
economies. Consequently, it is more polluting and emits more CO
2
. Thirdly,
the slowdown in energy consumption in those three economies occurred at a
time when global warming was nowhere close to being as big a threat as
today. All this makes us believe that the slowdown in energy consumption
growth in the case of China is going to be much sharper than Japan and
Korea and more similar to Mexico.
Production of energy intensive goods should fall
As Chinas economy moves from an industry- and investment-led economy to
a services and consumption led economy, the production of metals and
cement - building blocks for most of investment and industry - will also
slowdown sharply. Growth rates for steel are likely to roughly halve over the
next five years compared with the past five, while those for aluminium and
cement are likely to come down by around one third of the past five years.
China will experience a
similar slowdown once GCF
peaks as a % of GDP
Over the short term the
trend may be exaggerated
Chinas energy growth
slowdown to be sharper
than Korea or Japan
May resemble the trend
observed in Mexico
Consumption of metals
and cement should slow



Growth for production of steel, aluminium, copper and cement in China
59.3
68.8
140.8
82.6
21.9
45.5
42.8
40.0
25.2
20.5
12.6
0
20
40
60
80
100
120
140
160
Steel Aluminium Copper Cement
2005-10 2010-15 2015-20
(%)
While we do not have estimates for the chemicals industry we expect a
similar trend in production growth too. The metals, cement and chemicals
sectors combined, accounted for 53% of total energy consumption by
industry in 2007 and 58% of the incremental-energy demand by industry
over 2002-07. A slowdown in these sectors will have a substantial impact on
the overall energy demand in the country.
Our three-year moving average growth rate estimates for metals and cement
(5)
0
5
10
15
20
25
30
2005 10CL 15CL 20CL 25CL 30CL
Steel
Aluminium
Copper
Cement
(%)
Energy efficiency - The magic bullet
The second leg of Chinas reduction in its energy diet will revolve around
energy efficiency. Globally, energy efficiency will be the biggest contributor to
GHG reduction. Most of the energy contained in energy resources is lost in
the value-chain from extraction to end use.
Given China has already closed a lot of its most inefficient power capacity,
and given the breakneck speed of power capacity additions in the past ten
years, the room for further improvement is limited. Some 75% of Chinas
thermal current power capacity is less than 10 years old.
High-energy intensity
industries should grow
slower over 2010-20
Cement and steel
consumption set to
decrease post 2010
Energy efficiency is key to
GHG reduction
Metals, cement and
chemicals use 53% of
industrial energy
Some 75% of Chinas
thermal capacity built
over the last 10 years



Among all major countries this makes Chinas current power fleet the most
recent. That does not mean that Chinas thermal power capacity is most
efficient though. In a hurry to add capacity we understand China has
compromised on the quality of equipment to some extent. For instance the
heat rates of the supposedly more efficient 660MW supercritical power plants
supplied by China are higher than the heat rates of 500MW subcritical power
plants in India according to Central Electricity Authority in India.
Evidence Chinas energy-conservation efforts are working
A recent report by our China Reality Research (CRR ) team Energy Efficiency
to help smooth price volatility gives concrete evidence of China governments
energy efficiency efforts starting to have effect on the ground level. Some
interesting excerpts from the report are given below:
Under pressure from Beijing and their own desire to reduce costs, major coal
end-users have cut consumption (per unit of production) by an average
12.6% since 2005. They plan to make further annual reductions of 3.3% in
2011-13. Cement and fertiliser makers see the biggest room for further cuts.
Coal efficiency improves in key industries. On average, the 39 big coal
users we looked at have cut their per-unit product coal consumption by
12.6% since 2005. Fertiliser plants and IPPs have achieved an average
reduction of 19% and 16.8%, while the cement and steel mills cut their per-
unit product coal consumption by just 12%.
Further room for coal saving. These end-users see further room to cut coal
intensity over the next few years by closing excess capacity. The cement
makers see the biggest room to further cut coal use, while the power
generators see the least. Compared with the power sector which has seen
over 70GW of small coal-fired generators closed since 2005, Chinas cement
industry still has some 400 million tonnes of outdated capacity, or 20% of
total existing capacity, that should be shut down in the future.
How much have you cut per-unit product coal consumption since 2005?
(12.6)
(12.0) (12.0)
(16.8)
(19.0)
(30)
(25)
(20)
(15)
(10)
(5)
0
Fertilizer
producer
Power plant Cement plant Steel mill Overall
(%)
Weighted by % of the related sector to China's total coal consumption in 2009. Source: CRR
China has the most
modern power fleet
CLSA Asia-Pacific Markets
Second-biggest cuts came
from power plants
CRR shows that energy
conservation efforts are
yielding results

Our CRR team talked to
39 big end-users of coal
in 20 cities



Cagr of coal saving by sector among the 39 end-users
(2.6)
(3.7)
(4.2)
(2.6)
(2.8)
(3.3)
(8.0)
(3.2)
(6.7)
(2.3)
(9)
(8)
(7)
(6)
(5)
(4)
(3)
(2)
(1)
0
Fertilizer
producer
Power plant Cement plant Steel mill Overall
2005-year to date
2011-2013F
(Cagr %)
Weighted by % of the related sector to China's total coal consumption in 2009. Source: CRR
Average coal consumption per unit output among the 39 end-users
1,725
89
614
379
130
752
1,439
312
114
658
1,343
303
105
643
1,253
96
628
293
1,169
284
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
Fertilizer Power plant Cement Steel
(unit)
2005 Current 2011F 2012F 2013F
In terms of urea per tonne; Include both coking coal/thermal coal and electricity consumption. g/kWh for
power plant and kg/tonne for the rest. Source: CRR
Chinas future energy consumption trends
The structural changes in Chinas economy (consumption and services driven
growth), urbanisation and increased focus on energy efficiency will certainly
lead to a substantial slowdown in Chinas energy consumption. However, to
quantify that slowdown is a bit tricky as China has frequently revised its past
energy-consumption data and figures available from various government
bodies at times do not match.
The various conversions from raw coal tonnes to standard coal tonnes and to
mtoe to kWh also do not always stack up using standard conversion metrics,
which should be taken into account. We have tried to make as much sense as
we could of the diverse and often contradictory data available. First, we begin
by analysing the government estimates on future energy consumption and
then we present our conclusions.
Government targets on energy intensity
In 2009 the Energy Research Institute came out with a detailed paper
discussing Chinas energy consumption targets for 2020-50 based on three
scenarios - base case, low carbon and super low carbon.
Cement has the best
scope of improvement for
energy efficiency
Improvement potential
across industries
Difficult to quantify
Chinas energy
consumption slowdown
Take note of conversions
into standard coal tonnes



In the base case China expects the energy consumption growth to slow to
3.4% from 2010 to 2020 and 1.4% from 2020 to 2030. In the low-carbon
and super-low carbon scenarios energy consumption is even lower. In the
super-low carbon scenario the growth in energy consumption between 2020-
30 is negative. In these scenarios the mix of coal is much lower, while the mix
of renewables, hydro power and nuclear power capacity is much higher.
Base scenario primary energy demand (mt of coal equivalent)
Year Coal Oil Natural
gas
Hydro Nuclear Solar/
Wind
Biomass Alcohol Biodiesel Total
2000 944 278 30 85 6 0 1 0 0 1,346
2005 1,536 435 60 131 20 1 2 2 1 2,189
10CL 2,424 628 109 217 28 7 16 10 1 3,438
20CL 2,991 1,096 271 294 90 20 30 22 3 4,817
30CL 2,932 1,708 460 358 181 54 44 33 8 5,526
40CL 3,001 1,710 532 380 380 84 71 36 9 6,202
50CL 2,925 1,836 668 397 595 103 86 39 9 6,657
% Cagr in energy demand
10-20CL 2.1 5.7 9.5 3.1 12.4 11.1 6.5 8.2 17.8 3.4
20-30CL (0.2) 4.5 5.4 2.0 7.2 10.4 3.9 4.1 9.8 1.4
30-40CL 0.2 0.0 1.5 0.6 7.7 4.5 4.9 0.9 0.7 1.2
40-50CL (0.3) 0.7 2.3 0.4 4.6 2.1 1.9 0.8 0.8 0.7

Low-carbon scenario primary energy demand (mt of coal equivalent)
gas
Hydro Nuclear Wind Solar Biomass Alcohol Biodiesel Total
2000 944 278 30 85 6 - - 1 - - 1,346
2005 1,536 435 60 131 20 1 - 2 2 1 2,189
10CL 2,173 528 109 207 46 12 - 9 2 1 3,087
20CL 2,195 843 349 375 136 51 1 32 8 6 3,996
30CL 2,091 964 529 401 301 92 4 52 28 12 4,474
40CL 2,063 1,010 628 424 471 118 9 61 36 13 4,833
50CL 1,984 1,025 745 422 760 169 20 68 44 14 5,250
2000-10 3.5 2.0 6.2 4.7 8.7 28.2 16.2 0.0 0.0 3.5
10-20CL 0.1 4.8 12.3 6.1 11.4 15.6 13.5 14.9 19.6 2.6
20-30CL (0.5) 1.4 4.2 0.7 8.3 6.1 14.9 5.0 13.3 7.2 1.1
30-40CL (0.1) 0.5 1.7 0.6 4.6 2.5 8.4 1.6 2.5 0.8 0.8
40-50CL (0.4) 0.1 1.7 0.0 4.9 3.7 8.3 1.1 2.0 0.7 0.8

Super low-carbon scenario primary energy demand (mt of coal equivalent)
gas
Hydro Nuclear Wind Solar Biomass Alcohol Biodiesel Total
2000 944 278 30 85 6 0 0 1 0 0 1,346
2005 1,536 448 60 131 20 1 0 3 1 0 2,203
10CL 2,083 532 107 180 40 18 0 8 2 1 2,971
20CL 2,144 838 330 354 145 66 1 31 8 6 3,921
30CL 1,903 943 491 395 301 156 5 49 20 12 4,275
40CL 1,814 993 604 429 497 214 16 59 22 13 4,660
50CL 1,715 1,032 710 420 761 239 37 63 23 14 5,014
10-20CL 0.3 4.6 11.9 7.0 13.7 13.9 14.5 14.9 19.6 2.8
20-30CL (1.2) 1.2 4.1 1.1 7.6 9.0 17.5 4.7 9.6 7.2 0.9
30-40CL (0.5) 0.5 2.1 0.8 5.1 3.2 12.3 1.9 1.0 0.8 0.9
40-50CL (0.6) 0.4 1.6 (0.2) 4.4 1.1 8.7 0.7 0.4 0.7 0.7
Source: ERI, NDRC, CLSA Asia-Pacific Markets
ERI estimates energy
consumption growth to
slow to 1.4-3.4%
Energy demand
in aggressive
low-carbon scenario
Energy demand in the
base scenario
Energy demand in
baseline low-carbon
scenario



Our estimates for energy consumption
The structural changes in the economy, as well as increased focus on energy
intensity will be able to achieve a sharp slowdown in Chinas energy
consumption growth. We expect Chinas average annual energy-consumption
growth rate to come down from around 8.9% over 2000-10 to 3.8% during
2010-20 and 1.6% during 2020-30.
Growth in Chinas annual energy consumption
0
2
4
6
8
10
12
14
16
18
1981 1985 1989 1993 1997 2001 2005 2009 2013 2017 2021 2025 2029
Growth in energy consumption
Average for the decade
(%)
Our estimates are a bit higher than those of ERIs base case but broadly in
line. For 2020 our forecasts are around 2% higher and for 2030 they are 4%
higher. However, our base-case estimates assume a higher share of
renewable and nuclear power (discussed in detail in the next section) in
Chinas overall energy mix. We believe ERI estimates have underestimated
the extent of pick up in wind power and nuclear power installations.
However, despite a higher share of renewables in our base case, our coal
demand assumptions are not very different to ERIs, given that the marginally
higher overall energy consumption estimates absorbs most of our additional
renewable energy production.
Our estimates versus ERIs
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
2010 2020 2030
ERI base case
ERI low carbon
ERI super low carbon
Our estimates base case
(m tonnes)
Source: ERI, CLSA Asia-Pacific Markets
We expect energy
consumption to slow to
3.8% over 2010-20 . . .
Our estimates assume a
higher share of renewable
and nuclear power
Our coal demand
assumptions similar
to ERI
We have modelled higher
energy consumption
. . . and by 1.6% over
2020-30



Lower elasticity of energy consumption to GDP growth is a key driver
The key driver for slower energy consumption is the lower energy elasticity of
the Chinese economy, though lower GDP growth forecasts compared with the
past also helps. We expect the elasticity of energy consumption growth to
GDP growth to come down from 0.88 in the last decade to 0.5 during 2010-
20 and further to 0.3 during 2020-30.
Chinas energy elasticity is set to decline
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1981 1985 1989 1993 1997 2001 2005 2009 2013 2017 2021 2025 2029
Average for the decade
Annual energy elasticity
(%)
Sharp slowdown in industry sector; residential relatively robust
Within sectors we expect the sharpest slowdown in energy consumption for
the industry segment where we believe the rate will slowdown from an
average 11.5% over 2003-10 to 2.9% over 2010-20. We expect growth to
remain reasonably healthy at 4-5% until 2013. Post 2013, we expect a sharp
slowdown to around 1.7-2.8% on the back of a decline in production of
energy intensive products (metals and cement). From 2020-30, we expect
the average growth in energy consumption by industry to be just about 1%.
However, we expect a fairly decent growth for residential and commercial
sectors. While overall per capita-energy consumption in China is higher than
the world average, per capita non-industrial use is still low. With rising
affluence and increased importance of consumption and services in Chinas
future economic expansion the share of energy consumption by residential
and commercial purposes will rise.
We expect residential and commercial energy to rise at a healthy 6% during
2010-20 before slowing down to around 3.3% during 2020-30.
Energy consumption growth forecasts
0
2
4
6
8
10
12
2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030
Industry Residential & commercial
(%)
Industry segment will
also slowdown in terms of
energy consumption
Residential sector will
consume energy
at higher rates
We expect elasticity of
energy consumption
growth to decrease
Energy elasticity to
drop from over
1x to 0.5x in 2020
Residential and commercial
energy consumption to rise
more than industrial use



Change in proportion of energy use by various segments
56
58
60
62
64
66
68
70
72
74
2005 2010 2015 2020 2025 2030
0
2
4
6
8
10
12
14
16
18
Industry (LHS)
Transport, Storage, Post and Telecom
Residential
(%) (%)
As a result we expect the share of industry in overall energy consumption to
fall from around 72% in 2010 to 67% in 2020 and 62% in 2030. Meanwhile,
we expect the share of residential energy use to rise from around 11% in
2010 to 14% in 2020 and 16% in 2030.
Chinas energy obesity versus rest of the world will reduce
We expect China energy consumption per unit of GDP (million tonnes of
standard coal equivalent per renminbi million) to come down from 92.1 in
2010 to 66.0 in 2020 and 45.9 in 2030 (all at 2009 prices). This implies a
28% decline in energy intensity by 2020 and a further 30% decline by 2030.
Overall from 2010 to 2030 Chinas energy intensity is likely to halve. From
the peak of 2004-05 it will be down by almost 60%. Currently, Chinas energy
consumption per unit of PPP GDP is around 55% higher than the world
average. The sharp decline in the energy intensity of the Chinese economy
will help it reduce its energy obesity versus the rest of the world.
Chinas energy consumption per unit of GDP (at 2009 prices)
101.2
46.0
107.9
92.1
78.1
66.0
54.9
0
20
40
60
80
100
120
140
2
0
0
1
2
0
0
2
2
0
0
3
2
0
0
4
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
2
0
1
4
2
0
1
5
2
0
1
6
2
0
1
7
2
0
1
8
2
0
1
9
2
0
2
0
2
0
2
1
2
0
2
2
2
0
2
3
2
0
2
4
2
0
2
5
2
0
2
6
2
0
2
7
2
0
2
8
2
0
2
9
2
0
3
0
(mt/Rmbbn)
Residential will consume
the most energy
after 2017
Share of industry in
overall energy
consumption will reduce
China energy use per unit
of GDP is likely
to halve by 2030
We forecast 50%
reduction in CO
2

emissions per unit of GDP



Chinas mix of installed power capacity
2010
Hydro
21.8%
Nuclear
1.0%
Coal
68.6%
Others
2.5%
Solar
0.1%
Gas
2.7%
Wind
3.3%
2020
Hydro
18%
Nuclear
5%
Wind
12%
Gas
4%
Solar
3%
Others
3%
Coal
55%
2030
Wind
18%
Hydro
17%
Coal
42%
Others
5%
Solar
5%
Gas
5%
Nuclear
8%
Chinas mix of power generated
2010
Hydro
15.6%
Nuclear
1.7%
Wind
1.3%
Gas
2.7%
WTE
0.1%
Other
0.9%
Coal
77.7%
2020
Hydro
15%
Nuclear
8%
Wind
6%
Gas
4%
Solar
1%
Other
2%
WTE
1%
Coal
63%
2030
Wind
9%
Hydro
14%
Coal
51%
Other
3%
WTE
1%
Solar
2%
Gas
5%
Nuclear
15%
Coal will remain the king - But one with shrinking turf
Despite the increase in share of non-coal power capacity, power generation
through coal-based capacity will remain the largest in China in 2020 as well
as 2030. However, the share of power generated from coal will shrink
considerably over this period. We expect the share of coal in total power
capacity to come down from 71% in 2009 to 52% in 2020 and 42% in 2030.
While the portion of coal-fired capacity in total generation should come down
from 78% in 2010 to 62% in 2020 and 50% in 2030.
Another interesting way to look at the changing dynamic is the share of different
fuel/technologies in the new capacity added going forward. In the past decade,
thermal power (primarily coal) accounted for 74% of net new installed capacity,
hydropowers share was 20%, wind 5% and nuclear had 1% share. In the next
decade, we expect the share of coal to shrink to less than half at 36%, wind at
24%, hydro 14%, nuclear 9% and gas 5%. During the decade ending 2030,
winds share in net new installations rises to 35%, followed by nuclear at 22%,
hydro 14%, solar 10%, gas 7%, biomass 6% and waste to energy at 3%.
Overall, thermal and coal power capacity additions are already down from
their peak of about 96GW in 2006. However, capacity additions have picked
up again in 2009 after a sharp fall in 2008. Based on the capacity already
under construction, we anticipate 2010 additions to be at similar levels and a
gradual decline in 2011. However, we expect capacity additions to start a
steady decline from 2012.
Coal will still be the most
important energy resource
Coal expected to make up
only 36% of new capacity
additions from 2010-20
Thermal and coal capacity
additions already down
from their peak



We have assumed that the shutdown of old and inefficient capacity continues at
about 10GW per annum beyond 2010. This number could be higher if the
government is more strict, allowing gross capacity additions to grow at a faster
pace than we are forecasting. The shutdown is likely to accelerate from 2020 as
the capacity China added in the mid-1990s approaches its retirement life of
close to 25 years. Towards the late-2020s, Chinas coal and thermal power
capacity additions are likely to turn negative as the plants added by China
during its boom period after 2002 start to reach retirement age.
Gross and net thermal power capacity additions forecasts
(20,000)
0
20,000
40,000
60,000
80,000
100,000
120,000
2
0
0
5
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
1
0
C
L
1
1
C
L
1
2
C
L
1
3
C
L
1
4
C
L
1
5
C
L
1
6
C
L
1
7
C
L
1
8
C
L
1
9
C
L
2
0
C
L
2
1
C
L
2
2
C
L
2
3
C
L
2
4
C
L
2
5
C
L
2
6
C
L
2
7
C
L
2
8
C
L
2
9
C
L
3
0
C
L
(MW)
Net thermal additions Gross thermal additions

Gross and net coal power capacity addition forecasts
(30,000)
(20,000)
(10,000)
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
2
0
0
9
1
0
C
L
1
1
C
L
1
2
C
L
1
3
C
L
1
4
C
L
1
5
C
L
1
6
C
L
1
7
C
L
1
8
C
L
1
9
C
L
2
0
C
L
2
1
C
L
2
2
C
L
2
3
C
L
2
4
C
L
2
5
C
L
2
6
C
L
2
7
C
L
2
8
C
L
2
9
C
L
3
0
C
L
(MW)
Net coal power additions Gross coal power additions
Source: CEC, CLSA Asia-Pacific Markets
Overall energy mix - Big changes ahead
Chinas overall energy mix is set for a big change with a fairly sharp drop in
the share of coal and a rise in the share of natural gas, oil and renewable
energy capacity.
Wind power will experience the highest increase in capacity share among all
available technologies, rising from 3% in 2010 to 12% in 2020 and 18% in
2030. This is based on the already aggressive ramp-up in wind-power
capacity additions and the fact that it is the most economic source of
renewable power generation in China.
Thermal capacity
set to decline
Capacity shutdown
could be higher than
our estimates
Steady declines in coal
capacity additions
from 2012
Chinas energy mix in for
a big change
Wind power will
experience the biggest
rise in terms of capacity



While wind will have the highest incremental share in capacity, the technology
with the biggest portion in actual power generated will be nuclear. This is
because of the much higher utilisation levels for nuclear (more than 80%)
compared with less than 25% for wind and solar. We expect nuclear to
account for 7.9% of power generated by 2020 and 15.1% by 2030.
Chinas total energy consumption trend by fuel/technology
0
1,000
2,000
3,000
4,000
5,000
6,000
2003 2006 2009 2012 2015 2018 2021 2024 2027 2030
Hydro, nuclear, wind, solar, others
Natural gas
Oil
Coal
(m tonnes of standard coal equivalent)

Share of various fuels, technologies in Chinas long term energy mix
0
20
40
60
80
100
2003 2006 2009 2012 2015 2018 2021 2024 2027 2030
Coal Oil Natural gas Hydro, nuclear, wind, solar, others
(%)

The use of greener fuels/technologies is likely to rise sharply
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2003 2006 2009 2012 2015 2018 2021 2024 2027 2030
Natural gas Hydro Nuclear
Wind Solar Others
(m tonnes of standard coal equivalent)
CLSAs energy mix
forecast
Strong growth in nuclear,
solar and wind
Share of wind, solar,
nuclear and gas to rise at
the cost of coal
But nuclear will rise
the most in terms of
power generation



We expect solar power to account for 1.2% of total power generation by 2020
and 1.8% by 2030. Natural-gas power capacity should also experience an
increase in the share of power generated, from 2.8% in 2009 to more than
4% in 2020 and over 5% by 2030. We expect the share of biomass and
waste-to-energy power capacity to grow from almost negligible in 2009 to
1.2% and 0.6% in 2020 then 2.3% and 1% in 2010.
While the near-term demand for coal (2011-13) is relatively robust (also
supported by potential implementation of Nitrogen Oxide control norms) at
around 5%, we expect a sharp slowdown from 2014 due to a steep decline in
coal-fired power generation as well as a slowdown in production of steel,
aluminium and cement, among others. We expect the coal demand to slow to
around 2-3% in 2014-16 before slowing further to around 1% or less in the
following years.
Apart from a higher share of renewable capacity and a slowdown in energy
intensive industry, improving energy efficiency will be another driver for the
slowdown in coal demand. We expect gradual efficiency improvements in
energy intensity for most industries.
Coal demand growth rate
(%)
(5)
0
5
10
15
20
2000 2005 2010 2015 2020 2025 2030

Oil demand growth rate
(%)
0
2
4
6
8
10
12
14
16
18
2000 2005 2010 2015 2020 2025 2030
Coal will experience a
sharp slowdown in
demand around 2014
Improving energy
efficiency also lowers
coal demand

Share of oil in energy
demand will rise

Solar will rise from a
(very) small base



Unlike coal we expect the share of oil in the overall energy demand to rise. The
share of oil in Chinas overall energy demand is substantially lower than in
other countries. However, rising vehicle penetration as well as rising share of
residential energy consumption will provide a continued boost to oil demand
which is expected to grow at a higher rate than overall energy demand.
We believe that Chinas oil production is already close to its peak which
implies that almost all of the incremental oil consumption will need to be
imported. China is also experimenting with coal to liquid technologies to
reduce its dependence on imported coal. However, this increases Chinas
dependence on coal and hence is not an ideal solution to the oil shortage. The
success of these technologies will depend on oil prices and future
development in technologies which can make the conversion processes
cleaner and more efficient.
The table below summarises our expectation of the share of various fuels and
technologies in the overall energy mix by 2020 and 2030.
Share of various fuels and technologies in Chinas energy mix by 2030
(%) Coal Oil Natural gas Hydro Nuclear Wind Solar Others
2010 69.8 17.9 4.2 6.1 0.7 0.5 0.0 0.8
2020 59.4 18.8 7.1 6.6 3.4 2.8 0.5 1.4
2030 48.1 21.9 8.2 6.9 7.3 4.4 0.9 2.4
With Chinas energy consumption growth slowing amid economic
restructuring, and an increased focus on new power supply from gas, nuclear
and renewable sources, Chinas thermal-coal consumption growth looks likely
to remain subdued for the years ahead. Our forecasts for Chinas energy
consumption growth over the next ten years are for a Cagr of 4.8%, while for
thermal-coal generation we only expect a Cagr of 3.1%.
With a lower demand growth rate than for coking coal, and the fact that
China still has plenty of thermal-coal reserves to exploit, China should
theoretically have no problem meeting its own demand growth with domestic
supply. However, we believe cost pressures and tighter domestic policies on
safety and environmental issues will restrict Chinas domestic coal output
while still encouraging imports. China will import a significant volume of coal
should the global price become cheaper than its domestic cost base, as
happened in 2008. That is largely dependent on Chinas domestic inflation,
logistics network costs, and renminbi appreciation, and is discussed in the
supply section of this report.
Chinas increased oil
consumption will
rely on imports
Coal still the biggest fuel
source at 48% of total
in 2030



Appendix 6: Global coking-coal supply by company
Companies by country
(mt) Type 2008 2009 10CL 11CL 12CL 13CL 14CL 15CL
Australia
Total HCC HCC 77 75 86 95 100 100 103 103
BMA HCC 41 39 45 49 50 50 50 50
Rio Tinto HCC 9 9 9 11 12 11 11 11
Xstrata HCC 9 9 8 9 9 9 9 9
Anglo HCC 8 8 9 11 11 11 11 11
Gujarat HCC 1 1 2 2 3 3 5 5
Peabody HCC 6 5 6 7 8 8 8 8
Other HCC 4 4 5 7 8 9 10 10
Total SS SS 43 46 50 55 56 57 57 57
BMA SS 10 10 11 12 12 12 12 12
Rio Tinto SS 5 4 4 5 6 6 6 6
Xstrata SS 8 9 9 8 8 8 9 8
Anglo SS 6 6 8 9 8 8 7 7
Other SS 15 17 19 21 23 23 24 25
Total PCI PCI 19 18 23 26 29 29 30 32
BMA PCI 4 3 4 4 4 4 4 4
Rio Tinto PCI 0 0 0 0 0 0 0 0
Xstrata PCI 0 0 0 0 0 0 0 0
Anglo PCI 2 3 3 4 4 4 4 4
Macarthur PCI 5 4 5 6 6 6 6 6
Wesfarmers PCI 2 2 2 2 2 2 2 2
Yanzhou PCI 1 1 1 1 2 2 2 2
Other PCI 5 5 8 10 11 11 12 14
Total CC All 139 139 159 176 185 186 190 193
BMA All 54 52 60 64 66 66 66 66
Rio Tinto All 14 13 13 16 17 16 17 17
Xstrata All 16 18 17 17 17 17 18 17
Anglo All 17 17 20 23 23 22 22 21
Other All 38 39 49 56 63 65 69 72
Indonesia
Kangaroo Resources HCC 0 0 0 0 1 2 2 2
BHPB/Adaro HCC 0 0 0 0 0 0 1 2
Borneo Lumbung HCC 0 0 1 2 2 2 2 3
Murunda HCC 1 1 1 1 2 2 2 2
Other PCI 1 1 1 1 1 1 1 1
Continued on the next page



Companies by country (Contd)
(mt) Type 2008 2009 10CL 11CL 12CL 13CL 14CL 15CL
CIS
Mechel (Russia) HCC 0 0 0 1 3 7 9 9
Evraz HCC 7 8 7 7 8 8 8 8
Other SS 6 5 9 9 8 8 7 8
Mozambique
Riversdale HCC 0 0 0 0 0 0 0 2
Riversdale HCC 0 0 0 0 1 2 5 6
Posco/Talbot/NSC HCC 0 0 0 0 0 0 0 1
Vale HCC 0 0 0 0 2 3 5 7
Coal India HCC
Other Africa
CoAL (South Africa) na 0 0 0 0 0 1 2 3
CoAL (South Africa) SS 0 0 0 1 1 1 3 5
Keaton SS 0 0 0 0 0 0 0 0
Exarro SS 0 0 1 1 1 1 1 1
Mongolia
MCC HCC 2 2 4 6 8 11 14 15
South Gobi SS 1 0 2 3 4 4 4 4
South Gobi SS 0 0 0 0 1 3 5 5
Mongolia Energy SS 0 0 1 2 4 5 6 6
Energy resources HCC 0 2 4 5 6 7 8 8
Nariin Sukhait SS 1 2 2 2 2 3 4 4
Other SS 1 0 1 1 1 1 1 1
Canada
Teck HCC 19 18 19 22 24 25 25 25
Teck PCI 2 2 2 2 2 2 2 2
Western coal HCC 2 2 2 3 4 4 4 4
Western coal PCI 1 1 1 2 2 2 2 2
Grand Cache HCC 2 1 2 3 3 3 4 4
PRC HCC 2 1 1 1 2 3 4 4
Kailuan HCC 0 0 0 0 1 1 2 2
USA
Massey HCC 6 6 6 8 11 11 11 11
Alpha natural resources HCC 6 5 5 5 6 6 6 6
Patriot HCC 2 2 3 3 4 4 4 4
Walter HCC 6 9 9 10 10 10 10
Metinvest/UCC HCC 1 1 1 1 1 1 1 1
Consol HCC 3 2 6 6 7 7 7 7
Mechel HCC 1 1 3 3 4 4 4 4
Arch SS 3 2 5 5 5 6 6 6
Cliffs HCC 2 1 3 4 4 4 4 4
Drummond HCC 2 2 2 2 2 2 2 2
Other small mines HCC 5 5 7 8 9 9 9 9
Source: Company reports, industry sources, CLSA Asia-Pacific Markets

Coal outlook


Notes


Coal outlook


Notes


Coal outlook


Notes


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27/08/2010
2010 CLSA Asia-Pacific Markets ("CLSA").
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Tel: (86) 755 8246 1755
Fax: (86) 755 8246 1754

Korea
CLSA Securities Korea Ltd
15/F, Sean Building
116, 1-Ka, Shinmun-Ro
Chongro-Ku
Seoul, 110-061
Tel: (82) 2 397 8400
Fax: (82) 2 771 8583

Thailand
CLSA Securities (Thailand) Ltd
16/F, M Thai Tower
All Seasons Place
87 Wireless Road, Lumpini
Pathumwan, Bangkok 10330
Tel: (66) 2 257 4600
Fax: (66) 2 253 0532

USA - San Francisco
(USA) Inc
Suite 850
50 California Street
San Francisco, CA 94111
Tel: (1) 415 544 6100
Fax: (1) 415 434 6140

Hong Kong
CLSA Limited
18/F, One Pacific Place
88 Queensway
Hong Kong
Tel: (852) 2600 8888
Fax: (852) 2868 0189

Malaysia
CLSA Securities Malaysia Sdn
Bhd
Suite 20-01, Level 20
Menara Dion
27 Jalan Sultan Ismail
50250 Kuala Lumpur
Tel: (60) 3 2056 7888
Fax: (60) 3 2056 7988

United Kingdom
CLSA (UK)
12/F, Moor House
120 London Wall
London EC2Y 5ET
Tel: (44) 207 614 7000
Fax: (44) 207 614 7070

CLSA Sales Trading Team
Australia (61) 2 8571 4201
China (Shanghai) (86) 21 2020 5810
Hong Kong (852) 2600 7003
India (91) 22 6622 5000
Indonesia (62) 21 573 9460
Japan (81) 3 4580 5169
Korea (82) 2 397 8512
Malaysia (60) 3 2056 7852
Philippines (63) 2 860 4030
Singapore (65) 6416 7878
Taiwan (886) 2 2326 8124
Thailand (66) 2 257 4611
UK (44) 207 614 7260
US (1) 212 408 5800

2010 CLSA Asia-Pacific Markets ("CLSA").
Key to CLSA investment rankings: BUY = Expected to outperform the local market by >10%; O-PF = Expected to outperform the local market
by 0-10%; U-PF = Expected to underperform the local market by 0-10%; SELL = Expected to underperform the local market by >10%.
Performance is defined as 12-month total return (including dividends). 14/09/2010
CLEAN
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sustainable development.
We print on paper sourced from
environmentally conservative
factories that only use fibres
from plantation forests.
Please recycle.
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