Coal Struggles May Persist in 2015 Even as Positive Signs Emerge Analysts: Andrew Cosgrove & William Foiles Dec 15, 2014

Transcription

1 Overview > Global Coal Primer Outlook >> Exhibit 1 of 20 Coal Struggles May Persist in 2015 Even as Positive Signs Emerge Analysts: Andrew Cosgrove & William Foiles Dec 15, 2014 Risks to market fundamentals for coal producers remain elevated heading into 2015 as demand weakens and miners take steps to reduce supply. After the Bloomberg Intelligence global coal peer group fell 40% in 2013, share declines were limited to 20% this year as prices for both thermal and coking coal induced global capacity cuts. More production cuts may be on the horizon, given the subdued pricing outlook for Key Points: * Thermal Coal Set for 2015 Declines Before Market Improves * Coking-Coal Supply Growth, Steelmaker Demand Poised to Weaken * Basin Specifics, Retirements, Exports to Drive U.S. Coal Outlook

2 Overview > Global Coal Primer Outlook >> Exhibit 2 of 20 Coal Producers Underperform World Market on Glut, Soft Demand Analysts: Andrew Cosgrove & William Foiles Dec 15, 2014 The past year has been challenging for coal producers, whose equities trailed the MSCI World Index by 26 percentage points. Persistent global oversupply and waning Chinese demand depressed seaborne coal prices, earnings and valuations for a fourth straight year. While low prices induced the most serious round of supply cuts since 2011, more will be needed in 2015 to improve market fundamentals. For interactive exhibit on Bloomberg, run: G BI2 8260<GO>

3 Overview > Global Coal Primer Outlook >> Exhibit 3 of 20 China, India Coal Mining Shares Beat U.S., Diversified Peers Analysts: Andrew Cosgrove & William Foiles Dec 15, 2014 Most of the best-performing coal producers in 2014 have been Chinese and Indian miners. Chinese coal shares and Coal India rose along with their respective equity markets, even as the companies reduced production forecasts amid a dire pricing backdrop. U.S. producers were among the worst performers as domestic prices languished after strength in 1Q, while diversified producers fell in the middle of the pack. For interactive exhibit on Bloomberg, run: BICOATGC Index MRR<GO>

4 Overview > Global Coal Primer Outlook >> Exhibit 4 of 20 Coal Mining Ebitda Estimates Cut on Oversupply, Weak Demand Analysts: Andrew Cosgrove & William Foiles Dec 15, 2014 Coal producers' enterprise value-to- Ebitda multiples expanded in 2014 for the wrong reasons. Estimate cuts exceeded share declines, leaving valuations at their highest levels since While a seaborne surplus may return in 2015, coal prices have fallen to levels where even the lowest-cost producers are struggling to make acceptable margins. Valuations and equity volatility may remain elevated next year as margins for many producers remain razor-thin. For interactive exhibit on Bloomberg, run: G BI2 8475<GO>

5 Overview > Global Coal Primer Outlook >> Exhibit 5 of 20 Thermal Coal Set for 2015 Declines Before Market Improves Dec 15, 2014 While thermal coal prices have fallen more than 55% since early 2011, more declines may come in 2015 as supply grows and demand wanes. The wave of new capacity that started in 2011 after prices recovered from the plunge in 2008 and 2009 is still under way, though winding down. Chinese demand, which helped keep prices elevated from 2010 to 2013, is waning and countries such as India will be needed to fill the void. Key Points: * Thermal Coal Price Optimism May Be Thwarted by Excess Supply * Thermal Coal Woes May Persist as New Mines, Capacity Add Supply * China's Industrial Slowdown to Weigh on Thermal Coal Demand * Thermal Coal Cost Curve Shows Close to 50% of Output Under Water * Chinese Demand Weakness May Delay Global Coal Price Recovery

6 Overview > Global Coal Primer Outlook >> Exhibit 6 of 20 Thermal Coal Price Optimism May Be Thwarted by Excess Supply Dec 17, 2014 International thermal coal prices may rise in 2015, based on consensus, though forward and swap markets appear less optimistic. While prices for Australian, South African and imported European coal are expected to improve in 1Q and climb throughout the year, ample supplies and volatile power-plant demand may undercut the forecasts. In the U.S., Powder River Basin prices are expected to gain while Appalachian and Illinois Basin coal trade mostly lower.

7 Overview > Global Coal Primer Outlook >> Exhibit 7 of 20 Thermal Coal Woes May Persist as New Mines, Capacity Add Supply Nov 20, 2014 The global seaborne thermal coal market will attempt to absorb increased supply in 2015 as new mines are commissioned and production capacity expands. While the 15 million metric tons of new capacity represents only 1.5% of the seaborne market, the additions are coming as demand stagnates. With seaborne prices having fallen more than 25% in 2014, suppliers will need higher import demand in China and India to stave off further declines in 2015.

8 Overview > Global Coal Primer Outlook >> Exhibit 8 of 20 China's Industrial Slowdown to Weigh on Thermal Coal Demand Dec 15, 2014 China's slowdown in industrial growth, which picked up steam in 1Q, may extend into 2015 as housing construction and investment falter. Steel, cement and power production, which together make up more 80% of Chinese domestic demand, may shrink as overcapacity deters investment. Lower demand for thermal coal may put additional pressure on imports, which are expected to fall for the first time since China became a net importer. For interactive exhibit on Bloomberg, run: G BI2 8402<GO>

9 Overview > Global Coal Primer Outlook >> Exhibit 9 of 20 Thermal Coal Cost Curve Shows Close to 50% of Output Under Water Oct 24, 2014 Almost half of the global seaborne thermal coal analyzed by Bloomberg Intelligence is losing money on a cash cost basis. Based on a almost six-year-low Newcastle thermal coal export price of $63 a metric ton, South Africa, Colombia, Indonesia and Australia are the only regions producing profitable thermal coal. Russian, U.S. and some select Australian capacity is the most at risk. The BI study covers 50% of the global seaborne thermal market.

10 Overview > Global Coal Primer Outlook >> Exhibit 10 of 20 Chinese Demand Weakness May Delay Global Coal Price Recovery Nov 20, 2014 Recoveries in both thermal and coking coal prices probably will take longer than analysts and producers expect if Chinese demand remains weak in Chinese thermal coal imports were set to decline 10% in 2014 after rising almost 6% in Following torrid 41% growth in 2013, coking coal imports were expected to fall 21% in With China's rail capacity expanding and mining costs coming down, seaborne exporters could be further challenged by an increase in domestic supplies.

11 Overview > Global Coal Primer Outlook >> Exhibit 11 of 20 Coking-Coal Supply Growth, Steelmaker Demand Poised to Weaken Dec 15, 2014 Coking coal's prospects are mixed heading into 2015, with both supply growth and demand from steelmakers likely to be lower than in Australia and Mozambique may add supply as U.S. miners cut back. Announced supply cuts and mine shutdowns coming in 1H may work to balance the market, though any gains could be undermined by further deterioration in Chinese demand. Key Points: * Met Coal Prices May Stall as China Steel Demand Falters * Coking Coal Supplies Poised to Rise While Market Digests Cuts * Real Estate, Housing May Dent China Metallurgical Coal Demand * Met Coal Curve Shows Some Miners Still Covering Cash Costs

12 Overview > Global Coal Primer Outlook >> Exhibit 12 of 20 Met Coal Prices May Stall as China Steel Demand Falters Dec 17, 2014 Metallurgical coal prices may be little changed in 2015, based on consensus. After years of overly optimistic forecasts, estimates have adjusted to levels that are more aligned with market fundamentals. Supplies are buoyant while demand from steelmakers has waned, especially from China, as the biggest user's economy slows. The most bullish forecasts call for an increase in the benchmark price throughout the year to $128 a metric ton. The most bearish projections foresee a drop to as low as $107 a ton in 3Q.

13 Overview > Global Coal Primer Outlook >> Exhibit 13 of 20 Coking Coal Supplies Poised to Rise While Market Digests Cuts Nov 20, 2014 More than 7 million metric tons of new coking coal supply may come to market in 2015 after capacity additions and weak demand fueled a three-year, 58% rout in prices. The new supplies may arrive while the market is still digesting more than 25 million tons of production cuts. Coking coal prices may improve in 2015 if the Australian dollar strengthens, encouraging Australian producers to speed up capacity cuts to reduce costs, and global steel production finds its footing.

14 Overview > Global Coal Primer Outlook >> Exhibit 14 of 20 Real Estate, Housing May Dent China Metallurgical Coal Demand Dec 15, 2014 Chinese metallurgical coal demand is likely to be challenged in 2015 as the Chinese economy moves away from fixed-asset heavy manufacturing to a services-based model. Pig iron production, an indicator of coking coal demand, has risen only 0.1% this year. Both imports and domestic tons will compete for a shrinking pie in China, as indicators of steel demand -- real estate, fixed-asset investment and floor space of newly started housing units -- deteriorate. For interactive exhibit on Bloomberg, run: G BI2 8488<GO>

15 Overview > Global Coal Primer Outlook >> Exhibit 15 of 20 Met Coal Curve Shows Some Miners Still Covering Cash Costs Oct 24, 2014 Little more than 10% of global seaborne metallurgical capacity analyzed by is losing money on a cash cost basis. At a price of $110 a metric ton, Australia, Canada and select U.S. tons are still insulated. The analysis, which covered 60% of the global seaborne met coal market, compares companywide costs, not mine level. Pockets of capacity not included in this analysis (about 120 million tons) are likely part of the 30 million tons slated to be cut.

16 Overview > Global Coal Primer Outlook >> Exhibit 16 of 20 Basin Specifics, Retirements, Exports to Drive U.S. Coal Outlook Dec 15, 2014 The U.S. coal industry's outlook will likely reflect diverging paths, based on issues specific to basins where they operate, power-plant retirements and exports. Prospects for coal from the Powder River Basin appear the most favorable, given its competitiveness with natural gas and demand from utility restocking, though demand may be damped by shutdowns of of coalfired generation. Demand is likely to decline in the U.S., principally from a lack of gas-to-coal switching, falling exports and retirements. Key Points: * U.S. Coal Demand May Fall 20 Million Tons as Power Plants Shut * Power-Plant Retirements in Next Two Years to Trim Coal Demand * Low Seaborne Coal Prices, Europe Weakness May Curb U.S. Exports * U.S. Coal Prices May Be Challenged by Rail Bottlenecks, Demand

17 Overview > Global Coal Primer Outlook >> Exhibit 17 of 20 U.S. Coal Demand May Fall 20 Million Tons as Power Plants Shut Nov 21, 2014 U.S. thermal coal demand may fall by more than 2% in 2015, when almost two dozen coal-fired power plants are set to close. The loss of 20 million tons of sales will affect all major U.S. basins, with the Powder River Basin and Appalachia seeing the largest declines. The Powder River Basin may lose 5 million tons and Central Appalachia 5.7 million. Generation facilities planning to close next year may file for an extension to delay retirement until 2016.

18 Overview > Global Coal Primer Outlook >> Exhibit 18 of 20 Power-Plant Retirements in Next Two Years to Trim Coal Demand Nov 21, 2014 U.S. thermal coal demand is under pressure as expected retirements of coal-fired generation begin. Announced retirements and those modeled by Bloomberg New Energy Finance, based on new regulations, total slightly more than 30 gigawatts through While this figure represents about 45 million tons of potential lost coal demand, the actual total may be less due to higher coal use at compliant plants that will be allowed to stay open.

19 Overview > Global Coal Primer Outlook >> Exhibit 19 of 20 Low Seaborne Coal Prices, Europe Weakness May Curb U.S. Exports Nov 21, 2014 Persistently low seaborne thermal and coking coal prices may prompt more declines for U.S. coal exports in Weak global demand may remain a drag on exports, most notably in Europe, after flows to the region fell more than 20% in The lowest contract prices since 2008 also are taking a toll on U.S. producers, which have announced cuts in coking coal exports of more than 10 million tons since the first quarter, equal to about 10% of domestic capacity. More cuts are likely into 2015 if prices fail to pick up.

20 Overview > Global Coal Primer Outlook >> Exhibit 20 of 20 U.S. Coal Prices May Be Challenged by Rail Bottlenecks, Demand Nov 20, 2014 Central Appalachian and Powder River Basin coal prices have fallen about 20% since late April and early May as declining natural gas prices slowed utilities' coal purchases after a surge in late 2013 and early With current Central Appalachian coal prices making more than 50% of the region's output unprofitable, producers likely are starting to feel the pain. While Power River Basin coal output remains insulated from losses because of lower costs, any increase in shipments could be slowed by rail bottlenecks.