The Outlook for Coal. Presentation to the Australian Institute of Energy National Conference. Brendan Pearson Vice President Government Relations Peabody Energy. November 2012
The global outlook. Presentation outline. Where are we now, (and why)? Recent trends in the global energy mix. Where are we headed (and why)? The near-term outlook and to 2030/35. The policy imperatives. Maximizing Australia s share in global markets. 2
Peabody: The World s Largest Private Sector Coal Company London Essen Ulaanbaatar Urumqi New Delhi Beijing St.Louis DTA Singapore Balikpapan International Offices Brisbane New Delhi Newcastle Beijing London Urumqi Ulaanbaatar Singapore Essen Jakarta Balikpapan Jakarta NCIG Mining Operations Position Sales Reserves S. PRB #1 148 2.7 Midwest #1 30 3.6 Southwest #1 18 1.1 Colorado #1 8 0.2 Australia #5 25 1.2 Mining position and sales based on 2011 reported sales volumes in millions of tons. Reserves based on 2011 10-K filing in billions of tons. 3
Peabody s Australian Operations Contribute Half of Earnings and Growing Adjusted EBITDA from Mining Operations 2003 2007 2011 U.S. >99% U.S. 83% Australia 17% U.S. 50% Australia 50% $422 million $958 million $2,129 million Percentages represent share of Mining Adjusted EBITDA. 4
Global Coal Market Fundamentals Remain Strong 5
Coal: The World s Fastest Growing Major Fuel Coal is the fastest growing energy source in the world, with use growing by 56 per cent. Coal growth is greater than all other energy sources combined. The importance of coal in the global energy mix is the highest since 1971, the first year for which IEA statistics exist. Source: BP Statistical Review of World Energy 2012 6
Mtoe Coal Expected to Overtake Oil in 2013 Total Primary Energy Demand by Fuel Coal 2013 Oil Natural Gas Nuclear Hydro Renewables 2000 2005 2010 2015 2020 2025 2030 Source: Woods Mackenzie Energy Markets Service
Annual World Coal Demand Expected to Grow ~1.3 Billion Tonnes in Five Years 10,000 8,000 6,000 4,000 2,000 Expected Global Coal Demand 0 7,600 600 3,845 (Tonnes in Millions) 7,900 640 4,090 3,175 3,140 3,290 2011 2012P 2016P ROW China India 8,900 840 4,795 New coal-fueled generation of 390+ GW expected by 2016 Steel production expected to grow 20%, requiring additional 200 MTPY of metallurgical coal More than 85% of global demand growth in China/India Seaborne demand expected to grow at 8% CAGR Source: Peabody Global Analytics. 8
China Demand Expected to Grow ~1.0 Billion Tonnes by 2016 Imports Expected to Double From 2011 to 2016 240 GW of coal-fueled generation expected to come on line by 2016 Much of build-out occurring in coastal areas Represents >800 TPY of thermal coal use over time China NDRC seeks coking coal production limits for special and scarce resource China reducing domestic production; continuing to close small inefficient mines. 9
Growth in China s generation to 2016. 10
Tonnes in Millions India Likely to be World s Fastest Growing Coal Importer 70 GW of new coal generation expected to start over five years Requires additional ~250 MTPY of thermal coal use over time Thermal demand expected to outpace production by >150 MTPY within five years Blackouts highlight need for increased coal imports Multiple new port projects under way to enable increased imports 200 150 100 50 0 India Coal Imports 74 43 Met Thermal 100 63 31 37 118 88 130 100 30 30 200-220 150-160 50-60 2009 2010 2011 2012P 2016P Source: Peabody Global Analytics and other industry sources. 11
India s New Generation Built for Coal Imports 12
Global Seaborne Supply: Australia and Indonesia Expected to Lead Growth 2011 Total Exports 2011-2016 Growth 2016 Exports Indonesia 319 130 160 450 480 Australia Metallurgical Thermal 281 140 160 420 440 U.S. 93 30 50 120 140 Russia 88 15 25 105 115 Colombia 77 35 45 110 120 South Africa 67 10 15 75 80 Canada Mongolia 24 33 Total 2011 Exports: 1,040 Million Tonnes 0 5 35 50 35 40 60 75 China 14 (15 5) 0 10 Other 44 0 50 100 150 200 250 300 350 5 10 50 55 385 515 1,425 1,555 Source: Peabody Global Analytics; McCloskey and Wood Mackenzie. Data shown in million tonnes. Excludes land-based exports, except Mongolia. 13
The Task of Ending Energy Poverty. 3.6 Billion People Have No or Only Partial Access to Electricity 136 2 70 21 1,054 493 378 184 449 31 209 585 Millions of People Who Lack Adequate Electricity Millions of People Who Have No Electricity Source: International Energy Agency World Energy Outlook 2011 and The World Bank World Development Indicators 2011. 14
U.N. Human Development Index Electricity enables people to live longer and better. United Nations Links Affordable Energy to Quality of Life 1 0.9 Argentina UK Germany Japan United States Canada Finland Sweden Qatar 0.8 0.7 0.6 Brazil China Indonesia India South Africa Russia 0.5 0.4 0.3 Bangladesh Nigeria Ethiopia DR Congo Every 10-Fold Increase in Per Capita Electricity Use Drives a 10-Year Increase in Longevity 0 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 18,000 Electricity Use Per Capita (kwh/year) Source: CIA World Fact Book, United Nations Development Program s Human Development Report. 15
The re-balancing of world growth The engines of growth will all need energy. 16
Coal to remain largest electricity source in 2035. World net electricity generation by fuel type (2008-2035) Source: US EIA 17
East Asia will dominate growth in coal use. World coal consumption by region 1990-2035 (quadrillion BTU) Source: US EIA. 18
Historic Build-out of Advanced Coal Underway 429 GW On Line and Under Construction Nearly Half the World s Advanced Coal Fleet in Asia China 175 GW ROW 45 GW U.S. 96 GW Other EU 11 GW India 37 GW Japan 20 GW Germany 12 GW S. Korea 17 GW Russia 16 GW Supercritical and ultrasupercritical operating plants and plants under construction. Source: Platts World Electric Power Plant Database, January 2011. 19
China as Test Case: Technology Cost Tumbles as Green Coal Commercializes Technology Reduces CO 2 Emissions Rate 40% Over Oldest Fleet Solar PV $185 Onshore Wind $71 Nuclear AP 1000 $53 Large Hydro $50 Gas CCCT $39 Supercritical Coal Plant $33 $0 $20 $40 $60 $80 $100 $120 $140 $160 $180 $200 USD/Megawatt Hour Source: IEA, 2010c. 20
Regaining Australia s competitive edge: The policy imperatives
The risk: Australia s resources sector is losing competitive ground. Significant increase in capex per tonne of installed capacity Strengthening Australian dollar Increase in labor costs Lengthening Permitting and Environmental Delays Emergence of new competitors Sizeable increase in state and federal tax burden 22
Australia has lost market share. 23
More Than Half of Australia s Mines Have Costs Above Global Averages Percent of Production by Cost Curve Quartile* Thermal Coal Hard Coking Coal 34% 3% 6% 25% 2% 20% 66% 31% 45% 58% 23% 28% 29% 25% 5% 2006 2012 2006 2012 Quartile 1 Quartile 2 Quartile 3 Quartile 4 * Million tonnes of production; coal delivered to China; metals costs net of by-product revenue. Q1, Q2, Q3 and Q4 represent the percentage of total Australian production within the first, second, third and fourth quartiles of the global cost curve. Source: Port Jackson Partners. 24
Thermal Coal: Project Capital Costs Two Thirds Above Global Average Capital Spend to Build a Tonne of New Capacity (2011 US$ per tonne of capacity) $73 2007 $61 2011/2012 $176 $106 Australian thermal coal project capital costs 60% above global average Capital spend per tonne of new capacity has almost tripled over last five years ROW Australia ROW Australia Source: Port Jackson Partners. 25
Total Delay from Studies to Completion Lengthening Project Permitting Delays, Infrastructure Slowdown Australia s historic delay from studies to completion more than three years vs. global average of 1.8 years Mining sector productivity shaved 0.6% from Australia s overall productivity growth this year due to employment in projects yet to produce a return Total Historic Delays by Geography 3.1 Years 1.8 Years Australia Rest of the World Average new delays in each year based on ABARE announced date may differ actual delays incurred/announced by operator. Sources: Port Jackson Partners; PwC. 26
Tonnes per Year (Millions) Emerging Competitors: Indonesia, Mongolia and Mozambique 30 25 20 15 Hard Coking Coal Exports Forecast Mongolia Mozambique 10 5 0 2000 2005 2010 2015 2020 2025 Indonesia has already overtaken Australia in thermal coal exports Five years ago Mozambique and Mongolia not part of the global coking coal conversation Now starting to ship and looking increasingly attractive to investors U.S. coal exports set to rise dramatically in the next decade Source: Port Jackson Partners. 27
Coal Miners Face Increasing Federal and State Tax Burden Queensland Taxation Rates Now Among World s Highest Effective Tax Rates in Key Coal-Producing Nations (%) 50 45 40 Average 35 30 25 20 15 10 5 0 NSW QLD (current) (before 1 Oct.) QLD QLD (3% increase) (after 1 Oct.) China Mozambique Canada Mongolia Indonesia South Africa Source: Synergies Economic Consulting. 28
Governments a major contributor to costs. Taxes, charges and levies have risen at all levels of Government even before the QLD royalty increase. The carbon tax will cost the coal sector $17 billion by 2020. New mines are being required to provide basic public services including policing and ambulance services. The effective tax rate faced by coal producers is close to the highest in the world. 5000 4500 4000 3500 3000 2500 2000 1500 1000 500 0 Massive increase in Governmentrelated costs 2010-13 (Example of one Peabody Energy mine) 2010 2011 2012 2013 Increase in mine safety levy. Increase in mine rescue levy Increase in approvals costs Carbon tax-fugitives Carbon tax-fuel Increase in council rates. 29
The Policy Prescription Establish a National Commission on Resource Sector Competitiveness (NCRSC) devoted to ensuring policy framework serves long-term national interest NCRSC would be comprised of: Federal and state governments Senior industry leaders Academics Immediate goals to include: Re-evaluation of Carbon Tax, MRRT and State Royalties Labor policies to mitigate inflation and expand skills base Review of infrastructure planning to support export growth National, coordinated approach to project permitting process 30