Global Coal Services Prepared by: Dan Watkins 1 February 2005 1
Build a Better Strategic Plan Copyright 2002 Global Insight, Inc. Understand Coal Prices, Risks, and Competition Plan Future Freight Requirements Analyze the Impact of New Environmental Policies Anticipate Structural Changes within the Industry Receive an Independent Value-at-Risk Benchmark 2
Drawing Upon our Strengths 3
Global Coal Services 4
Coal Trade Services Global Coal Market Quarterly A detailed quarterly assessment of coal market fundamentals, providing: An in-depth analysis of recent coal and freight spot price developments A look at key factors driving short-term market dynamics and how they relate to underlying long-term trends Quarterly FOB, freight and CIF price forecasts out to 2007 Comparison of forecasts versus TFS and Global Coal forward curves 5
Coal Trade Services Global Steam Coal Trade and Price Review A comprehensive long-term view of coal market fundamentals, including: 20-year forecasts of coal demand across 40 countries Base case and alternative scenario forecasts Projections of coal supply costs from all existing and potential major coal exporters Detailed analysis of future risks to the forecasts and the impact of structural changes on the industry 6
Coal Trade Services Global Coal Monthly Monitors This email service tracks FOB and freight prices for South Africa, Colombia, and Australia covering a rolling two year period. Subscribers also receive Global Insight s custom index which is comprised of a basket of coals made up of 60% South African, 30% Colombian, and 10% Australian. Conferences Each year, Global Insight's Coal Industry Perspective conference provides an opportunity to hear our views of the market and to exchange view with a broad range of industry peers. Custom Presentations Global Insight's international team of coal experts are available to answer questions regarding the industry or deliver customized presentations on the industry. 7
Country Coverage 8
Building a Better Forecast Coal Price Forecasting Methodology Price (indicative data) Mine Cost Rail & Port Port & Barge Return + Profit Ocean Freight Delivered price CIF ARA price FOB price Supply Chain Approach : We analyze each component of the supply chain separately in order to create a more robust topline number Netherlands Germany 9
Copyright 2002 Global Insight, Inc. 10
ARA CIF Coal Price 70 60 16 year average (1987-2002) = 52.58 50 40 2003 US$/tce 30 20 10 C&F ARA EU Historical Linear ( C&F ARA EU Historical ) Historical Trend Line Global Insight Forecast C&F ARA Real coal prices have been on the decline for some time due to productivity gains and exchange rate movements. 0 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Global Insight predicted a large market inflection point for 2004 11
Mine-mouth Cost Analysis Coal Production Costs 40 35 30 25 Costs 20 15 10 5 Poland Russia Colombia China South Africa Indonesia Australia Geology, exchange rates, and productivity all contribute to relative cost differences. In China, people substitute for technology, making coal production more expensive. 0 0 10 20 30 40 50 60 70 80 90 100 Production in Million tonnes We produce coal supply curves for all price setting countries 12
Mine Cost / Port & Rail Cost Production Costs in Australia 40 Mine Wages Other Mine Costs Productivity gains reduce the wage cost element 30 R & R Charge Port & Rail Haulage Royalty Other mine costs become a higher percentage of mine cost 20 Port and haulage account for almost 50% of total cost Royalty assumed flat in nominal terms 10 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 13
How the Market Works A Review of 2003 Atlantic Demand 205 45/8 26/10 66 5 15 6 12 Pacific Demand 273 73 14 74 92 South Africa sets the price in the Atlantic in the first instant but price is capped by competition from the Pacific. Australia is the price driver in the Pacific and so ultimately becomes the World price driver. In this price setting international ocean sea freight rates play a significant role. In 2003 & into 2004 market failed to operate correctly due to high freight. 14
Producer Return and Profit Demand for Coal in Power Generation - by type in 2002 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% USA JP DE UK FR IT SP NL Nuclear Coal Lignite Gas Oil Renewables Coal in the fuel mix for power generation varies from around 50% in the U.S.A. to less than 10% in France 15
Producer Return and Profit Medium-term supply/demand balances 16
Producer Power Shares 2000 & 2003 100% 90% Anglo Coal BHP Billiton Glencore Rio Tinto Xstrata 80% 70% 60% 50% 40% 30% 20% The 5 major producers do not have as high a share of production on a global basis as is often thought 10% 0% 2000 2003 2000 2003 2000 2003 2000 2003 2000 2003 South Africa Australia Colombia Venezuela Indonesia 17
Producer Return and Profit Producer Market Power in 2003 45 Fob Cash Cost Capital Cost Contract Prices High Spot Price 2003 Low Spot Price 2003 2003 40 35 US$/t basis 6000 nar 30 25 20 15 10 5 0 Fob Fob Fob Fob Fob Fob Fob Fob Fob Fob Fob Fob Australia South Africa Colombia 18
Freight trends S. Africa to ARA 30 25 20 15 US$/t 10 5 Average Annual voyage Rates - RBCT to ARA RBCT- ARA 1990-2003 Average 1990-2003 Average 1990-2003 plus 25% Average 1990-2003 minus 25% Average Jan-May 2004 High - January 2004 Exceptional conditions in 2003-04 caused the freight market to break out of the long term US$ 7+/- 25% band 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 19
Ocean Freight China s Contribution to a Strong Market 300,000 280,000 China Bulk Imports/Exports Coal Exp Ore Imports Steel Imp Coal Import CSP Million Tonnes 260,000 240,000 220,000 200,000 180,000 160,000 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 Steel Imp Ore Imports Coal Exp 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 20
Freight Market Fleet Additions 10.0 9.0 8.0 Bulk Carrier Scheduled Newbuildings For Delivery 2004 Dwt For Delivery 2005 Dwt For Delivery 2006 Dwt For Delivery 2007 Dwt For Delivery 2008+ Dwt 7.0 Million Dwt 6.0 5.0 4.0 3.0 2.0 1.0 0.0 10-40 Handysize 40-60 Handymax 60-80 Panamax +80 Capesize 21
For Additional Information, Dan Watkins XXX-XXX-XXXX dan.watkins@globalinsight.com 22