Market Developments
Galilee Basin Coal & Energy Conference
John SnellingExecutive Director - Corporate Advisory
25 November 2013
4
A better looking 2014
• We expect commodities to firm towards the end of the year and improve in 2014 as comfort around the Chinese demand outlook and improving growth elsewhere sets a positive backdrop for prices
• We think prices bottomed in June this year, with official Chinese PMI data basing and Chinese government stimulus and inventory restocking re-emerging
• Investment positions look more encouraging with commodity index holdings and US commodity futures markets trending higher over the third quarter
• That said price gains have been tepid and look more like relief rallies and short covering rather than fresh buying. Signs of more consistent positive data in China would improve the sentiment triggering long investors to return
• The US news flow will continue to provide a volatile backdrop with better economic data offset by QE exit chatter. The reverse would be better, with dull data pushing back the timing on QE tapering
• Inventory levels still look tight, which flags the need for further restocking - particularly in iron ore and copper. Coal and oil stocks look higher
• Most of the base metals and coal look oversold, while iron ore and oil look fair value. Precious metals looks vulnerable while US bond yields continue to rise
• Our preferred exposure in 2014 are base metals and energy markets which will be more exposed to positive demand-side dynamics. The bulks will lag, with increasing supply and or inventory overhang holding back better price gains
5
Another difficult year for commodity markets in 2013, but 2014 will be better – base metals and oil the outperformers
Source: ANZ Research
2012 2013F
Average Annual Percentage Change
2014F2011
74
51
39
28
25
23
19
17
14
12
10
5
2
0 20 40 60 80
Silver
Coking Coal
Brent Crude
Gold
Average
Thermal Coal
WTI Crude
Copper
Iron Ore
Lead
Aluminium
Nickel
Zinc
6
1
(1)
(10)
(11)
(11)
(13)
(14)
(16)
(22)
(23)
(24)
(27)
(40) (20) 0 20 40
Gold
Brent Crude
WTI Crude
Copper
Zinc
Silver
Average
Lead
Aluminium
Thermal Coal
Iron Ore
Nickel
Coking Coal
5
4
3
(2)
(3)
(8)
(8)
(8)
(12)
(13)
(15)
(21)
(25)
(40) (20) 0 20 40
WTI Crude
Lead
Iron Ore
Zinc
Brent Crude
Copper
Average
Aluminium
Thermal Coal
Nickel
Gold
Silver
Coking Coal
12
9
9
8
8
6
6
5
3
2
2
1
(6)
(40) (20) 0 20 40
Zinc
Nickel
WTI Crude
Copper
Aluminium
Coking Coal
Lead
Average
Brent Crude
Thermal Coal
Silver
Gold
Iron Ore
6
(60)
(40)
(20)
0
20
40
60
05 06 07 08 09 10 11 12 13(2.5)(2.0)(1.5)(1.0)(0.5)0.00.51.01.52.0
ANZ CCI ANZ Global Inventory Pulse (RHS)
6 mth % dev. from 12mth trend
30
34
38
42
46
50
54
58
62
05 06 07 08 09 10 11 12 13
US EU China
Points
expansion
contraction
(50)
(40)
(30)
(20)
(10)
0
10
20
J F M A M J J A S O N D J F M A M J J A S O N
Brent Oil
Copper
Iron Ore
Rebar Steel
Thermal Coal
Coking Coal
% return from 1 Jan 2012
2012 2013
bottoming in June
(3.0)(2.0)(1.0)
0.01.02.03.04.05.06.0
97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
US Developed China Emerging
contribution to global growth
foreast
Source: ANZ Research
ANZ Global GDP Growth Forecasts Commodity Price Performances
ANZ CCI & ANZ Global Inventory Pulse Global PMIs
Global growth will bottom in 2013 at 3% before rebounding to 4% in 2015
7
0
50
100
150
200
250
300
350
400
450
00 01 02 03 04 05 06 07 08 09 10 11 12 131.0
2.0
3.0
4.0
5.0
6.0
7.0Oil Other EnergyPrecious Metals Base MetalsAgs SoftsUS 10y Bond (RHS)
USD billion %
(8)
(6)
(4)
(2)
0
2
4
6
00 01 02 03 04 05 06 07 08 09 10 11 12 13
Long
Short
Net Position (Long-Short)
USD billion
(40)
(30)
(20)
(10)
0
10
20
30
40
50
00 01 02 03 04 05 06 07 08 09 10 11 12 13
Long
Short
Net Position (Long-Short)
USD billion
(20)
(10)
0
10
20
30
40
50
00 01 02 03 04 05 06 07 08 09 10 11 12 13
Long
Short
Net Position (Long-Short)
USD billion
Source: ANZ Research
Investment Fund Commodity Positions
This is showing up in tepid investment fund activity– total funds in global commodity indices have gained only a modest US$15b or 6.5% since June after a US$140b or 37% sell-off in the first half of 2013
CFTC Non-Commercial Gold Positions
CFTC Non-Commercial Oil Positions CFTC Non-Commercial Copper Positions
8
100
200
300
400
500
600
05 06 07 08 09 10 11 12 130
500
1,000
1,500
2,000
2,500
3,000
3,500
ANZ-CCI Shanghai Composite (RHS)
Index points Index points
China play
-2
0
2
4
6
8
10
12
14
16
2005 2006 2007 2008 2009 2010 2011 2012 2013
Official Property Price Index ANZ Property Price Index
5
6
7
8
9
10
11
12
13
00 02 04 06 08 10 12 14-15
-10
-5
0
5
10
15
20
25
30
China GDP Power Production Growth
y/y %
0
20
40
60
80
100
120
J F M A M J J A S O N DGov't Exp (2012) Gov't Exp (2013) Target
%
Source: ANZ Research
ANZ CCI & Shanghai Composite China Yearly House Price Change
China GDP and Power Production Growth Government Target Expenditure 2012/13
A choppy to weaker Chinese equity market has flagged softer commodity demand conditions – but the industry data has been a lot better, while government stimulus should gather pace towards the end of the year
9
134
106 103
57
36 3323 19 18 18
0
20
40
60
80
100
120
140
Ther
mal
Coa
l
Bau
xite
Cok
ing
Coa
l
Iron
Ore
Nic
kel
Cop
per
Silv
er
Gol
d
Lead
&Z
inc
Plat
inum
Years
55
0 10,000 20,000 30,000 40,000 50,000
Real GDP per capita (US$)
India
CopperSteel
Aluminium
Coal
China
GasIntensity per capita
25
69
1618
2222
2327
2930
0 5 10 15 20 25 30 35
IndiaBrazilChinaWorld
AustraliaUKUS
CanadaSouth Korea
TaiwanGermany
Japan
Min level for steel intensive exporting countries
Min level for infrastructure and housingdevelopment in a developed economy
(4)(2)
02
46
810
1214
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
Consumption Investment Net Exports GDP, y/y
y/y %
F F F F
ANZ Forecasts
China’s long term appeal is still very much in tact – steel stock supply is still well below developed world levels, while modest mine life for many commodities suggests prices will need to stay high
Source: Bloomberg, ANZ Research
Global Steel Stock Inventory (1950-2012)China Annual GDP Breakdown
Global Commodity Intensity Curves Global Commodity Mine Life
1010
Resources Exports – value growth 2002 to 2012
A$56 billion A$192 billion
2002 2012
Source: Bureau of Resources and Energy Economics, Australian Bureau of Agricultural and Resource Economics
12
Coal Summary
• We think coal prices have bottomed out in Q3 2013, spot Newcastle thermal hitting USD76/t and Australian Premium hard coking coal basing at USD131/t
• This period coincides with a pullback in high cost Chinese coal production and in a drop in marginal US coal exports
• We only expect prices to rise marginally in 2014 with firming Chinese demand offset by the backdrop of still high Chinese stockpiles
• Stronger coal exports from Australia and Indonesia will also cap the upside. Australian suppliers will continue to operate at capacity because of fixed cost commitments and Indonesian coal producers high-grading (lowering strip ratios to sustain margins)
• We think 2015 holds better price upside particularly for thermal coal as delayed expansion plans, particularly in Australia and a return to higher strip ratios in Indonesia limits a meaningful supply response
• We expect Newcastle thermal coal prices to average USD88/t in 2014 followed by USD95/t In 2015
• In coking coal the price expectation for 2014 is USD175/t with prices expected to strengthen further in 2015 to USD180/t
13
(30)
(20)
(10)
0
10
20
30
40
50
04 05 06 07 08 09 10 11 12 13
Hydro power Thermal power
y/y % change
(15)(10)(5)
05
101520253035
04 05 06 07 08 09 10 11 12 13
Coal output Thermal power output
y/y % change
Source: Bloomberg, ANZ Research
China thermal power demand is up, but domestic supply is down
China Thermal Power & Coal Production Growth
China Thermal Power & Hydro Production Growth
• Chinese coal demand growth (thermal power) appears to be outperforming domestic coal supply growth, currently creating a supply deficit
• Falling domestic coal prices in the past two years has diminished coal profitability significantly, particularly in the large producing north east provinces
• Stronger thermal power demand has also benefited from diminishing hydropower capacity
• A particularly dry Chinese summer has accentuated the drop in hydropower availability with growth rates again in negative territory
14
A drop in Chinese domestic coal production has benefited Australian thermal coal exports
Source: Bloomberg, ANZ Research
China Thermal Coal Origins
10
30
50
70
90
110
06 07 08 09 10 11 12 13
Newc - Indo 5000 Newc - Indo 4200 Newc - Indo 3400
USD/tonneNewcastle 6000 Coal Price Spreads
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
07 08 09 10 11 12 13
Indonesia
Australia
Russia
Vietnam
USA
Colombia
m tonnes• The drop in Chinese coal production has been supplemented by a rise in coal imports
• The biggest beneficiary has been Australian thermal coal exports, which has now surpassed Indonesia as the largest seaborne supplier into China
• The attraction of coal exports has been the underperforming price performance of Newcastle FOB against key lower rank Indonesian coals
• The recovery in the price spread in the past 6 months confirms a stronger appetite for the higher ranked Australian coal supply
15Source: Bloomberg, ANZ Research
China’s coal production has been falling for the past 3 quarters
China Coal Production
0
20
40
60
80
100
120
00 01 02 03 04 05 06 07 08 09 10 11 12 13-60
-40
-20
0
20
40
60
Coking Coal Exports Thermal Coal Exports
m tonnes YoY % change
Coking growth (RHS)
Thermal growth (RHS)
US Coal Exports
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
00 01 02 03 04 05 06 07 08 09 10 11 12 13-20
-10
0
10
20
30
40
50YoY % change (RHS) Total Production
3.3 billion tonnes
• A key reason for the slump in thermal coal prices has been the strong supply growth in China
• Significant industry consolidation in the past 3 years had seen the closure of inefficient capacity only to be replaced by larger more efficient coal supply
• However falling coal prices and profitability has seen the higher cost capacity in China start to pullback significantly in the past 12 months
• The other supply drag has been the significant jump in US coal exports post the US shale boom leaving excess coal supply
• But falling seaborne coal prices and rising freight costs has seen this swing supply fall over 10% y/y in the past 12 months
16Source: Bloomberg, ANZ Research
Aus + Indo Exports
Indonesian Coal Exports
0
100
200
300
400
500
00 01 02 03 04 05 06 07 08 09 10 11 12 13-20
-15
-10
-5
0
5
10
15
20
Coking Coal Exports Thermal Coal Exports
m tonnes YoY % changeCoking growth (RHS)
Thermal growth (RHS)
Australia Coal Exports
0
50
100
150
200
250
300
350
00 01 02 03 04 05 06 07 08 09 10 11 12 13-40
-20
0
20
40
60
80
Coking Coal Exports Thermal Coal Exports
m tonnes YoY % change
Coking growth (RHS)Thermal growth (RHS)
• A reason coal prices haven’t rebounded more strongly is the ongoing strong supply growth in Indonesia and Australia
• Indonesian thermal coal supply is maximising output to sustain margins and pay, in many cases high debt obligations
• In Australia the supply response has been even stronger
• High fixed-costs and infrastructure take-or-pay arrangements are factors in the supply response
17
118
190
0
50
100
150
200
250
300
350
2000 2010 20200
10
20
30
40
50
60
70
8075%
10%
% yoym tonnes
55
145
0
50
100
150
200
250
300
350
2000 2010 20200
5
10
15
20
25
10%
20%
% yoym tonnes
China and India thermal coal imports to grow
Source: Bloomberg, ANZ Research
China Thermal Coal Imports
India Thermal Coal Imports
• The long term outlook for the world’s largest thermal coal importers – China & India remains strong
• Although China’s y/y growth rate will drop significantly, total tonnages forecast to grow strongly to 2020
• India’s import demand is equally as strong, by 2020 India will make significant ground on China as the largest importer
• In 2020 it’s expected that total tonnages imported into India will be almost three times the level a decade prior
18
Australian exports to grow
Source: Bloomberg, ANZ Research
Australian Coal Exports
Australian Thermal Coal Exports
0
100
200
300
400
00 01 02 03 04 05 06 07 08 09 10 11 12 13F 14F 15F-20
-15
-10
-5
0
5
10
15
20
Coking Coal Exports Thermal Coal Exports
m tonnes YoY % changeCoking growth (RHS)
Thermal growth (RHS)
0
100
200
300
00 02 04 06 08 10 12 14F 16F 18F 20F-20
24
68
1012
1416
Thermal Coal Exports
m tonnes YoY %
Thermal growth (RHS) forecast
• Australia expected to capture a significant share of the demand growth in Asia Pacific region
• Total coal exports to grow by 21% from 2012 to 2015
• In thermal coal, demand growth out to 2020 will support significant supply capacity increases
20
Alignment
Queensland�Coal�Regions�and�Ports
GalileeBasin
SouthernBowenBasin
SuratBasin
Abbot�Point
DBCTHay�Point
Gladstone
Brisbane
NorthBowenBasin
• Development of coal chain infrastructure requires alignment of the mine and infrastructure elements, with respect to schedule, system specifications, approvals funding and risk allocation
• Alignment will be an important issue in future financings
• Alignment requires collaboration
21
Business Risk of Rail and Port Infrastructure
21
• Reserves and production dependent
• If single or few mines:
o concentration of reserves and production risks;
o limited ability to socialise default risk;
o for new coal basins, initially only limited customer replacement potential;
o potential stranded asset issues;
o terminal and part of rail infrastructure may have broader potential catchment from existing
coal basins.
22
Separate or Linked / Integrated Financings?
Benefits Issues
Separate
• Access separate (specialised) financier pools for mine and infrastructure
• Facilitates equity structure flexibility and sell down e.g. post Completion
• Facilitates multiple customers for infrastructure
• Mine risk limits financier pools anyway• Fragmented security pools – no step-in
rights for whole of business• Payment security across each interface –
additional cost and credit utilisation• Higher position on mine cash cost curve• Need to ensure information provided to
financiers is consistent
Linked / Integrated
• Reflects interdependency of components
• One security pool – step-in across whole business
• Reduce cross default issues • Eliminate payment security costs
across interfaces• Apply cash sweep proceeds across
whole of financing• Cash cost curve position
• Inter-creditor terms for linked financing• Reduced flexibility on separate equity
ownership of mine and infrastructure components
• Not reflective of potential portfolio risk for infrastructure
24
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