Sabyasachi Mishra, Tata International Singapore Pte Ltd - Securing and Sourcing Coal from Kalimantan Mines

CASE STUDY: SECURING AND SOURCING COAL FROM KALIMANTAN MINES

The 2nd Annual Kalimantan Coal 3-4 September 2013 Balikpapan, Indonesia

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Points to Cover

Ø  Tata International (TIL) – A brief Introduction

Ø  Global Coal Trade Snapshots

Ø  India’s growing appetite for Coal

Ø  Kalimantan has emerged as a major originator

Ø  Supply Security – Challenges & Strategies

TIL - A Brief Introduction

Ø  TIL is the flagship trading arm of Tata Group with a turn over of USD 100 Billion +

Ø  TIL just celebrated its 50th anniversary

Ø  Trades in Minerals, Metals, Agro, Distribution and Leather verticals

Ø  Coal forms a part of the Minerals vertical

Ø  Group consumes in excess of 20 Million MT in thermal coal per annum; TIL also sells to other major consumers in India.

Ø  TIL looking for strategic partnership with suppliers to increase its share in the Global Coal Trade

GLOBAL COAL TRADE SNAPSHOTS

Asia’s Most Important Fuel

"   Coal remains a primarily source for power generation and metallurgy

"   Cheapest source of energy on a heat adjusted basis

"   Long term factors to drive global growth in coal demand

"   Infrastructure bottlenecks and regulatory constraints restricting supply

Energy Consumption1

Rest of World 7,313 Mtoe

Asia 3,982 Mtoe

Source: BP World Energy Report 2009 1Mtoe = Million tonnes of oil equivalent

Coal51.0%Oil

29.7%

Natural Gas11.0%

Hydro Electric5.3%

Nuclear Energy3.0%

Oil37.5%

Natural Gas31.3%

Coal17.4%

Hydro Electric6.9%

Nuclear Energy6.8%

Global Coal Scenario Proven Balance Reserves

Share of World

Current Production

Reserve to Production Ratio Years

China 114,500 14% 3,800 35

USA 238,308 29% 973 245

India 58,600 7% 574 100

Australia 68,200 9% 409 186

Russia 157,010 19% 335 527

Indonesia 4,328 0.5% 375 15

South Africa 30,408 3.7% 250 122

World 826,001 7,678 119

All figures are in Million Tons Source: World Energy Council

WORLD’S TOP COAL IMPORTERS / EXPORTERS (2012)

IMPORTERS EXPORTERS PR  China   230Mt   Australia   284Mt  Japan   182Mt   Indonesia   309  Mt  

South  Korea   130Mt   Russia     124Mt  India   138Mt   USA     97Mt  Taiwan   70Mt   Colombia   75Mt    Germany   41Mt   South  Africa     72Mt  

UK   33Mt   Kazakstan   34Mt  

USA 97 Mt exports

India 138 Mt imports

China 230 Mt imports

Europe 160Mt imports

N. East Asia 221 Mt imports

Importer Exporter

Major trade flows

Minor trade flows Indonesia 309 Mt exports

Others 117 Mt imports

32 Mt

40 Mt to Asia

57% of world seaborne coal trade in the Pacific market

Australia 284 Mt exports

Colombia 75 Mt exports

South Africa 72 Mt exports

Russia 124 Mt exports

Importer Exporter

Major trade flows

Minor trade flows

Others 74 Mt exports

India and China are key players and will drive future demand

Global Trading (Hard Coal)

Steam Coking Total Trade

1990 299Mt 199Mt 498Mt 2000 421Mt 187Mt 608Mt 2012 750Mt 250Mt 1000Mt

Top 5 thermal coal import countries are all from Asia, with total imports accounting for ~54% global demand

Source: World Coal Institute, IEA 2010

•  Australia is the world’s largest coal (Steam + Met) exporter. •  Indonesia is the world’s largest steam coal exporter. •  Seaborne trade in steam coal has increased on average by about 7% each year (over the last 20 years)

Major Originating Countries Exporting Countries

Total Exports Imports to India

Imports to China

Australia 284.00 25.00 56.00

South Africa 72.00 25.00 15.00

Indonesia 300.00 50.00 68.00

Total Coal 975.00 137.50 220.00*

Thermal Coal 775.00 105.00 110.00

All figures are in Million Tons

Bituminous Coal Price – NewC Index – 6000 NAR

Source –Bloomberg

Price decline led to cancellation of more than 400 Million MT new port Capacity

Bituminous Coal Price – API4 Index – 6000 NAR

Source –Bloomberg

API4 is becoming a more significant benchmark of Bituminous coal imports into India

Sub-Bituminous Coal Price – SGX 4900 NAR

Source –Bloomberg

Not many hedging options available on sub-bit coal space

INDIA’S GROWING APPETITE FOR COAL

Indian Coal Economics 2006-07 Actual

2012-13 Actual

2013-14 Estimate

2016-17 Estimate*

Coal Demand 474.18 700.00 770.00 980.00

Indigenous Coal

430.83 557.00 605.00 715.00

Net Gap 43.35 143.00 165.00 265.00

Coal Import 43.08 137.50 165.00 260.00

Coking 17.88 32.50 35.00 50.00

Non-coking 25.20 105.00 130.00 210.00

All figures are in Million Tons Source –Reuters * Planning commission estimates

Factors influencing Indian growth in imports Macro Economics

• GDP Growth • Favorable Demographics • Per Capita Consumption of Electricity • Reduction in import duty

Micro Economics • Supply – Demand mismatch • Controlled Mining Regime • Quality of indigenous Coal

Environmental Factors • Limitations of use of High Ash, High Sulphur Coals • Expensive cost of local logistics

Indian Power Scenario

0

200

400

600

800

1000

1200

2002 2007 2012 2017

Installed Capacity

Per Capita Consumption

Non-coking Coal Originations for India

SHORT TERM

 Largest exporter of steam Coal, ~300Mt in 2012

 Low Ash low Sulphur Coal, suitable for power generation

 Inland waterways and floating cranes allow multiple loading points

 Regulatory changes could be potential impediment

LONG TERM

 Significant untapped coal reserves

 Close proximity to India gives freight advantage

 Suitable for blending with Indian coal, with low Ash disposal

 Environmentally friendly

SHORT TERM

 South African exports well established in the international market

 Exports through Richards Bay Coal Terminal, only major export option with capacity of upto 91Mt

 Railway capacity is bottleneck at 70Mt annual throughput

LONG TERM

 Limited scope for growth

 Inadequate railway infrastructure

 Port owned by consortium of producers – significant entry barrier for new investors

INDONESIA SOUTH AFRICA

KALIMANTAN HAS EMERGED AS A MAJOR ORIGINATOR

Indonesia Coal Economics 2012 Actual

2013 Estimate

2017 Projection

Coal Production 360.00 375.00 400.00

Local Demand 53.00 65.00 100.00

Exports 303.35 310.00 300.00

POWER GEN CAPACITY

60 GW (Coal 20 GW)

66 GW 85 GW (Coal 28 GW)

All figures are in Million Tons Source –Reuters

Indonesia Coal Reserves Reserves Resources

Kalimantan 19.10 56.00

Sumatra

12.90 63.50

Others - 0.50

Total 32.00 120.00

All figures are in Billion Tons Source –Geological Agency 2013

Reserves Resources

Lignite 29% 20%

Sub-bit

60% 66%

Bituminous 11% 14%

Resources Comparison

• Better average coal quality • 90% Coal Production v/s 34% of

total reserves • Relatively new and efficient

infrastructure; no railway

Kalimantan

• In general, poorer quality • 8% of Coal production v/s 55%

of total reserve • Old with new ones coming fast

and existing railway

Sumatra

SUPPLY SECURITY – CHALLENGES & STRATEGIES

Why Supply security ?

Long Term Security

Equity Model Off-take

Model

Infrastructure Investment Terms

Regulatory Framework Mining

Equity

Key Challenges to Investments "   Conflicts between mining operations and Forestry regulations

"   Lack of Coordination between Central and provincial Govts

"   Confusions over implementation of mining law

"   Land Acquisition

"   Improving competitiveness of taxation and royalty system

"   Security of assets, people and ownership rights

"   Interference from Taxation authorities

"   Corruption, Collusion and Nepotism

Quantity/ Duration

Pricing/ Cost Plus

Regulatory Framework Flexibility

Off-take

Key Challenges to Off-takes

"   Uncertainty over regulatory frame work on minimum pricing

"   Possible bans/restrictions on Low Rank Coals

"   Infrastructure development to get the coal from mine to loading points in time

"   Availability of Floating Cranes/Floating terminals

"   Competitiveness of the Mining Cost/Transport Cost to sustain the low price regime prevailing currently

"   Weak legal framework to enforce contractual defaults

Strategies for Supply Security

"   Tie-ups with key suppliers is important for growth

"   Relationship based model

"   Supplier benefits from the Brand recognition in the destination market

"   Win-win pricing model

"   Volume commitments in the right CVs

To Conclude…

"   While India face a few short term issues, the fundamentals for strong and sustained growth are in place.

"   Power sector reforms need to be accelerated but private players drive growth in generation side.

"   Tata International hopes to play a significant role in India’s Power Sector growth story.

"   Kalimantan Coal makes an obvious choice for India however Kalimantan bituminous Coal will continue to face high competition from other sources like South Africa, USA and Australian coal

"   Kalimantan Low Rank Coal will face competition from Sumatra and domestic coal prices in India

"   To help alleviate negative perception, there should be a stop to draft regulations which only force potential investors and long term buyers wary of further commitments.

Thank You

Sabyasachi Mishra Head – Minerals (Singapore) Tata International Singapore Pte Ltd Email: [email protected] Please visit www.tatainternational.com for more details.