China Coal Market Lookout 2014

Fenwei Energy Consulting

Feb 2014

Overview

2

1. China Coal Market Lookout

2. 2014 Coking Coal Price Movement

3. 2014 Thermal Coal Price Movement

1.1 China’s coal market has been in depression for two years1.2 End 2013 has seen high stockpile on ports1.3 Sluggish Economy drag down coal demand in 20141.4 factors that play roles in coal price movement

2.1 Supply demand fundamentals

2.2 2014 price forecast

3.1 supply demand fundamentals

3.2 2014 price forecast

3

Coal market running weak for 2 years

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1st wave of downturn

2nd wave of downturn

3rd wave

1st wave: ship charterers, middle-men loses profit2nd wave: truck contractor, checkpoints, and mines loses profit3rd wave: free competition sets the tune

Linear correlation

• Since 2003 China has witnessed the ‘golden age’ of coal trading thanks to the rapid economic growth, trade have been flourishing and prices have been elevating. During this period demand has always slightly exceeded supply.

• The ‘golden age’ is now history. Since 2012, coal industry struggled in turbulence, price kept dropping. 2014 will be spent in another wave of downturn.

Fig 1-1 thermal coal price movement (FOB QHD 5500 RMB/t)

Source: Fenwei

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High stockpile drives prices low

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1 000 threshold

• Inventory on Qinghuangdao (QHD) surged from 4.82 million tons (MT) of end 2013 to 8.42MT on 2nd Feb. From experience this is above threshold and prices will be driven down in due course

Fig 1-2 QHD stockpile (10,000t)

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Fig 1-3 Jingtang old port stockpile (10,000t)• Inventory on Jingtang port, north China’s largest coking coal terminal, is increasing

Source: Fenwei

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Trough

Fig 1-4 China quarterly GDP growth rate

Weakened economy dampens coal demand• China’s GDP growth is on a 3-years slide and is expected to continue sliding through to 2014-15, as

China’s 2014 projected GDP growth at 7.5%. Periodicity can be seen in GDP growth per quarter from below chart.

• During the golden age China’s coal consumption average elasticity is 0.75. Due to enactment of strict environment regulation and the boom of renewable energy, we project coal consumption elasticity in 2014 at 0.55, and demand growth stable at 4.1%.

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Factor Matrix

Basis Description Outcome

1 Macro Economy

• Macro continues to gloom, expected GDP retracts• Industry sectors remain unchanged, no significant sign of

recovery

• Downstream demand for coal (i.e. real estate, electricity) stays flat

2 Policy • Tentative resource tax was tossed around but industry had mixed opinion

• Shanxi, Shaanxi and Inner Mongolia introduces stimulus package for coal sale

• Tax reform will be introduced in 2014• Price volatility due to policy changes, lives of

small coal mine becomes more difficult

3 FAI • The golden age is history, decreasing margin means less investment

• Previously invested coal mines enters the market。

• As production capacity increase, capital will move on to find its next target

4 Transport • Multiple railways and highways under construction. As they begins operation the transport bottleneck will be eased in 2014

• Transport cost reduces on average, but long distant transport will still be a large portion of the cost

5 Safety • Spontaneous events • No long-term impact on prices

6 Cost • Cost will continue to reduce as producers strive to do so • About 5yuan/ton cos decrease in Shanxi 2014

7 Import • Policy will encourage import • Low cost, good quality make import ideal for coastal areas of China

8 EnergySector

• Nat Gas, Coal Bed Methane will catch up in energy mix • Coal will dictate as primary energy source

Overview

7

1. China Coal Market Lookout

2. 2014 Coking Coal Price Movement

3. 2014 Thermal Coal Price Movement

1.1 China’s coal market has been in depression for two years1.2 End 2013 has seen high stockpile on ports1.3 Sluggish Economy drag down coal demand in 20141.4 factors that play roles in coal price movement

2.1 Supply demand fundamentals

2.2 2014 price forecast

3.1 supply demand fundamentals

3.2 2014 price forecast

8

Demand Supply Fundamentals

• In 2013, China produced 476MT of coke, equivalent to 620MT of coking coal consumption.

• As China upgrades to a higher grade steel furnace , blend ratio of strong-caking coal increased to cope with relevant coke requirement. in 2013, overall strong-sticking coal blend ratio is 63%.

• We predict coke production in 2014 to be 505MT, correspond to 656MT of coking coal. We also foresee the blend ratio for strong-caking coal increase to 64%.

Source: Fenwei

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2012 201310,000t

Fig 2-1 2012-13 China Coking Coal Consumption (104)

Table 1-1 2013 China Coking Coal blend ratio

JM FM SM QFM 1/3JM QM Other

Blend Ratio 33% 10.8% 6.5% 6.8% 19% 16% 6.9%

Consumption(104) 20550 6725 4048 4234 11832 9964 4682

Source: Fenwei

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Demand Supply Fundamentals

Fig 2-2 2008-13 Coking Coal Production by sub-category (104)

• In 2013, China’s coking coal production totaled 564MT, calculated by raw production per sub-class, wash rate and yield rate. Amongst this, Shanxi province alone has produced 177MT, or 31.37%.

• In 2014, China’s output capacity will witness another year of rapid increase as new mines enter production. Fenwei predicts a 60MT capacity increase in 2014, reaching 1.59 billion overall. Raw production will reach 1.49 billion and refined coking coal production estimated at 576MT, or 2% increase.

Source: Fenwei, Bureau of coal safety

44712 44773 48955

53861 54671 56463

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Demand Supply FundamentalsTable 1-2 2009-13 Coking Coal export and import (104)

• China is now a net importer of coking coal. In 2013, the import number is 75.4MT, meaning a y-o-y increase of 40.78%. This is much higher than the CAGR of 21.59% over the previous 4 years.

• Export however is suppressed. 2013 has seen 1MT of export, leveled with the 2012 number but lowered from 2011’s 3.59MT.

• In complement of ample supply of weak-caking coal, China is importing an increasing volume of strong-caking coal. As domestic supply of strong-caking coal remain shorthanded, this trend is expected to continue, with net import reaching around 95MT or 28% increase in 2014.

Year 2009 2010 2011 2012 2013

Import 3449 4727 4466 5355 7539

Export 64 114 359 131 109

Fig 1-2 2013 China coking coal import by country

Fig 1-3 2013 China Coking coal export by country

Source: NBS

40%

20%

15%

11%

8%

4% 2%Australia

Mongolia

Canada

Russia

USA

Indonesia

Others

41,25%

11,42%

47,02%

0,00% 0,31%

Japan

N. Korea

S. Korea

Canada

Russia

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Supply vs DemandTable 1-3 2009-13 Coking Coal Supply vs Demand (108)

• In 2013, China’s coking coal supply exceeded 638MT, split between 88% of produced and 12% imported. Demand reached 620MT. This suggests an slightly over-supply situation.

• As of 2014, because of newly operating mines, the supply is growing steadily whereas rate of demand growth is losing speed. Our forecasted gap from its supply is 15MT.

Source: Fenwei

2009 2010 2011 2012 2013 2014E

Supply Side

Production 4.48 4.89 5.39 5.47 5.64 5.76

Net Import 0.334 0.459 0.414 0.527 0.739 0.95

Net availability 4.81 5.35 5.80 5.60 6.38 6.71

Demand Side 4.72 5.37 5.63 5.45 6.20 6.56

Margin 0.09 -0.02 0.17 0.15 0.18 0.15

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Overview

13

1. China Coal Market Lookout

2. 2014 Coking Coal Price Movement

3. 2014 Thermal Coal Price Movement

1.1 China’s coal market has been in depression for two years1.2 End 2013 has seen high stockpile on ports1.3 Sluggish Economy drag down coal demand in 20141.4 factors that play roles in coal price movement

2.1 Supply demand fundamentals

2.2 2014 price forecast

3.1 supply demand fundamentals

3.2 2014 price forecast

14

Demand Supply FundamentalsFig 3-1 2008-13 thermal coal consumption and growth (108)

• China’s thermal coal consumption has increased from 2008 with CAGR 9.5%.

• In 2013, China’s thermal coal consumption is 3.42BT. Share of electricity is 61%. Building material usage decreased by 1% to 22%. Civil use is also on the down side.

• As economic couldn’t rally in 2014, especially with real estate industry rolling downhill, coal consumption cannot sustain current growth rate. We predict 2014 thermal coal consumption to be 3.54BT, or 3.5% y-o-y increase.

Fig 3-2 2013 coal consumption by industry

Source: Fenwei

Electricity61%

Building Material

22%

Chemical5%

Metallurgy4% Others

8%

21,6924,82

28,7232,09

34,11 34,2214,43% 15,71%

11,73%

6,29%

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Consumption Growth Rate

Source: Fenwei

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Demand Supply FundamentalsTable 2-1 2009-13 thermal coal export/import (108)

• According to NBS, China imported thermal coal 252MT in 2013, up 6.8% y-o-y; exported 6.34MT, making China the net importer of 246MT throughout the year.

• China thermal coal import has been inclining since 2009, with CAGR 29%.

• For policy reasons, China’s export has been on the decline each year.

• Fenwei expect China’s GDP growth rate stables at 7.5%, and net import volume up to 265MT.

Year 2009 2010 2011 2012 2013 Import 0.91 1.19 1.82 2.36 2.52 Export 0.22 0.18 0.11 0.08 0.06

5,3% 6,6%5,3%

23,2%

7,6%

48,4%

3,6%

Fig 3-4 2013 China thermal coal import

42,9%

42,1%

14,0%

1,0%

Fig 3-5 2013 China thermal coal export

Source: NBS

South AfricaN. KoreaVietnamAustraliaRussiaIndonesiaOthers

JapanS. KoreaTaiwanOthers

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Supply vs DemandTable 2-2 2008-13 thermal coal fundamentals (108)

• China’s total 2013 supply was 3.49BT with a 93% to 7% spread between domestic and import. Total demand was 3.32 billion tons. It’s a slightly over-supplied situation.

• As of 2014, because of new mines were put in operation, the supply is growing steadily whereas rate of demand growth is losing speed. Over-supplied situation will be the topic of 2014, with a 62MT margin.

Source: Fenwei

2008 2009 2010 2011 2012 2013 2014E

Supply side

Production 21.8 24.1 27.1 29.9 31.8 32.4 33.38

Net import -0.02 0.69 1.19 1.67 2.27 2.46 2.65

Net availability 21.78 24.79 28.29 31.57 34.07 34.86 36.03

Demand side 21.69 24.82 28.72 32.09 34.11 34.22 35.41

Margin 0.09 -0.03 -0.43 -0.52 -0.44 0.64 0.62

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About Fenwei• Established in 1998, Fenwei is based in Taiyuan, Shanxi. Fenwei is China’s premier expert in coal, coke,

coal bed methane, coal chemical and other forms of energy.

• Consulting: tailored reports on investment valuation, feasibility studies, market studies, and solutions etc.

• Information: China’s largest and quickest go-to platform for any coal related data – www.sxcoal.com

• Outsourcing: management outsource, coke plant outsource, wash plant outsource, mine outsource etc.

• Reports: Weekly, monthly, yearly, tailored etc.

• Mine database: capacity, status, coal quality data on more than 13,000 coal mines nationwide.

• Coal database: coal composition and coal seams data f 98 l t l fi ld i Chi

Fenwei

Information Consulting Outsourcing

Databases

Analysis and maths models

reports

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Coal quality valuation

Market study and consensus

Product design and pricing

Marketing campaign

Our partners in Mongolia

• Quality inspection in accordance to Chinese quality convention

• Identify key strength or weakness for the coal just like how Chinese buyers would see them

• Study market value and target market for the coal

• Identify Potential buyers, competitors, and complementary coal,

• Application of the coal and investigate to confirm our judgment with market players

• Blend Scheme

• Selling point and price range

• Transportation to target market

• Facilities (e.g. wash plant) requirement

• Take it to the market with Fenwei's broad connection and experience in China. Allow you to start a dialogue directly with end-buyers from day one.

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（030003）

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The End