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North America Equity Research29 June 2014

Global Coal UpdateOversized Mine, Rail and Port Capacity Leads to Skinny Prices. US miners watch their thermometers.

Precious Metals & Coal

John Bridges, CFA, ACSM AC

(1-212) 622-6430

[email protected]

Bloomberg JPMA BRIDGES <GO>

J.P. Morgan Securities LLC

European Coal

Dominic O'Kane AC

(44-20) 7742-6729

[email protected]

Bloomberg JPMA OKANE <GO>

J.P. Morgan Securities plc

Australia Coal

Mark Busuttil AC

(61-2) 9003-8619

[email protected]

Bloomberg JPMA BUSUTTIL <GO>

J.P. Morgan Securities Australia Limited

China Coal

Daniel Kang AC

(852) 2800 8570

[email protected]

Bloomberg JPMA KANG <GO>

J.P. Morgan Securities (Asia Pacific) Limited

India Coal

Pinakin Parekh, CFA AC

(91-22) 6157-3588

[email protected]

Bloomberg JPMA PAREKH <GO>

J.P. Morgan India Private Limited

Russia Coal

Yuriy A Vlasov AC

(7-495) 967-7033

[email protected]

Bloomberg JPMA VLASOV <GO>

J.P. Morgan Bank International LLC

Indonesia Coal

Lydia J Toisuta AC

(62-21) 5291-8316

[email protected]

Bloomberg JPMA TOISUTA <GO>

PT J.P. Morgan Securities Indonesia

See page 26 for analyst certification and important disclosures, including non-US analyst disclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

Companies are demonstrating again that costs follow prices – up and down. Our work shows that while backward-looking cost curves offer hope that a large share of production is unprofitable, after adjusting for weaker commodity currencies and lower costs, most tonnage only incurs losses equal or less than the take–or–pay sunk cost. Additionally, lower coal prices in China are reducing that country’s appetite for imports.Consequently, we’ve lowered our coal prices a little more, to recognize miners’ resilience. Areas to watch are the US where coal shortages could cause a crisis and India where, if the weak El Niño monsoon continues;reduced hydro power supplies should lift thermal coal imports.

Met coal for Q3 settled at $120/t; we’ve modestly lowered our coking and thermal coal prices to recognize the miners’ abilities to drive costs down and keep the coal flowing. Already lower thermal coal prices are being used to explain strong demand growth for this fuel and economies of scale may yet help troubled miners’ economics. Yet in the short term, the markets remain oversupplied, especially in Asia. With Take-or-Pay contracts probably stretching out at least two years, this could be a slow basing process.

Oversupply of Chinese thermal coal has depressed imports. Chinese steel production is holding up, but exports have also been rising. Since most Chinese steel uses domestic coking coal, this seems to be a net negative for the seaborne coking coal price.

New pressure to reduce carbon emissions came from the US’s EPA. The new rule is out for debate and will be finalized in about a year; thenwe expect legal challenges. Hence it’s impossible to know what the rule will look like when or even if it’s implemented. We suspect Exxon is on the right track when it says it expects carbon pressure will continue but efficiency improvement is the most practical solution and the most draconian cuts to emissions are not supportive of political realities in non-developed economies.

Indians we talk to were euphoric about new PM Modi’s success but his first challenge could be a weak monsoon and thus a weaker agricultural economy. However, less rain should mean reduced hydro power and bigger demand for imported coal.

Table 1: Key Coal Prices

Coal Type Q1 14 Q2 14 Q3 14 Q4 14E 2014E 2015E 2016E

Hard Coking Coal 143 120 120 125 127 134 150

Newcastle Thermal 79 75 75 77 77 78 85

European Th. (API2) 79 75 75 80 77 82 86

Richards Bay (API4) 77 75 75 76 76 79 83

Source: J.P. Morgan estimates.

[email protected] Barbara Tong 06/30/14 01:30:42 AM CITIC Bank International

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John Bridges, CFA, ACSM(1-212) [email protected]

Summary and conclusions

We had hoped that falling US coal exports would tighten the seaborne market and at least stabilize prices. However, other producers are reducing costs and staying in the market with more coal. After reviewing coal cost curves, we believe costs are again following prices. The weaker trend in the A$, aggressive cost cutting and improved mine productivity seem to be helping Australian producers adjust to lower prices. As take-or-pay contracts roll off, prices should pick up but Peabody’s disclosure suggests its heavy freight commitments last at least two years.

Oversupply of coal in China is not helping that market with its miners competing on price for sales. Coal imports are not pricing into China at present. Sharply lower iron ore prices are not helping sentiment, although unlike iron ore, there is little new coal mine capacity being bought on line now. With coal it’s more that operating mines are working very hard to remain in operation, hence we’ve reduced coal prices modestly.

Table 2: Coal price forecast

International Coal Q1'14 Q2'14 Q3'14 Q4'14 CY14E Q1'15 Q2'15 Q3'15 Q4'15 CY15E CY16E LT '14$

Hard coking coal New 120 125 127 130 130 135 140 134 150

Hard coking coal Old 143 120 125 130 130 135 140 145 150 143 160

%change -4.0% -3.8% -1.9% -3.7% -7.1% -6.9% -6.7% -6.1%

Semi-soft Coking New 84 88 91 91 91 95 98 94 105

Semi-soft Coking Old 103 90 88 91 93 95 98 102 105 100 112

%change -4.0% -3.8% -1.9% -3.7% -7.1% -6.9% -6.7% -6.1%

Ratio to HCC 72% 75% 70% 70% 70% 70% 70% 70% 70% 70% 70% 70%

PCI (low vol) New 100 104 105 108 108 112 116 111 128

PCI (low vol) Old 116 100 104 108 107 112 116 120 125 118 136

%change -4.0% -3.8% -1.9% -3.7% -7.1% -6.9% -6.7% -6.1%

Ratio to HCC 81% 83% 83% 83% 83% 83% 83% 83% 83% 83% 85% 85%

Newcastle Spot Thermal New 75.0 77.0 76.5 77.0 78.0 78.0 79.0 78.0 85.0 90.0

Newcastle spot Thermal Old 79.0 75.0 75.0 77.0 76.5 79.0 80.0 80.0 81.0 80.0 90.0 95.0

%change 0.0% 0.0% 0.0% -2.5% -2.5% -2.5% -2.5% -2.5% -5.6% -5.3%

European Th. (API2) New 75.0 80.0 77.3 82.0 81.0 81.0 84.0 82.0 86.0 90.0

European Th. (API2) Old 79.0 75.0 80.0 84.0 79.5 84.0 83.0 83.0 86.0 84.0 90.0 95.0

%change -6.3% -4.8% 0.0% -2.4% -2.4% -2.4% -2.3% -2.4% -4.4% -5.3%

Richards Bay (API4) New 75.0 76.0 75.8 78.0 77.0 77.0 82.0 78.5 82.5 85.0

Richards Bay (API4) Old 77.0 75.0 75.0 78.0 76.3 78.0 77.0 77.0 82.0 78.5 85.0 90.0

%change 0.0% -2.6% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% -2.9% -5.6%

Source: JPM

Some have worried that the EPA’s new carbon emissions rule that requires a 30% cut to US emissions, compared with 2005, will lead to an armada of dry bulk carriers dumping excess US coal on the seaborne market. We don’t think this will happenbecause:

This is a draft rule which will be finalized in about a year’s time and will then likely face significant and lengthy legal challenges.


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It’s not economic to export US coal at present, and while some sales are continuing; probably driven by take or pay commitments, we doubt new sales will be signed outside long standing relationships.

We feel Exxon Mobil is correct in suggesting that the intensity of carbon emissions for a given level of economic activity will continue to fall. However, it goes on to suggest that the level of cuts required to stabilize carbon dioxide at 450ppm would put unsustainable pressures on society, especially in the world’s poorest and most vulnerable countries.

We continue to expect more demand for US coal exports in the medium to long term due to the forecast for growth in demand for coal as an affordable energy source in the developing world. However, because of the need for new west coast export capacity, increased US exports will probably be delayed until new capacity built in the last few years in the Pac-rim is fully utilized. Another support for US exports could come if South African exports come under pressure from domestic demand. If new ports in the US NW are delayed further, due to environmental pressure, we’d expect to see a new export corridor developed through Mexico.

India’s new PM Mr. Modi wants to break the bureaucratic log jam. The country’sdomestic coal production has been suffering due to project permitting delays and infrastructure bottlenecks. That has led to power shortages across the country and consequently a weaker economy. Hopes that Mr Modi will fast track approvals and remove hurdles have already lifted Coal India (COAL IN) by 36% in the last six weeks. If he delivers on his campaign promises, India’s coal production may rise in the long term, reducing the country’s dependence on imports. However, in the near term, a developing El Nino weather pattern may result in lower than normal rainfall reducing hydro power supplies and raising the need for coal imports.

Figure 1: India’s monsoon so far has been deficient

Source: IMD


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Key points

Costs are still following prices. The very tight seaborne coking coal market of 2008-11 was driven by double digit Chinese growth in demand and Australian floods cutting supplies. These dynamics took the price well ahead of what we consider the long term price of coking coal at $160/t. More recently, the oversupplied market forced the spot price below $110/t.

Met coal

Take-or-pay (TOP) contracts allow miners to justify $10 to $15/t “losses” to avoid paying the similar sized commitments for infrastructure access. Recently Peabody detailed its take or pay exposure in its annual 10k filing to the SEC averaging $390m per year between 2014 and 2016.

Even companies that don’t have TOP exposure because they own their ports are still motivated to export. While port owning mining companies don’t have formal TOP exposure, they will often be carrying the cost of building the port facility in the form of interest bearing debt. This urge to fully utilize productive mine and port capacity seems to have contributed to the fall in the coking coal price shown below.

Figure 2: Spot coking coal price v/s benchmark

$/t

Source: Bloomberg

Miners are becoming more aggressive with cuts to costs and requiring their suppliers to help hence we are not enthusiastic about prospects for near term production cuts from Australia to raise prices.

Thermal coal

The EPA has announced its proposed rule for carbon emissions from existing power plants but there are still many more questions than answers.

1. Will EPA’s view that it is enabled to rule on carbon hold up in court?

2. What will the rule look like in its final form in June 2015?

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Quarterly Benchmark Spot Queensland Coking Coal


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3. What will the rule look like after the likely legal challenges of the “final rule” beginning in H2 2015?

4. Will the EPA’s more cooperative approach with the existing plants be easier in the courts or create new challenges?

US coal exports are falling more quickly now, but with other countries apparently concluding it’s easier to drop costs rather than production, seaborne prices are reaching new lows. Positively, the increased affordability of coal continues to raise demand as detailed by recent IEA and BP reports so perhaps miners feel they can grow their way through the downturn.

In more detail

Trader commentary

The Atlantic basin entered 2014 well supplied with coal. Prices were little affected by the outage at Drummond’s Colombian operation due to the mild winter and abundant supplied of renewable power. The Ukraine standoff has delivered volatility but was unable to prevent the 2015 contract falling to new lows at $78.35/t recently. While oil prices received a boost from the rebel activity in Iraq, this is not a coal event and was unable to lift coal.

Figure 3: API2 Coal vs. Nat Gas

($/tonne)

Source: Bloomberg

Newcastle coal has been weaker than Euro prices reflecting increased supplies from Indonesia and the unprofitable netback to China. Interestingly, while Newcastleprices have been stronger than (delivered) European prices for several years, looking back to before the very rapid Chinese expansion of 2009-12, European prices were higher.

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Figure 4: Thermal Coal Prices Make New Lows

($/tonne)

Source: Bloomberg

China sentiment bearish

Oversupply persisting, spot prices slipping again

China’s market sentiment remains bearish with persistent oversupply coinciding with China’s slowing economy. After a brief rebound to RMB535/t in April, benchmark Qinhuangdao thermal coal prices (5500Kc NAR, FOB) fell to RMB515/t (USD83/t) this week. Meanwhile, benchmark coking coal prices have also fallen to their lowest levels in years, with HCC at RMB823/t (USD133/t).

Figure 5: QHD coal prices fell to RMB515/t this week

Source: SxCoal, J.P. Morgan

Figure 6: Chinese coking coal prices fell to the lowest level in years


Shenhua and China Coal Energy bearish on market outlook

At J.P. Morgan’s China Summit 2014 recently, China Shenhua and China Coal Energy remained cautious on domestic thermal coal markets. Both expect coal oversupply to persist over the next few years. While current thermal coal prices were viewed to hold limited downside given cost support from marginal producers, upside to prices were capped by lackluster demand. China Coal Energy estimated c40% of industry players are loss-making, however, China’s supply response has disappointed thus far with YTD production at 1.48bn tonnes (+1.6% y/y).

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China 1/3 Coking (Rmb/t) China anthracite (Rmb/t)


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Figure 7: Limited supply response, 5M output +1.6% y/y

Source: NBS, SxCoal, J.P. Morgan

Utilities well supplied; seasonal weakness in Q3, improvement likely in Q4

As we enter the summer peak season, coal markets should regain demand momentum in July and August, when consumption typically sees a seasonal rise amid high temperatures. We note that coal burn has picked up slightly to 3.28mt/day in mid-June, from an average of 3.20mt/day in May. However, utilities are currently well supplied holding stocks sufficient for 23 days of consumption (above trend levels of 18 days). Likewise, inventories at ports have grown rapidly as a result of the completion of the Daqin maintenance work and weak 2Q demand (due to strong rainfall and hydro output increases). Coal inventories at Qinhuangdao port were 7.15Mt (on 20th June), well above the normal levels of 6.5Mt.

Figure 8: Chinese utility inventories remain comfortable (22 days)


Figure 9: QHD port inventories (7.2Mt) above trend levels (c6.5Mt)


Newcastle trading at parity with QHD coal; no appetite for imports

Despite landed coal prices into China hitting a new low this week, at USD71.45/t, imports have struggled recently. With Newcastle trading at parity with QHD coal at present, imports are struggling to price into China. Traders typically need at least 5% discount to be motivated to purchase coal from Newcastle.

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Figure 10: China’s monthly coal imports slowed in May, -13% y/y or -11% m/m


Australia: cost reductions protect coal margins

Mining inflation in Australia averaged high single/low double digits over the past decade as the resources sector saw capital inflows in a booming industry that was essential for the Chinese expansion. Commodity producers competed for infrastructure access as well as skilled labor leading to double digit annual inflation in some categories as shown in the chart below. During this period, the Australian dollar rose from $0.6 (per USD) to its peak level of $1.07. The situation was not helped by the floods of 2008/11 that curtailed supplies of global coking coal raising prices to records and leading to further investment in the global industry.

Figure 11: Australia Annual Mining Inflation between 2006 and 2013

Source: QRC

With Q2 met coal benchmark down ~25% compared to last year’s average, miners are aggressively cutting costs to protect market share and cashflows. Roughly, 17mt of met coal cuts have been announced globally this year of which the majority of the cuts are by North American producers. While it may appear that much of the Australian coal is loss making using 2013 costs, after applying modest cost cuts,most of the coal is in the money. See the chart below.

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Don’t look backwards at cost curves. Forward looking curves

show how cost cuts have kept

mines operating.


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Figure 12: Australia Met Coal Margin Curve

($/tonne)

Source: Woodmac, JP Morgan Analysis

We justify this 14% cost reduction using three drivers as shown in the chart below (Figure 13) 1) A$ is down 5% from 2013 average levels and with iron ore trading below $95 per tonne, we could see more downside from current levels 2) Royalties constitute about 10% of the costs and are linked to the price that is down 30% over last year’s average 3) We assumed progressive cost reduction with bottom quartile mines cutting costs by 15% and top quartile mines keeping costs flat. This yields an average cost reduction of 6% across the total Australian production base. Collectively, these factors add up to 14% lower costs over 2013 which we believe is a plausible scenario. As highlighted in the above chart (Figure 12), this scenario essentially brings back to profitability most of the coal that would have been loss making at prevailing lower met prices. We are not surprised that Australian miners haven’t responded with big, across the board production cuts so far.

Figure 13: Cost Reduction Scenario (Indicative)

Source: Woodmac, JP Morgan Analysis

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Operating cost reduction 2014 Cost


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Interestingly, Australia’s BREE estimates that about 12000 miners have left the coal industry as producers scaled back some high cost production, however a bigger number (including many of those who left) of people have joined the industry as new lower cost mines expand.

Table 3: Global met coal cuts announced this year$m

Company Country Quality Tonnes

Alpha Natural USA Mixed 1.4

Arch Coal USA High vol 1.1

Consol Energy USA Low/high vol 0.8

Mechel Bluestone USA Mixed 1.6

Patriot Coal USA High-vol 1.3

Cliffs USA Low-vol 2.8

Drummond USA Mid-vol 0.3

Walter Energy Canada Mixed 3.6

Glencore Australia Semi-soft 2.1

Vale Australia Mixed 1.5

Rio Tinto Australia Semi-soft 0.3

Total 16.8

Source: Company reports

Take or pay contracts

Peabody drops the veil on take-or-pay’s. In its latest 10K, BTU details its take or pay exposure. Assuming take or pays mostly affect its 28mt of Australian export coal (16-17mt of met coal and 11-12mt of Aussie thermal coal) this equates to about $14/t for next three years and is approximately in line with the estimated per ton loss reported by Australian producers.

Table 4: Take or pay obligations of Peabody$m

Take or pay obligations $mn

Less than 1 Yr 386

2-3 Years 780

4-5 Years 703

More than 5 Years 1,857

Total 3,725

Source: Peabody

There are some talks underway with the rail companies to readjust rail contracts but we don’t expect volume commitments to change much and therefore we doubt that volumes will fall greatly until many of these contracts roll off in about 24 months. Perhaps by then the demand growth will keep coal flowing even as take-or-pay contracts roll off.

Indonesia: production ahead of government's target

Indonesia’s year to date coal production of 183mt is up 12% year over year. On an annualized basis, production is tracking ahead of the 425mt target set by the Indonesian government for 2014. Of this 183mt, about 136mt was exported.


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The country is contemplating new rules to limit coal production and tighten control on exports and plans to introduce the new measures by early next month. The government is considering new rules on shipments that would require miners to register themselves and channel exports only through authorized port facilities. However, exports through dedicated coal terminals appear to be more of a longer term plan.

Russia

Thermal coal

Russian thermal coal production remains relatively stable at the end of Q2’14. Domestic consumption is showing some encouraging signs of a possible recovery (Russia: IP steels the limelight. 18 June 2014), however with 2014 GDP growth forecast at just 0.5% (JPMCe), we are not optimistic for a near term improvement inRussian domestic thermal coal consumption. Domestic thermal coal output showed some signs of a slow-down in Apr’14 but we expect that Q2’14 production data (available in Aug’14) will be 3-4% down on 2013.

Figure 14: Russian thermal coal productionmnt

Source: Metals Expert, JPMCe

Russian thermal coal export volumes gained some momentum in Q1’14, adding +14% y/y, courtesy of the weak RUB. We believe that stabilization of the domestic currency to the levels below RUB34 per USD is unlikely to have an immediate effect on Russian thermal coal exporters. We anticipate that Russian thermal coal exports in 2014 will grow 9-10% y/y.

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We anticipate that the Russian thermal coal export in 2014 shall

grow at 9-10% y/y.


https://jpmm.com/research/content/GPS-1421597-0

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Figure 15: Russian thermal coal export vs RUB FXmnt

Source: JPMCe, Metal Expert, Bloomberg

As most of the Russian thermal coal is developed in the Kemerovo region far from ports, transportation cost erodes miners’ margins, making export unprofitable for many players. With TCC within $35-45/t range, most of the Russian thermal coal exporters are hardly making money with API2 below $75/t and keep export to maintain operational leverage.

Deterioration of the political conflict between Russia and Ukraine should lead to a decrease in thermal coal exports from Russia to Ukraine. During the first four months of the year, we noticed the drop in the share of the Russian thermal coal exports to Ukraine, both in absolute tonnage (-33% y/y, Jan-Apr) and as percentage of the total Russian thermal coal export for Jan-Apr’14 (from 4% in Jan-Apr’13 to 2% in Jan-Apr’14).

Figure 16: Russian thermal coal export to Ukrainekt

Source: JPMCe, Metal Expert

The situation in Ukraine is adding another variable to the Atlantic thermal coal market. Since early June, Russia’s Gazprom (covered by J.PMorgan analyst Andrey Gromadin) switched to a pre-payment gas delivery scheme for Ukraine, due to $4.5 bn of unpaid gas bills (Gazprom. Russia and Ukraine have enough time to resolve gas pricing issues, ED discount could be icing on the cake. 13 June 2014). The share of the Russian imported gas (c27 bcm, 2013) in Ukraine gas consumption (c50bcmpa) is over 50%. Ukraine has gas stored in underground inventory; however the press (Vedomosti, 23 Jun’13) reported that Ukrainian Federal Government plans

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With TCC within $35-45/t range, most of the Russian thermal coal

exporters are hardly making any

money at API2 below $75/t and keep export to maintain

operational leverage.

We noticed the drop in Russian

thermal coal exports to Ukraine, both in absolute tonnage (-33%

y/y, Jan-Apr) and as a

percentage of the total Russian thermal coal export for Jan-

Apr’14 (from 4% in Jan-Apr’13 to

2% in Jan-Apr’14).




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to ration gas usage, giving the priority to residential users and residential utility producers. Consequently, we expect Ukraine to maximize its thermal coal usage.

Figure 17: Ukrainian thermal coal S/D balancemnt


Although the share of imported thermal coal in Ukraine is not significant (c10%, 2013, JPMCe), there is a real possibility that domestic thermal coal production could have some downside in 2014. The lion’s share of the Ukrainian coal business is located in the eastern part of the country, and this is the area that is involved in armed conflict. So far there were no signs of any production slowdown but recently there was news that DTEK, one of the largest Ukrainian coal producers (48% of Ukrainian coal output, 2013, company data), was reportedly curtailing its coal output due to military action in close proximity to its coal mines (link, in Russian).

Figure 18: Ukrainian thermal coal outputmnt


As stated above, we see no downside to Ukrainian thermal coal consumption (due to gas availability constrains). At the same time, a decrease in domestic thermal coal production by 15% y/y (JPMCe) we estimate would add an extra 5.9-6.1mt of thermal coal demand to the Atlantic market.

If Ukrainian production were to fall, we see some issues with funding such additional demand, given current difficulties in the Ukrainian budget. Any external funding will likely be only considered if the issue with gas payments between Russia and Ukraine is resolved.

39.6

2.8

39.4

3.0

0.0

10.0

20.0

30.0

40.0

50.0

UA production UA import UA usage UA export

2.0

2.5

3.0

3.5

4.0


2013 2014 YtD

We believe a reduction in domestic thermal coal

production by 15% y/y (JPMCe)

would add an extra 5.9-6.1mt ofthermal coal demand at Atlantic

market.


http://www.donetskie.com/news/v-svyazi-s-boevymi-deystviyami-v-donbasse-ostanavlivayut-rabotu-shakht/

14



Coking coal

Recently, production of coking coal in Russia posted slightly negative dynamics with -3% y/y decline (Jan-Apr’14). Many producers, including those who are linked to a steelmaking parent via upstream integration links, demonstrated no intention to expand in the face of the uncertainly faced by the Russian steel industry.

Figure 19: Russian coking coal outputmnt


Export volumes of coking coal from Russia actually gained 13% y/y (Jan-Apr’14) despite sales to Ukraine decreasing from 39% (average in Jan-Apr’13) to 36%. We note that some Russian integrated steel players, such as Evraz, have steel and coke production facilities in the Ukraine and are likely to maintain stable export coking coal volumes to Ukraine. Exports to South East Asia, the second most popular destination for Russian coking coal were helped by the weaker RUB. We anticipate that the level of the Russian coking coal exports shall remain stable, staying between21-22.5mt in 2014.

Figure 20: Russian coking coal Exports


India: El Niño likely to support more coal imports

The new Modi government is upbeat on turning the coal sector around by accelerating project approvals and land acquisition as well as the associated environmental clearances. It also intends to speed up rail infrastructure projects linking coal producing regions to the rest of the country. We also expect a biggerparticipation from the private sector players in this space. While we believe that in the longer term, these steps will increase domestic production and reduce India’s

6.0

5.7

6.16.3 6.4

6.1

6.6

6.3

6.0

6.4 6.4

6.1

5.8 5.75.9

6.1

5.0

5.5

6.0

6.5

7.0


2013 2014 YtD

1.21.6

1.91.7 1.7

2.0 2.11.9

2.1 1.9 1.8 1.7

0.9

1.2

3.7

1.4

46% 47%

20%

31%

0%

10%

20%

30%

40%

50%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0


2013 2014 YtD Export to UA as % of total export 2013 (rhs) Export to UA as % of total export 2014 YtD (rhs)

We anticipate that the level of the Russian coking coal exports

should remain stable, staying

between 21-22.5 mt in 2014.


15



reliance on imports, we don't expect domestic production to rise meaningfully over next 12 to 18 months.

An El Nino weather pattern seems to be cutting into monsoon rains. This could limit hydro power generation and should be supportive of coal demand and in turn coal imports. This year’s monsoon has been delayed and with rainfall 38% below normal level since the beginning of June. Financially distressed distribution companies that were unable to buy sufficient power may get some support from the new government raising the demand for coal.

Figure 21: India’s monsoon so far has been deficient

Source: IMD

Colombia

Colombian coal exports dropped 11% year on year to 5.4mt in April but were still up from 3.33mt in March when Drummond wasn’t shipping. In Q1’14, Colombia produced 24.6mt of coal, up 33.8% from Q1’13. However, Colombia’s exports dropped 13% y/y to 15.1mt due to the effect of the port loading ban for Drummond.

Figure 22: Colombia Exports

Source: SIMCO Colombia

South Africa

President Zuma’s ANC returned to power but with a smaller majority. The country has signed into law new mineral rules which allow the mines minister to limit exports of strategic materials and allowed the country to take a large stake in the

63

7269

78

82

77

21

-

10

20

30

40

50

60

70

80

90

2008 2009 2010 2011 2012 2013 2014 (till Apr)

Milli

on M

etric

ton

nes


16



hoped for oil and gas projects in similar geology adjoining the Mozambican gas discovery.

The country’s leadership is currently rethinking the ownership structure of gas ventures. However, it’s not immediately obvious whether this extends to the legislation that could limit coal exports. In the same way as its power generating capacity has fallen behind; there has been underinvestment in coal mines needed to fuel South Africa’s power grid. The country will need to contract new coal supplies for the grid in 2015 and beyond.

South Africa’s earlier coal mine development model, where a high quality, high price, product was sold for export with the balance of the coal being sold to nearby mine mouth power plants is now being questioned. Government’s new laws that might restrict exports, if coal is needed for the power grid, are limiting investors’ interest in this sector.

And rolling blackouts have returned to South Africa. An unusually cold southern hemisphere winter with some record low temperatures has lifted demand ahead of capacity twice already. Two new coal fired power plants called Medupi and Kusile are being constructed but have taken longer than expected to complete.

Environmental challenges to South Africa’s coal dominated power supplies must also be affecting government policy. A newly issued Eskom report is saying that 20 people could be dying every year due to emissions. Yet the chart below shows how availability of power in developing countries has a strong correlation with the longevity of the whole population which in SA is about 48 million. A key problem for developing countries like South Africa is the price of power is low, not all of the supply is paid for and consequently the higher cost of renewables is difficult to finance.

Figure 23: Life expectancy and Power consumption are correlated

Source: EIA, JP Morgan

Rolling blackouts have returned

to South Africa even as almost half of its Platinum sector has

been on strike

In the developing world limited access to power has grave

implications


17



New EPA rules; very early stage

New Carbon rule may take years (and a different form) to come into effect

The EPA released its new rules on carbon emissions from existing power plants. The rules seem to be in a state of flux as they are out for public comment and review. We expect the “final” rule will be released about June 2015 and this will likely be the trigger for litigation. Consequently, we don’t believe it’s possible to draw conclusions from the rule as it currently stands.

The requirement is to cut 30% of carbon emissions by 2030 compared with the (relatively high) base year of 2005, although some statements say the base year is 2012. Carbon emissions have already fallen 15% since 2005, making this target more attainable. However, we do expect vigorous opposition from coal groups and others who are fearful of sharply higher power prices.

The EPA is offering states significant flexibility in their respective plans to reduce CO2 emissions. Currently, 38 States have their own renewable portfolio standards (RPS) and 47 states are already engaged in demand side management. The rule relies heavily on energy efficiency leading to lower demand. The EPA is assuming energy efficiency savings reach 1.5% annually by 2030 or an 11% lower power generation relative to the base case which we view as optimistic. Without these energy savingsassumptions, we believe the cost of compliance would have been higher than the $7.3-$8.8b suggested by the EPA.

In EPA’s scenario, coal retains a 30% share although in a smaller power market. The EPA estimates that coal will contribute 30% (down 7% over base case) to the electricity mix in 2030 in a smaller (11% lower) electricity market. Interestingly, this compares with growing demand for affordable coal power internationally, thus the global impact of these moves on emissions is limited unless other nations are persuaded to write similar laws, and then enforce them.

Key questions/challenges to the proposed rule:

The reported difference in the benchmark years between 2005 and 2012

Whether the EPA is able to demonstrate that it is legally responsible for writing carbon rules under the Clean Air Act.

Whether the EPA’s assumption that power demand will fall by 2030 is feasible and that this will limit demand for gas and thus its price.

Whether higher levels of renewables are feasible without new technology; such as low cost (high capacity) storage. Without new technology,renewables tend to rely on the old fossil fuel powered grid to act as a backup. In Europe the existing grid is backing up the renewables but may not be receiving enough income for this service to continue.

Will unused US coal find a home in the export market? We do expect to see more US coal exports, particularly from lower cost sources like the PRB and the ILB in the medium to longer term.

The chart below shows how while US power generation has flattened out in recent years it has only fallen briefly, in years of financial distress. But the EPA’s study assumes that demand will fall by 11% in 2030 over EIA’s forecast.

The carbon rule is at a draft

stage and issues such as

whether the base year is 2005 or 2012 should be resolved before

next year


18



Faced with challenges to its energy outlook, Exxon Mobil detailed its views on carbon. While renewables will grow quickly, it feels renewables will continue to comprise about 5 percent of the total energy mix by 2040. This modest level is a function of their scalability, geographic dispersion, intermittency (in the case of solar and wind), and cost. Regarding the most aggressive target of stabilizing carbon at 450 ppm and thus stranding a portion of its current oil and gas reserves, it feels this would require CO2 prices of more than $200 per ton by 2050.

Exxon Mobil says “Our Outlook for Energy does not envision the “low carbon scenario” advocated by some because the costs and the damaging impact to accessible, reliable and affordable energy resulting from the policy changes such a scenario would produce are beyond those that societies, especially the world’s poorest and most vulnerable, would be willing to bear, in our estimation”.

Figure 24: Electricity generation mix in 2030 – base case

Source: EPA

Note: The chart is based on option 1 and state compliance approach in the proposed rule

Figure 25: Electricity generation mix in 2030 – proposed rule

Source: EPA

Note: The chart is based on option 1 and state compliance approach in the proposed rule

US fuel inventories are tight

Coal and nat gas inventories remain low but the price response has been muted

After the tough 2013/4 winter, US natural gas and coal inventories have fallen well below the level of the last four years. Natural gas prices have moved up modestly, though JPM’s Scott Speaker is not yet convinced this will be enough to put enough gas into inventory for the 2014/5 winter.

Coal, 37%

Nat Gas, 31%

Nuclear, 17%

Non-hydro renewables,

8%

Hydro, 6%

Other, 1%

Coal, 30%

Nat Gas, 34%

Nuclear, 20%

Non-hydro renewables,

9%

Hydro, 7%

Other, 1%


19



Figure 26: US Coal Stockpiles


Figure 27: US Nat Gas Storage


Adequate natural gas supplies are becoming more important as the introduction of the new MATS emission rules on coal fired power plants will outlaw many power plants by the end of 2015 that have not invested in new emissions controls. Of note many plants that were scheduled to close due to the MATS rule were forced to operate due to shortages of natural gas last (2013/4) winter.

The EPA has been granting some extensions to the requirement for coal fired power plants to meet the MATS rules. However, there’s a concern that delays with new gas pipelines to supply gas fired power plants could make the US power grid in the NE vulnerable.

Grid operators must decide on the right level of natural gas pipeline capacity into the NE. It would be nonsensical to build enough pipeline capacity for the coldest winter. But the difference between the installed gas pipeline capacity and power needs in winter will have to come from somewhere

JPM’s Scott Speaker continues to expect an end-October number that is well below 3.5 Tcf, even with conservative degree day expectations and some price appreciation in the third quarter. He believes that the large builds in utility-held storage capacity will no doubt continue regardless of underlying price, but it wouldn’t be a big surprise to see some negative numbers once the real summer demand arrives. The absolute levels of injections have been impressive, but he thinks it is too early to feel comfortable about where the highest volumes are going into the ground.

PRB 8800 coal has reacted well to the lower coal stockpiles and the higher gas prices. Eastern coal prices have been weaker. East coast coal prices have probably been affected as export demand has weakened and as lower quality coking coal has been redirected to the US thermal coal market.

110

130

150

170

190

210


2011 2012 2013 2014 Last 4 year Avg.

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15

Current Storage Level

5-yr Average

Historical Min-Max Bands


20



Table 5: Moves in US coal prices (ytd and y/y)

Closing Price % change

24-Jun-14 1-Jan-14 24-Jun-13 ytd y/y

Henry Hub (Nat Gas) 4.5 4.3 3.8 18% 3%

PRB 8800 Prompt Year 13.5 12.3 12.6 7% 9%

NYMEX Prompt Year 63.0 58.2 58.9 7% 8%

CAPP (CSX 1%) Prompt Year 62.2 66.0 62.1 0% -6%

Crude Oil 106.0 95.6 88.8 19% 11%

ILB Mid-sulfur Spot 46.0 46.2 45.2 2% 0%

API2 Prompt Year 78.9 82.4 84.9 -7% -4%

API4 Prompt Year 75.2 84.3 81.8 -8% -11%

Hamptons Rd Coking coal - High Vol

103.0 109.5 140.0 -26% -6%

Hamptons Rd Coking coal - Low Vol 112.4 134.7 147.5 -24% -17%

QLD Premium Coking coal 115.5 136.3 138.0 -16% -15%

Coking coal spot (FISSCC00 Index) 109.5 133.5 129.5 -15% -18%

Source: Bloomberg

Note: ILB prices are captured infrequently. Thinly traded.

Rails becoming a bottleneck for thermal coal recoveryUS rail companies struggled with the tough 2013/4 winter and deliveries fell behind. And problems seem to continue as freight backlogs tie up rail equipment. See chart below. This seems to be depressing PRB coal prices as utilities are unwilling to buy coal they are uncertain they can receive. Some utilities are said to have very low inventories but railco’s are reported to be monitoring the situation closely and assure the market that no utility will be allowed to run out of coal. See charts below that highlight the high number of “cars-on-line” for CSX and BNSF, compared with 2013, pointing to network congestion. The other railco's cars-on-line numbers are much less elevated.

Figure 28: CSX - Cars-on-line

Source: www.railroadpm.org

Figure 29: BNSF - Cars-on-line

Source: www.railroadpm.org

This situation would normally have been a recipe for sharply higher coal prices. However, power generators may be favoring the use of natural gas with coal’s share of US power gen falling from 42.1% in Q1 to 37% in April. Although some weakness in coal power gen is normal in Q2 due to maintenance we believe utilities are emphasizing gas generation to conserve coal supplies until the railcos ’ efficiencies improve.

170,000

175,000

180,000

185,000

190,000

195,000

200,000

205,000

210,000

215,000

1 5 9 13 17 21 25 29 33 37 41 45 49

Avg

. Num

ber

of C

ras

on L

ine

per

Day

Weeks2013 2014

180,000

190,000

200,000

210,000

220,000

230,000

240,000

250,000

260,000

270,000

1 5 9 13 17 21 25 29 33 37 41 45 49

Avg

. Num

ber

of C

ars

on li

ne p

er D

ay

Weeks2013 2014


21



There seems to be a calm in the coal and gas world as a result of modest power demand resulting from the slow start to summer temperatures and perhaps even a belief that the El Nino winter that lies ahead will be much more mild than that of 2013/4. However, this complacency could unravel quickly if a good heat wave develops and railco’s congestion prevents the rebuilding of minimum coal inventories for the 2014/5 season.

US exports continue to declineTotal US exports have declined 14% year to date (till April) with thermal taking thebigger hit. Thermal coal exports are down 23% till April yet weak European demand and sufficient stockpiles are keeping API prices subdued. Met exports have been holding up (-7% yoy) with higher tonnes into Europe (+25% yoy) making up for lost tonnes into China (-41% yoy).

Figure 30: US Thermal Exports


Figure 31: US Thermal Exports


The table below shows our forecast for US supply demand. We are forecasting a 22mt reduction in exports from the US split roughly equally between met and thermal. Thermal exports have begun to fall off but met exports are still holding up on improving European demand. However, we do expect exports to decline through the year from already announced 10mt+ met coal production cuts as well continued losses on a majority of the remainder export tonnes at $120/t.

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC

Thermal Coal

2013 2014

-

10.0

20.0

30.0

40.0

50.0

60.0

70.0

JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC

Met Coal

2013 2014

Apparent complacency with coal

supplies could unravel quickly if

a good heat wave develops


22



Table 6: US Supply Demand

Millions of short tons 2013 Q1’ 14 Q2’ 14 Q3’ 14 Q4’ 14 2014E 2015E

US Coal production 985 246 247 247 260 1,000 985

Total power generation MWH 000s 4,058 1,032 980 1,145 975 4,132 4,096

Coal to Electric Generation T 000s (853) (237) (198) (217) (215) (866) (829)

Total consumption (916) (252) (214) (232) (231) (929) (892)

Exports - Steam coal (50) (10) (11) (9) (9) (39) (40)

Exports - Coking coal (66) (15) (14) (14) (12) (55) (50)

Total Exports (116) (25) (25) (23) (21) (94) (90)

Imports (90% thermal) 10 3 3 3 3 10 10

Surplus (Deficit) (37) (29) 10 (6) 10 (13) 13

Utility stockpiles (period end) 148 119 129 123 133 135 147


Natural gas prices have risen but this has not helped the coal equities significantly so far.

Figure 32: The met coal downdraft counters the gas recovery

Source: BBG

El Nino effect?

El Nino years generally have a bigger impact on winter’s (making them milder) rather than summer but the late start to the US summer may be making investors suspicious that summer power demand will be below par this year.

IEA also just released a new report

Both the IEA and BP highlight that coal demand remains strong.

The IEA points out that globally about $2t of investment is needed annually and more than half of this is required just to maintain current levels of power generation. This highlights expense of the new higher cost alternative power sources that new policies are requesting, especially if the IPCC much stricter limits on carbon emissions are to be achieved.

3.5

3.7

3.9

4.1

4.3

4.5

4.7

4.9

5.1

5.3

5.5

50

70

90

110

130

150

170

190

210

230

250

Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14

Met Coal Spot S&P Coal Index Nat Gas

Exxon Mobil believes the economic stresses of the 450

carbon scenario are more than

society, especially in the developing world can bear.


23



Figure 33: Fossil Fuel use with and without aggressive carbon control

Source: IEA

The EIA highlights the role of conventional power sources and the T&D system -“transmission and distribution networks play a crucial role in smoothing the variability of some renewables and accommodating distributed generation". An added complication is the block on development bank finance for coal plants which may mean that “countries that build new capacity will be less inclined to select the most efficient designs because they are more expensive”. The IEA also points out that Europe’s experience with high levels of renewable power has been “sobering”.

Power cost is a challenge in the developing world where power is sold for low prices, in some cases users don’t pay and this leads to a low rate of return on investment.But as the following chart shows, access to power is a life or death decision in some countries and calls into question whether “perfect is the enemy of the good”. ExxonMobil also thinks that the costs and damaging impacts of a low carbon scenario is beyond what the world's poorest and most vulnerable could bear and it doesn't incorporate such a scenario in its energy outlook.

And BP released its annual update

While coal prices have fallen now for two years, this extending its competitive advantage as a fuel. Growth in coal usage in 2013 was 3% (below the 10 year mean of 3.9%) but more than twice natural gases’ 1.4%. This took coal usage to 30.1%, the highest levels since 1970.

BP’s Bob Dudley highlights: “the challenge of sustaining expensive subsidy regimes, however, has become visible where penetration rates are highest, namely the below-average growth of Europe’s leading renewable producers, who are grappling with weak economic growth and strained budgets".

Coal production is still growing in Asia with Indonesia leading from the front. While the growth from Indonesia may be restrained by government policies, India appears ready to replace some of it by fast tracking permitting and infrastructure projects under the new government.

”The IEA also points out that

Europe’s experience with high levels of renewable power has

been “sobering”.


24



Figure 34: Growth in coal output of major global producers (rebased to 100 in 2001)

Source: BP data book 2014

Supply/demand

Table 7: Coking Coal Exports

Mn metric tonnes

2008 2009 2010 2011 2012 2013E 2014E 2015EAustralia 136.9 125.2 159.0 133.0 145.0 162.0 180.0 190.0USA 38.6 35.4 50.9 64.0 63.1 60.1 50.2 45.4Canada 26.6 25.5 28.4 28.0 29.0 32.5 32.0 35.0Russia 14.9 12.6 12.5 14.0 17.0 17.8 18.4 18.7Kazakhstan 0.0 0.0 0.1 0.1 0.1 0.1 0.1 0.1Indonesia 5.2 6.0 6.0 7.0 8.0 8.0 8.0 8.0China 3.5 0.6 1.1 3.6 1.3 1.0 1.0 1.0South Africa 1.3 1.7 1.0 2.0 2.5 3.0 3.0 3.0Columbia 1.1 2.8 1.4 1.5 2.0 2.5 2.5 2.5Poland 1.6 1.3 0.9 0.9 2.1 2.1 2.1 2.1Vietnam 0.0 0.0 0.0 1.5 3.8 5.5 5.5 5.5Mongolia 3.6 4.0 15.0 20.0 19.1 15.0 18.0 20.0Others 9.4 8.6 8.9 9.2 9.8 9.8 9.8 9.8Total Exports 242.7 223.7 285.3 284.8 302.8 319.4 330.6 341.1

Source: AME, China Coal Resource, Indonesian Ministry of Energy & Resources, ABREE, J.P. Morgan estimates.

Table 8: Coking Coal Imports

Mn metric tonnes

2008 2009 2010 2011 2012 2013E 2014E 2015E

Japan 63.8 52.0 58.0 54.0 53.0 53.0 54.0 55.0USA 1.6 1.1 1.0 1.0 1.0 1.0 1.0 1.0China 6.9 34.4 47.0 44.7 53.5 74.0 75.0 75.0India 22.0 19.0 19.0 19.0 26.8 27.5 31.0 35.0Europe 68.0 44.4 45.0 47.0 42.0 44.0 47.0 47.0South Korea 19.7 18.0 28.0 32.0 33.0 34.0 35.0 37.0Brazil 16.6 12.7 13.0 12.0 13.0 13.0 15.0 16.0Russia 0.2 0.3 3.0 1.5 2.0 2.0 2.0 2.0Others 43.9 41.8 71.3 73.7 78.5 70.9 70.6 73.1Total Imports 242.7 223.7 285.3 284.8 302.8 319.4 330.6 341.1


0

100

200

300

400

500

2001 2003 2005 2007 2009 2011 2013

Australia China India Indonesia


25



Table 9: Thermal Coal Exports

Mn metric tonnes

2008 2009 2010 2011 2012 2013E 2014E 2015EAustralia 124.0 142.3 141.0 148.0 171.0 184.0 190.0 195.0USA 35.2 30.9 23.2 32.0 49.0 45.1 35.2 36.3Canada 6.3 5.6 4.5 6.0 7.0 3.5 6.0 8.0Russia 84.4 80.6 95.0 109.0 116.0 106.0 106.0 106.0Kazakhstan 27.1 25.5 30.0 30.0 30.0 30.0 30.0 30.0Indonesia 197.1 228.9 250.8 305.1 380.0 407.0 412.0 412.0China 42.0 21.8 17.9 11.1 7.8 5.0 5.0 5.0South Africa 59.4 62.3 68.0 72.0 74.0 75.0 76.0 76.0Columbia 63.0 72.4 69.0 78.0 82.0 77.0 80.0 82.0Poland 6.8 5.3 5.0 4.0 4.0 4.0 4.0 4.0Vietnam 24.0 16.3 16.0 15.0 10.0 8.0 8.0 8.0Mongolia 0.4 2.0 1.5 0.1 2.0 2.0 3.0 5.0Other 9.7 14.8 48.4 51.6 27.6 59.0 47.8 38.8Total Exports 679.4 708.7 770.4 861.9 960.4 1,005.6 1,003.0 1,006.1


Table 10: Thermal Coal Imports

Mn metric tonnes

2008 2009 2010 2011 2012 2013E 2014E 2015EJapan 128.8 124.0 129.0 122.0 133.0 140.0 142.0 145.0USA 29.3 22.6 19.9 14.0 7.0 7.0 7.0 7.0China 33.5 91.4 117.8 177.5 234.6 245.0 220.0 190.0India 28.0 35.0 44.0 86.0 104.8 114.3 123.3 135.0Europe 178.5 167.5 160.0 165.0 173.0 167.0 166.0 166.0South Korea 75.8 78.4 91.0 97.0 95.0 98.0 98.0 98.0Brazil 1.5 1.6 4.0 7.5 7.3 6.0 6.5 12.0Russia 28.2 22.0 32.0 26.0 28.3 30.9 33.7 36.7Other 175.7 166.2 172.7 166.9 177.5 197.5 206.6 216.4Total Imports 679.4 708.7 770.4 861.9 960.4 1,005.6 1,003.0 1,006.1



26



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Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe: J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Neutral [Over the next six to twelve months, we expect this stock will perform in line with the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of the stocks in the analyst’s (or the analyst’s team’s) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a recommendation or a rating. In our Asia (ex-Australia) and U.K. small- and mid-cap equity research, each stock’s expected total return is compared to the expected total return of a benchmark country market index, not to those analysts’ coverage universe. If it does not appear in the Important Disclosures section of this report, the certifying analyst’s coverage universe can be found on J.P. Morgan’s research website, www.jpmorganmarkets.com.

Coverage Universe: Bridges, John D: Agnico-Eagle Mines (AEM), Alpha Natural Resources (ANR), Arch Coal, Inc. (ACI), B2Gold (BTG), Barrick Gold (ABX), CONSOL Energy (CNX), Cloud Peak Energy (CLD), Coeur Mining (CDE), Compania de Minas Buenaventura (BVN), Eldorado Gold (EGO), Goldcorp Inc (GG), Hecla Mining (HL), Kinross Gold (KGC), New Gold (NGD), Newmont Mining (NEM), NovaGold Resources (NG), Pan American Silver (PAAS), Peabody Energy (BTU), Silver Wheaton (SLW), Stillwater Mining (SWC)

O'Kane, Dominic J: African Barrick Gold (ABGL.L), Glencore PLC (GLEN.L), Petropavlovsk (POG.L), Rio Tinto plc (RIO.L), Talvivaara Mining Company (TALV.L)

Busuttil, Mark: Alacer Gold Corp. (AQG.AX), Aquila Resources Ltd (AQA.AX), Base Resources (BSE.AX), Energy Resources of Australia Limited (ERA.AX), Iluka Resources (ILU.AX), Lynas Corporation Limited (LYC.AX), Mineral Deposits (MDL.AX), Newcrest Mining (NCM.AX), OceanaGold Corporation (OGC.AX), Paladin Energy Ltd (PDN.AX), Perseus Mining Ltd (PRU.AX), Regis Resources Ltd (RRL.AX), Whitehaven Coal Limited (WHC.AX), Wollongong Coal Ltd (WLC.AX)

Kang, Daniel: Aluminum Corporation of China - A (601600.SS), Aluminum Corporation of China - H (2600.HK), Angang Steel - A (000898.SZ), Angang Steel - H (0347.HK), Anhui Conch - A (600585.SS), Anhui Conch - H (0914.HK), Baoshan Iron & Steel - A (600019.SS), China Coal Energy - A (601898.SS), China Coal Energy - H (1898.HK), China Hongqiao Group (1378.HK), China National Building Material (3323.HK), China Nonferrous Mining Corporation Ltd (1258.HK), China Shenhua Energy - A (601088.SS), China Shenhua Energy - H (1088.HK), China Steel Corp (2002.TW), Chinalco Mining Corporation (3668.HK), Hyundai Steel Company (004020.KS), Indika Energy (INDY.JK), Jiangxi Copper - A (600362.SS), Jiangxi Copper - H (0358.HK), Maanshan Iron & Steel - A (600808.SS), Maanshan Iron & Steel - H (0323.HK), Mongolian Mining Corporation (0975.HK), POSCO (005490.KS), PT Aneka Tambang Tbk (ANTM.JK), Vale Indonesia (INCO.JK), Yanzhou Coal Mining - A (600188.SS), Yanzhou Coal Mining - H (1171.HK)

Parekh, Pinakin: ACC Limited (ACC.BO), Ambuja Cements Limited (ABUJ.BO), Coal India (COAL.BO), Grasim Industries Ltd (GRAS.BO), Hindalco Industries (HALC.BO), JSW Steel (JSTL.BO), NMDC (NMDC.NS), National Aluminium Co Ltd (NALU.BO), Sesa Sterlite (SESA.NS), Steel Authority of India Ltd (SAIL.BO), Tata Steel Ltd (TISC.BO), UltraTech Cement Ltd (ULTC.BO)


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Vlasov, Yuriy A: ALROSA (ALRS.MM), EVRAZ (EVR.L), MMK (MAGNq.L), Mechel (MTL), Mechel (Preference) (MTL_P), Novolipetsk Steel (NLMKq.L), Polymetal International (POLY.L), Polyus Gold International (PGIL.L), Raspadskaya (RASP.MM), Severstal (CHMFq.L), TMK (TRMKq.L)

Toisuta, Lydia J: Adaro Energy (ADRO.JK), Banpu Public (BANP.BK), Harum Energy (HRUM.JK), Holcim Indonesia (SMCB.JK), Indocement Tunggal Prakarsa (INTP.JK), PT Indo Tambangraya Megah (ITMG.JK), Semen Indonesia (SMGR.JK), Tambang Batubara Bukit Asam (PTBA.JK)

J.P. Morgan Equity Research Ratings Distribution, as of March 31, 2014

Overweight(buy)

Neutral(hold)

Underweight(sell)

J.P. Morgan Global Equity Research Coverage 44% 44% 11%IB clients* 58% 49% 40%

JPMS Equity Research Coverage 45% 48% 7%IB clients* 78% 67% 60%

*Percentage of investment banking clients in each rating category.For purposes only of FINRA/NYSE ratings distribution rules, our Overweight rating falls into a buy rating category; our Neutral rating falls into a hold rating category; and our Underweight rating falls into a sell rating category. Please note that stocks with an NR designation are not included in the table above.

Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for covered companies, please see the most recent company-specific research report at http://www.jpmorganmarkets.com, contact the primary analyst or your J.P. Morgan representative, or email [email protected].

Equity Analysts' Compensation: The equity research analysts responsible for the preparation of this report receive compensation based upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues.

Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of non-US affiliates of JPMS, are not registered/qualified as research analysts under NASD/NYSE rules, may not be associated persons of JPMS, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account.

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independent decisions regarding any securities or financial instruments mentioned herein. JPMS distributes in the U.S. research published by non-U.S. affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments or announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P. Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.

"Other Disclosures" last revised June 21, 2014.

Copyright 2014 JPMorgan Chase & Co. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of J.P. Morgan. #$J&098$#*P


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