The Coal Market Awakes

1. The Coal Market Awakes Colin Gubbins McCloskey Group Houston 19th July

2. The Lessons of History • Will History Repeat Itself ? • High Coal Prices Encourage Over Development • New Entrants are attracted to the coal business • New production hits at the bottom of the commodity cycle • Prices tumble to levels that just cover marginal cost

3. How Did We Get Here? China China China

4. But That Isn’t The Whole Story Atlantic • US Coal Coal Imports Continue to Grow • Scandinavian Hydro Low • UK Gas Prices High • UK Air Conditioning Demand Grows • Polish Exports Decline

5. But That Isn’t The Whole Story Asia • The Tiger Economies Reawake • China looks after itself • Australia struggles to get the coal through the ports

6. The Impact of Steel • Coking Coal Prices Surge to unprecedented levels sucking steam coal into export and domestic coking coal markets in US • Strong Semi Soft and PCI prices add to the pressure on steam coal prices in Australia • Shortage of coke forces steel industry to look at use of anthracite in substitution wherever possible

7. Why Didn’t We See It Coming • Always a new boy on the block 1st South America 2nd South Africa freed of sanctions 3rd Indonesia 4th China rapidly expands exports • Buyers lulled into false sense of security

8. Can the buyers anticipate relief ? • Answer – Not yet awhile • Demand for coal still increasing • Development other than in Indonesia extremely disciplined • Little evidence of China increasing exports • Poland in decline • Russia held back by port constraints

9. Asia the first to Crack ? • Coal flowing back from Atlantic could ease supply tightness. • Utilities will want to rebuild stocks • Prices could ease in the last quarter • China the wild card. Development of power plants in Southern China may need imports to sustain them • Evidence of China investing overseas in advance of domestic supply constraints

10. Consolidation Begins to Bite Anglo BHP Billiton Xstrata/ Glencore Rio Tinto Control 50% of South American Exports 85% of South African Exports 60% of Australian Exports 30% of Indonesian Exports 80% of Russian Exports Can they keep it to themselves ? Will they strengthen their grip ?

11. Where Will New Coal Come From • Australia High Potential • Indonesia High Potential • Colombia High Potential • Russia Infrastructure Constraints • South Africa Limited to 80 mt ? • Venezuela Infrastructure Constraints • China ??????

12. Major Importers ATLANTIC • Europe 133mt • USA 20mt PACIFIC • Japan 95mt • S.Korea 53mt • Taiwan 46mt • India 13mt

13. Consolidation • 85% of South African exports controlled by three companies • 50% of South American exports controlled by same three companies • 60% of Australian steam coal exports controlled by these three companies plus Rio Tinto • Indonesia emergence of Bumi Resources • Development of new reserves becoming more considered • Companies quicker to respond to downturns in the market • Peabody with RAG Purchase potentially a new boy on the block

14. Long Run Price Series

15. MCIS ARA marker 75 65 55 $/t 45 35 MCIS ARA 25 15 Jul-02 Jul-03 Apr-02 Apr-03 Apr-04 Oct-02 Oct-03 Jan-02 Jan-03 Jan-04 Feb-02 Mar-02 Jun-02 Feb-03 Mar-03 Jun-03 Feb-04 Mar-04 Jun-04 Nov-02 Nov-03 May-02 Aug-02 Sep-02 Dec-02 May-03 Aug-03 Sep-03 Dec-03 May-04 Coal Price HistoryMcCloskey Index $/t

16. Coal v. Pet Coke Relativity

17. Determinant factors for 2004 • SUPPLY • South Africa looks East • South Africa constrained by rail system • Colombia , 25mt growth from 2003-2005can it • continue? • Even more consolidation of ownership (Caribe • falling to Drummond or Glencore) • Australia port constrained • Russia does its best • Poland decline arrested ? • China exports at standstill !!!?

18. Determinant factors for 2004 • DEMAND • Oil Prices High – Gas Prices High giving coal a • lot of headroom. • Scandinavia running into hydro problems • UK imports at record levels • US coal imports strong • Traders long – Buyers trying to hold back

19. Headline tonnage changes – seaborne steam coal (mt)

20. Major Steam Coal Flows

21. Tonnage flows between market sectors

22. How supply withdrawals are tightening the Atlantic market in 2004: mt

23. Implications of tonnage switch • 2005 starts with even more tonnage switch into • Asia (=2004 high case) • Tightness remains in Europe • Germination of seeds of oversupply into Asian • sector

24. Price outlook – our views Forecaster's spot price projections: $/t End Q2 03 Q3 03 Q4 03 Q1 04 Q2 2004 Q3 04 CIF NW Europe 37.10 49.40 61.15 63.80 FOB RBCT 28.45 36.45 42.75 45.15 FOB Newcastle 24.25 27.20 40.65 43.10 CIF Japan 34.55 37.70 57.15 76.05 FOB Vostochniy 25.95 28.55 35.25 55.93 FOB Baltic 31.30 37.25 46.50 52.75 Key: Flat price expectation Strong price increase Moderate price increase Moderate price decline Strong price decline to collapse

25. Freights – Riding the Chinese demand boom • Freights were driven to fantasy levels from the middle of last year. • Signs of softening but still well above historical levels. Temporary ? • Ship demand has been driven to record levels by surging Chinese raw material demand. Indications that the Chinese are coming back. • The supply of new dry bulk ships has not been able to grow to meet this demand because shipyards are already busy building the new generation of container ships and rebuilding the oil tankerfleet • Queues are shortening – Temporary ?

26. Long Term McCloskey Assumptions • The world cannot expand without utilising coal as a primary energy source • Coal will lose out in percentage terms to gas and re-newables • World growth will mean that use of coal does not decrease and at worst stabilises • New coal fired technology will start to come on stream in second decade • Growth in coal demand increases in the medium term • Medium Term growth means that new reserve areas will have to be opened up with higher infrastructure costs – some real price increases will result • In the long term stable demand combined with continued improvement in mining technology will result in stable real prices