Met Coal and Steel Market Perspectives

1
Met Coal and Steel Market Perspectives

• William D. Boyle, Crystal Star Enterprises, LLC
• Eastern Coal Councils 26th Annual Conference
• May 23 24, 2005
• Meadowview Conference Convention Center
• Kingsport, TN

2
Overview of major topics

• Fundamentals and ABCs of met coal markets.
• Fear factors!
• The effects of higher steel demand.
• US LV price equated to the 125 Aust benchmark.
• Why pay so much attention to China?
• What are the key problems to resolve?
• Political factors in long-term solutions.
• Non-political factors in long-term solutions.
• Conclusions about met coal supply growth.

3
Fundamentals of 2004 met coal markets

• Coal supply/demand imbalance was and is real.
• Global steel demand was strong and sustained.
• Chinese factors dramatically affected world
  markets.
• Freight and infrastructure problems persisted.
• Lack of coal industry investment led to price
  pressure.
• Weak US, high oil freight pricesmore US
  exports.
• Unprecedented change led to new challenges.
• Short-term problems require long-term solutions.
• Suppliers/customers must partner to solve
  issues.
• Tight hard coal supplies will last longerthrough
  2006.

4
Perspective on 2004 and the future

• High coal prices did not affect steel profits.
• High coal prices did not result in more supply.
• BHP/JSM prices increased from 57-125 MT FOB,
  adding 40 MT to average hot-strip operating
  costs, but hot-rolled coil prices rose 220 MT in
  2004. (CRU).
• If there is a fundamental shortage of
  economically mineable hard coking coal, which
  contains the quality necessary to produce coke of
  sufficient strength to operate satisfactorily in
  the environment of a large modern blast furnace,
  then spot buyers risk coverage and higher prices
  by waiting to commit and yearly buyers face
  multi-year price discipline from large
  suppliers. (SBB).
• The current market dynamics are new, based on
  strong demand from China and the resultant
  shortage and high costs of raw materials, and if
  current dynamics continue with China booming and
  India possibly next, then steel prices should
  remain relatively high, so there will be a long
  debate on the proper price level for any
  contract. (L.N. Mittal).

5
Met coal markets before 2004 were tough

• Abysmal demand growth in many steel markets.
• Australian and Canadian coals became major
  competitors.
• Advantages to subsidized foreign mines hurt
  pricing.
• Accelerated growth in PCI use hurt hard coal
  pricing.
• Aggressive Chinese coke export pricing disrupted
  markets.
• Aging US coke ovens demanded for upgrades.
• Additional steel capacity went unused, affecting
  profitability.
• Adverse impacts of EAFs environmental
  pressures.
• Alternative steam markets for US hi vol coals
  strengthened.
• Associated vulnerability with contraction and
  consolidation.

6
Big changes in 2004 met coal markets

• Booming steel demand was at odds with coal
  availability.
• Buyers without coal coverage were sweating
  bullets.
• Buyers easily absorbed big raw material price
  increases.
• Big mines with production problems meant big
  problems for buyers.
• Bonding and regulatory changes affect costs in US
  Central App mines.
• Better exchange rates urge non-US producers to
  raise prices to recover increased costs for
  existing operations and new projects.
• Balance for buyers historically meant nearby or
  subsidized sourcing.
• Best and next-best supply alternatives
  experienced the perfect storm.

7
Met markets in the foreseeable future

• Consolidation Consistent low prices killed many
  price warriors.
• Concentration Fewer majors, global presence
  public ownership.
• Coal capacity Aust/Can projects will not add
  supplies until 2007.
• Commitment Need term deals with prices to meet
  ROR hurdles.
• Commoditization Forget about it! No paper
  trading of met coal.
• Congestion High vessel rates, port problems, new
  ship backlog.
• Currencies Weak US continue? China float their
  currency?
• Coke capacity How much new production will
  actually come online?
• Continuation What level of US exports should be
  expected?

8
Fear factors!

• Steel sector fears impacts of China and
  carmakers.
• Raw material suppliers fear ROR history.
• History says at capacity is not sustainable.
• Historical busts last longer than booms.
• High coal/RM costseconomic slowdown?
• Bearish indicators usually outweigh bullish ones.
• Fewer producers and fragile marketsvulnerability.
  
• Financially weak sectors typify the food chain.
• History says prices will fall, causing pyramid
  effect.
• Suppliers need assurance that discipline will
  prevail.

9
The effects of higher steel demand

• 84 mm NTPY new coke capacity (106 coal) has been
  announced.
• 25 mm NTPY coke (35 coal) is new coke capacity
  outside China.
• What new coke capacity will actually come
  online?
• In any event, the coal supply/demand imbalance
  should last into 2007.
• Development time for coke/coal/infrastructure
  should support prices.
• Consolidation of steel and raw material suppliers
  helps price discipline.
• US C App met coals wanted for phos., yield coke
  strength/reactivity.
• US C App steam coals wanted by utilities for
  sulfur and access.
• Decline in C App production by 2007 will cause
  price discipline.
• Met coal value should relate to steel price
  alternative coal/coke cost.

10
Equivalent price of US LV to match the 125 MT
FOB Australian benchmark

• FOBT Australian port (0.35 sulfur, 8.5 ash LV
  US125.00 MT
• Vessel freight Australian port to Rotterdam
  30.00
• CIF Rotterdam price for Australian low vol coal
  155.00
• Plus moisture adj. for 10.0 Australian vs 8.5
  US 1.88
• Plus ash benefit for 8.5 Australian vs 5.75 US
  6.88
• Minus sulfur benefit for 0.35 Australian vs
  0.75 US (5.00)
• Adjusted CIF ARA price to equate Australian US
  coal 158.75
• Estimated vessel freight US port to ARA port
  18.00
• Estimated FOBT price US East Coast port
  US140.75 MT
• Note This price evaluation does not take into
  account additional factors that favor Australians
  for higher CSR values, but favor US coals for
  much lower phosphorus values and the weaker US.

11
Why pay so much attention to China?

• An emerging nation with expected annual GDP
  growth of 7-8.
• Huge inflows of direct investment.
• Heavy governmental investment in the
  infrastructure.
• China is a major market for other regional
  economies.
• China needs to create 25 million new jobs per
  year.
• China produced 273 mm MT crude steel in 2004 (27
  of world prod.).
• China expects to produce 366 mm MT crude steel in
  2005.
• China produced 245 mm MT iron in 2004 (35 of
  world production).
• Internal needs will consume near-term iron and
  steel production.
• China will not become a major exporter of steel
  for many years.
• Chinas growth projections will continue to
  influence global markets.

12
The Chinese influence

• Availability of cheap Chinese foundry coke in the
  late 90s resulted in less coke production and
  higher prices.
• The Chinese are becoming major coking coal
  importer, leading to increasing linkage between
  coking coal and coke prices.
• Will Chinese raise internal coal prices to
  international levels, and impact the future
  direction of coke market?
• When this happens, coke prices will rise and
  steel price discipline should result.

13
What are the key problems to resolve?

• Analysts did not predict this market cannot
  predict peak or decrease.
• Historical data and usual reactions cannot be
  applied to this market.
• Will the supply constraints really last into
  2007?
• If so, spot buyers may risk coverage and yearly
  buyers face multi-year discipline from major
  suppliers.
• Relative market stability into 2007 would allow
  development of long-term ideas and strategies.
• New supplies will require massive investment and
  a time lag.
• The commitment of resources to obtain more
  supplies is affected by political and
  non-political factors.

14
Political factors in long-term solutions

• The political extension of subsidies during high
  prices adds supply.
• Currency stability and a stronger dollar impacts
  global economies.
• Potential expansion of the terrorist war into
  other areas (or peace).
• Volatility and/or stability of oil pricing
  levels.
• Kyoto Protocol, mercury and CO2 emissions
  programs.
• Tenets of an impending US energy policy that
  favors coal and nuclear.
• Environmentalists reactions to a resurging coal
  and nuclear program.
• Scrubber programs for steam coal usage take years
  to develop.

15
Non-political factors in long-term solutions

• Marginal operations will produce as long as
  possible.
• Difficulty getting ironclad comfort for all
  committed parties.
• Pricing discipline is paramount to bring supplies
  to market.
• Term deals help suppliers regain financial
  health-but new coal a ?
• ROR risks and many global uncertainties suggest
  cautious approach.

16
Conclusions about met coal supply growth

• Historically weak growth in demand influences
  current perspective.
• Unprecedented changes in markets represent new
  challenges.
• Reaction of most suppliers has been one of
  cautious optimism.
• One year of boom and seven years of bust
  typifies recent pricing.
• Met coal projects over last 30 years likely did
  not meet original ROR.
• Consolidation in US met coal supplies suggests
  price discipline.
• Strong market positions into 2007 should restore
  financial health.
• Benefit of a 2-3 year time frame should clarify
  positions.
• Potential long-term market strength presents
  welcome opportunity.

17
Contact information for Bill Boyle

• Crystal Star Enterprises, LLC
• 1105 Grouse Run Drive
• Bethel Park, PA 15102
• Phone/Fax [phone]
• Cellular phone [phone]
• Email address wmdboyle_at_adelphia.net