Accenture Thermal Coal Production Marketing Trading 1

From Thermal Coal Production
to Marketing and Trading

A Growth Opportunity for the Coal
Mining Industry in Asia Pacific
Table of Contents
Executive Summary
Thermal Coal Market Overview
Global Evolution of Consumption, Production and Trade

Market Supply and Demand Dynamics Summary Asia Pacific Focus
Market Price Dynamics and Opportunities

Historical Price Evolution
Marginal Cost Pricing
Investment Incentivisation
Market Arbitrage Opportunities and Market Risks
Geographic Arbitrage
Quality Arbitrage
Market Risks
Expanding Into Trading, Marketing and Logistics
Trading and Marketing

Logistics
Conclusion and Recommendations

Appendix
Coal Global Production Split
Coal Indices
3
4
4
7
8
8
9
10
11
11
15
16
18
18
20
22
23
23
23
Executive Summary
The global coal market is becoming
increasingly centred on Asia Pacific, with
China alone accounting for more than 50
percent of total production and consumption1
while the Asia Pacific region is expected to
represent 80 percent of the global coal market
by 2030.2 In the meantime seaborne trading
has grown at 5 percent per annum over the
last 20 years3, far outpacing consumption
in the same period that has grown at 2
percent per annum.4 Trade flows have shifted
dramatically over the past decade, with
China becoming the largest importer of coal,
growing from near-zero imports in 2000 to
175 million tonnes in 2012. Furnishing this
demand is Indonesia, which has become
Chinas primary supplier of coal, driven by its
low relative cost of supply, and is now the
worlds largest coal exporter, shipping 356
million tonnes in 2012, equivalent to more
than 25 percent of global exports. However,
marketplace dynamics may shift again, with
new exports from the United States coming
into the Asian market and multi sourcing
strategies that blend coal from different
locations to meet the calorific requirements of
specific local markets.
In the past five years the market has seen
supply increases arising from greater
investment in response to strong energy
demand. However, demand growth has
recently faltered, leaving an estimated
oversupply of 150 million tonnes in
2013.6 In the Western developed markets,
energy feedstock switching in response to
environmental regulation governing emissions
and renewables has seen net coal power
plant closure despite coals relative low
cost advantage compared to other energy
sources. Nevertheless, coal power generators
continue to benefit from their feedstocks cost
competitiveness and are finding new ways
to comply with more stringent regulations
through, for example, co-firing coal with
biomass.
Oversupply in the thermal coal market
has placed downward pressure on prices.
Consequently, mining companies in the Asia
Pacific region now need to consider ways to
reduce income volatility, secure growth and
drive profitability. In a market characterised
by oversupply, marginal cost price is one

of the key reference points. Our analysis
indicates that the marginal production cost
of the 85th percentile of coal export volumes
(i.e. 85 percent of coal export volume is
produced at or below this cost) is the level at
which production shutdowns are anticipated
and might provide a floor to the price. We
estimate this level for Australian export
producers at $87/tonne and Indonesian
producers at $64/tonne and therefore
anticipate that the market has reached a floor
where capacity rationalisation would prevent
further downward price movements.7
risk management among others, in order to

help compete with global coal marketers and
trading houses. Acquiring these capabilities
might allow companies to capitalise on
market arbitrage opportunities, in terms of
both geographical and quality considerations,
recover margins handed over to intermediaries
and engage directly with end-customers to
develop more structured sales.
To understand the potential of these
opportunities, Accenture has developed
an analysis that highlights and calculates
incremental margins that can be realised
from arbitrage opportunities. We begin by
reviewing coal market dynamics, both globally
and in Asia Pacific, to assess the outlook for
supply and demand drivers before highlighting
market opportunities. Our conclusions
highlight the capabilities coal miners could
develop to execute an expansion strategy
into trading and logistics that can deliver
incremental value.
Accenture believes that within this cost

competitive environment, coal producers
can help improve their profitability and
reduce earnings volatility by expanding their
activities downstream into trading, marketing
and logistics. Producers can enhance margins
by blending lower and higher calorific-value
coal and selling the mix in end markets, or
by changing sourcing patterns by buying coal
in slightly more depressed markets, such as
the United States, and redirecting exports
to higher value markets, such as China.
Accentures analysis suggests that in current
market conditions, blending can increase
margins achieved on end prices by upwards
of 5 percent to 15 percent, while location
arbitrage can lead to a 10 percent to 15
percent increase in margins on specific trade
routes.8 As more spot volume is expected,
APAC miners might look to seize this strategic
opportunity as a means to expand into
marketing and trading activities.
Accenture expects miners to face the

imperative of executing this strategy in order
to remain competitive and hedge themselves
against future risks. Although we expect the
price of coal might recover in the medium
term, annual price volatility is likely to remain
at current levels, having averaged c30 percent
over the last five years.9 This volatility will
remain driven by a number of factors, but
primarily by uncertainty on mines throughput
and changes in consumption patterns in
end markets, i.e., incremental shale gas
supply in the United States, domestic coal
infrastructure capacity expansion in China, or
carbon price recovery in Europe.
This strategy is particularly relevant to

Indonesian miners, who have traditionally
focused solely on upstream activities.
However, the revised operating model used to
execute this strategy depends on investments
in capabilities such as origination, contract
structuring, chartering, and market and credit
Now is the time for coal producers to take

early advantage of this strategy, as part of
the overall effort to help enhance earnings,
reduce income volatility and achieve longterm growth.
Ma
Figure 1: Summary of Report Analysis and Scope

rket Supply
Supply &and
Demand
Overview
Market
Demand
Overview
Outlook for global consumption and

production of thermal coal by region
Exports
Imports
Production
Consumption
Trade Flows
Accenture analysis. Data source: BP Statistical Review 2013. Used

with permission.
2
Accenture analysis. Data sources: BP Statistical Review 2013,
IEA, World Coal Institute, IEA World Energy Outlook Bloomberg,
Thomson Reuters, Deutsche Bank, IHS McCloskey, Wood Mackenzie,
AWR Lloyd. Used with permission.
3
Accenture analysis. Data source: IEA. Used with permission.

with permission.
4
Accenture analysis. Data sources: IEA, World Coal Institute, IEA

World Energy Outlook Bloomberg, Thomson Reuters, Deutsche Bank,
IHS McCloskey, Wood Mackenzie, AWR Lloyd. Used with permission.
Evolution of global trade, mapping major

seaborne trade routes and outlook for
trade volumes and trade partners
Market Price Dynamics and Arbitrage Opportunities
Historic
Evolution
Marginal Cost
Pricing
Arbitrage
Opportunities
Market
Risks
Review of market price dynamics and

arbitrage opportunities globally
Analysis of market and liquidity risk
for coal trading
Capabilities Development
Deutsche Bank Report, Thermal Coal: Coal at a Crossroads, 9

May 2013
Accenture analysis. Data sources: Deutsche Bank, Wood Mackenzie,

AME. Used with permission.
8
Accenture analysis. Data sources: Thomson Reuters, Bloomberg.
Used with permission.
9
Accenture analysis. Data sources: Thomson Reuters. Used with
permission.
Logistics
Key capabilities identified by

Accenture that can help enable
coal players to expand into trading,
marketing and logistics operations
Source: Accenture analysis
,,
Thermal Coal Market Overview

Global Evolution of Consumption,
Production and Trade
Global consumption of coal has shifted
towards Asia Pacific with the region expected
to account for 80 percent of demand by
2030.10 Looking at the total consumption
of all primary energy sources, coal will, along
with oil, likely remain the worlds primary
source of energy until 2030, with only
marginal challenges from alternative energy
sources given coals important
cost competitiveness.
Within Asia Pacific, China is by a substantial
margin the largest consumer of thermal
coal, accounting for around 95 percent of
the increase in consumption over the last
decade.11 The countrys economic growth
(7.8 percent GDP annual change in 2012),
largely driven by its energy intensive
manufacturing sector, has fuelled demand.
Despite official moves towards alternative
sources of energy or higher calorific-content
thermal coal, demand growth from China
is expected to be resilient. As the Chinese
governments investment in energy sources
that are alternatives to coal has largely been
focused on coastal regions, the number of
coal-fired power plants inland has increased
significantly, with few other options available.
As well as increasing consumption, Asia
Pacific is expanding its share of global coal
production. Chinas share of production has
more than doubled between 1990 and today,
rising from 20 percent to 50 percent of the
current world total.12 A number of smaller
countries have lost out to China as producers,
owing to their relatively high production
unit costs highlighting the importance of
achieving economies of scale. High levels
of production in high consumption markets
differentiate the coal market from the oil and
gas market, limiting the extent of seaborne
trade to 16.4 percent as a proportion of
production. In contrast, trade flows in crude
were 64.2 percent of production in 2012.
Accenture analysis. Data sources: BP Statistical Review 2013,

IEA, World Coal Institute, IEA World Energy Outlook Bloomberg,
Thomson Reuters, Deutsche Bank, IHS McCloskey, Wood Mackenzie,
AWR Lloyd. Used with permission.
10
11
Accenture analysis. Data sources: BP Statistical Review 2013, IEA.
12
with permission.
13
Data source: BP Statistical Review 2012. Used with permission.
14
15
16
with permission.
17
Accenture analysis: Data sources: IEA, World Coal Institute, IEA
World Energy Outlook, Bloomberg, Thomson Reuters, Deutsche
Bank, IHS McCloskey, Wood Mackenzie, AWR Lloyd. Used with
permission.
Accenture analysis. Data source: BAU projections for Indonesia.

18
19
The expansion in Chinas consumption has

been matched by the strong growth in its
imports. In a little over a decade, Chinas total
imports have risen from 2.4MT in 2000 to
192MT in 201114, driven by the comparatively
low price of imported coal relative to
domestic supply. The increase means that
China has now overtaken Japan as Asias
largest importer (Figure 3).
Exports of coal globally have increased nearly
threefold over the last 20 years, from 470MT
to 1,290MT, a compound annual growth rate
of approximately 5 percent15, outstripping the
2 percent increase in consumption over the
same period16 and indicating a greater reliance
on global sourcing and international energy
procurement. Of all exporting countries
Indonesia has emerged as the global leader
with exports rising from only 5MT in 1990
to 356MT in 201217 largely focused on
the Asian market (Figure 3). Indonesias rise
in the coal industry has been driven by a

low cost of production and close proximity
to key demand centres in Asia. Analysis of
coal export volumes by major trade routes
confirms that Indonesia to Asia is the busiest
and looks set to continue carrying the highest
volume of coal exports at c400 MT/pa by
2020.18 While Indonesia has limited deep-sea
ports and lacks the associated infrastructure
to handle the largest capesize and panamax
vessels associated with coal exports,
transhipment facilities that are based next to
mining centres in Sumatra and Kalimantan
offer flexible platforms for off-loading to
large dry-bulk vessels. With 85 percent of all
exports heading for Asia Pacific, and China
in particular, Indonesian export demand and
price will remain heavily dependent on Chinas
appetite for imports.19
Figure 2: Coal Consumption by Region and Share of Coal Within Total Primary Energy Sources
Coal Consumption by Country
Fuel Composition to 2030
MTOE
5,000
MTOE
20,000
1 tonne of
coal
Forecast
0.6 tonne of oil

equivalent
Forecast
5%
7%
6%
16,000
12,000
4,000
28%
8,000
25%
4,000
3,000
28%
0
1990 1995 2000 2005 2010 2011 2015 2020 2025 2030
78%
Coal
Natural Gas
Oil
Renewables
Hydroelectricity
Nuclear Energy
2,000
2012 Fuel Composition (MTOE share)
1,000
2%
7%
4%
0
1965 70 75 80 85 90 95 2000 05 10 15 20 25 2025
Total Asia Pacific

Total Middle East
Total S. & Cent. America
Oil
33%
Natural Gas
Coal
Total Africa
Total Europe & Eurasia
Total North America
30%
Nuclear Energy
Hydroelectric
Renewables
24%
Source: Accenture analysis. Data source: BP Statistical Review 2013. Used with permission.
Figure 3: Imports and Exports by Country of Destination/Origin

Exports by Country
MT
Imports by Country
MT
1,400
1,400
1,200
1,200
1,000
1,000
800
800
600
600
400
400
200
200
0
1990
1995
Rest of World
Russia
United Kingdom
Germany
Taiwan
2000
2005
India
South Korea
China
Japan
2010
0
1990
1995
2000
Rest of World
Canada
Kazakhstan
South Africa
Colombia
2005
2010
United States
Russia
Australia
Indonesia
Source: Accenture analysis. Data source: IEA - Export/Import differential due to inventories at sea, losses in logistics operations,
upgrading, washing and blending operations. Used with permission.
Figure 4: Global Trade in Thermal Coal: Major Exporters, Importers and Market Highlights
Europe
Russia
Estimated Avg CV: 6,000 kcal/kg

Avg FOB cash cost: $89-$93/t
Avg calorific value: 6,177 kcal/kg

Avg cash cost: $92.5/t
221MT
200MT
Imports
Imports
2020
135MT
176MT
150MT
Exports
Imports
2030
Exports
2020
180MT
Exports
2030
China
Avg FOB cash cost: $71.9/t
508MT
North America
306MT

Avg CAPP FOB cash cost: $111.1/t
(Central Appalachian)
41MT
56MT
Exports
Exports
2020
174MT
185MT
Imports
Exports
2030

Domestic cash cost: $51.6/t


Avg FOB cash cost: $45.9/t
93MT
Exports
Exports
2020
Exports
2030
Net exporter
119MT
Imports
186MT
Imports
2020
310MT
Imports
2030
426MT
435MT
347MT
270MT
171MT
Exports
Exports
2020
Exports
2030
Exports
Exports
2020
Exports
2030
Net importer
Asia
Coal demand is expected to more than double in India and Southeast Asian countries
with combined demand by 2035 exceeding that of the OECD as a whole
North
America
As US domestic demand falls with natural gas substituting coal feedstock, there is
an expectation to increase exports and slow down the decline of the coal production
industry
South
America
In the next 10 years more than $12.2 billion is expected to be invested in the
Colombian coal industry. This will add an additional 20 million tonnes to Colombian
coal production, mostly available for exports
Africa
South Africa throughput growth will be limited due to high production and logistics
costs. However, neighbouring countries have an untapped export potential. In
Mozambique alone, if expected investment is carried out, capacity will increase from
10MT/pa at present to more than 50MT/pa by the early part of the next decade
Australia Costs along the supply chain are expected to rise in the coming years, yet IEA
projections suggest 25 percent growth of production by 2020, driven by Chinese
imports growth mostly. Estimates might be revised down as current capacity
rationalization and reduction in capital expenditure impact longer-term projections
Europe
Europes position as a relatively large coal importer is going to decrease with a

focus on clean energy sources. Very few new coal plants have come online in recent
years while a number are following a decommissioning process (mostly in Germany).
Biomass co-firing, coal upgrading and carbon capture storage offer opportunities to
limit reduction in capacity and comply with more stringent environment regulation
CIS
Production is expected to increase slightly to 2020 thereafter, slowing down slightly

with a 2010-2035 CAGR of -0.1 percent. Most mines in CIS face low production cost
efficiency and have lacked investments over the past 20 years to remain competitive
and grow throughput
Source: Accenture Analysis. Data sources: World Coal Institute, IEA World Energy Outlook, Bloomberg, Thomson Reuters,
Deutsche Bank, IHS McCloskey, Wood Mackenzie, AWR Lloyd. Used with permission
544MT

India
South Africa
93MT
Imports
2030
Indonesia
Australia
75MT
Imports
2020
Looking at the recent historical patterns

of seaborne trade in coal shows a more
complex picture emerging (see Figure 4).
Multisourcing strategies are being
developed to create the right calorific
mix for specific markets by blending coal
from different locations while leveraging
new lower cost supplies compared to
historical sources. These flows will tend
to become more complex as new supplies
from the United States are expected to
enter the export mix, as the United States
increasingly turns to its abundant supply
of relatively cleaner and price-competitive
natural gas for domestic use and offsets
coal oversupply through exports.
Market Supply and Demand Dynamics

Summary Asia Pacific Focus
Demand
While While Asia-Pacific Economic
Cooperation (APAC) members have signed up
to achieving a 45 percent reduction in energy
intensity by 203520, there are other significant
pressures that might make realising this
target unlikely. Achieving economic growth
(and the affordable power this requires) is
likely to outweigh other demands. 190 GW of
additional generating capacity is expected by
2030 in the region, alongside an accelerating
shift towards coal (35 GW of committed coalfired plants are planned and being developed
in ASEAN alone). This is largely the result of
increased urbanisation across China, India
and Indonesia that translates into higher
electrification and energy consumption per
capita. Rising levels of GDP and population
will also play their part to drive demand,
with growth for the region expected to hit
5.7 percent in 2013 and 6 percent in 2014
while 4.6 billion people are expected in the
region by 2040, up from 3.8 billion in 2010.
And while globally there is pressure to move
to cleaner energy sources, it is not expected
to make a material difference in Asia Pacific
over the next five years as governments focus
on achieving higher living standards at an
affordable cost.
Chinas demand growth in thermal coal
achieved 7.4 percent per annum over the
last decade, but this has dropped to 1.8
percent in the past year.23 Regulations to limit
emissions, increased natural gas and nuclear
capacity and a lower target for GDP all serve
to dampen demand. In India, the high cost
differential between domestic and imported
sources is the greatest limiting factor for
demand. In addition, poor incentives for power
generators to pass-through import costs to
power prices also inhibit the development of
new generation capacity. However, a recent
focus on stimulating Independent Power
Producer investments will likely lead to
changes in Power Purchase Agreement price
structures and further stimulate coal power
investments across India. In Indonesia, growing
domestic demand is being driven by the
governments identification of thermal coal as
a strategic power source and the demand for
independent power producers to supply the
state-owned utility PLN. Finally, Australias
demand is expected to decline in line with
emissions targets set by the government, the
introduction of the carbon tax as well as the
development of a natural gas supply from
conventional and coal-seam-gas sources that
is exerting downward pressure on prices.
Supply
Asia Pacific mine utilisation rates are likely to
decrease in line with an expected addition of
25MT of supply capacity to global seaborne
markets in 201324, prompting concerns about
overcapacity. With regional price benchmarks
declining considerably from their recent
highs in 2012, contracting margins will likely
continue to force higher-cost producers to
scale back throughput and expansion plans.
On the other hand, a recent push for mine
consolidation in top-producing Chinese
regions is increasing domestic production cost
efficiency and investment in rail transport
capacity will expand domestic supply
availability to coastal regions. Meanwhile,
Indias coal production, characterised by
low calorific content, has been a preferred

source of supply compared to imports, which
are priced higher and do not benefit from
domestic subsidy mechanisms. In this context,
while only 12 percent of supply originates
from imports, local production is expected to
maintain its current level unless changes in
regulation enable power feedstock costs passthrough.25 Indonesias increased productivity
has significantly outweighed the declining
quality of its coal, and production is expected
to increase by 180MT over the next decade,
driven by a lower relative cost of production.26
Australia, on the other hand will find it
harder to compete in international markets
from a production marginal cost standpoint
a challenge compounded by the foreign
exchange rate against the US dollar.
20
PWC-APACs path to green growth, 2012 APEC CEO Summit, PwC
issues spotlight http://www.pwc.com/us/en/apec-ceo-summit/2012/
assets/pwc-apec-2012-green-growth.pdf
Wood Mackenzie Press Release: Energy, 12th May 2011, Wood

Mackenzie says that Coal, not Gas, will Play the Dominant Role
in Power Generation for South East Asia by 2030 http://www.
woodmacresearch.com/cgi-bin/wmprod/portal/corp/corpPressDetail.
jsp?oid=2868122
21
http://www.woodmacresearch.com/cgi-bin/wmprod/portal/corp/
corpPressDetail.jsp?oid=2868122
Asian Development Bank, http://www.adb.org/countries/indonesia/
economy
22
23
Accenture analysis. Data source: BP Statistical Review 2013, IEA.
24
Deutsche Bank Report, Thermal Coal: Coal at a Crossroads, 9
May 2013
Accenture analysis. Data source: BP Statistical Review 2013, IEA.

25
26
Market Price Dynamics and Opportunities

Historical Price Evolution
Figure 5: Historical Spot FOB Cash Prices
Prices rose considerably over the past decade

(Figure 5), peaking in 2008, in line with the
commodity super-cycle and Chinas import
expansion. More recently, overcapacity has
given rise to downward pressure on prices
generally, with regional variations showing
through, e.g., Chinese domestic production
is relatively expensive while US production
is relatively cheap. However, compared to
any other feedstock, coal remains extremely
competitive in the Asian market. The
difference between coal and other fuels on
a calorific equivalent basis was narrowing in
the run-up to the financial crisis, but have
subsequently been reestablished and thermal
coal now trades at a considerable discount to
other fuel types (Figure 6) fuel oil prices at
3.5x more expensive than coal and LNG
at 3.8x.27
$/tonne
$250
$200
Note: API2 is a proxy for CIF ARA spot

using the API front month future.
All other curves represent historical
settlement prices of regional coal.
$150
$100
$50
$0
Jul-03
Jul-04
Jul-05
Jul-06
Newcastle, Australia FOB

Vostochny, Russia
API2 CIF ARA
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
Qingdao, China
Richards Bay, South Africa
Central Appalachian, United States
Jul-12
Jul-13
Puerto Bolivar, Colombia

HBA, Indonesia
Source: Accenture analysis. Data source: Thomson Reuters. Used with permission.
Figure 6: Price Comparison of Major Energy Feedstock in ASEAN

$/mmbtu
$35
$30
$25
$20
$15
$10
$5
$0
May -07
May -08
May -09
May -10
May -11
Australian Coal, CIF ASEAN
Fuel Oil FOB ASEAN
Current LNG FOB ASEAN

(14.5% Brent)
Theoretical US LNG CIF ASEAN (115%HH + $7)
Fuel Oil based on Singapore Fuel Oil 180 cst

Coal based on Newcastle Coal plus freight rates between Newcastle, Australia and Southeast Asia
LNG based on 14.5% Brent plus adjusted freight rates between Qatar, Japan and Singapore
Natural Gas based on 115% Henry Hub plus freight rate and canal fees
Source: Accenture analysis. Data sources: Bloomberg, Thomson Reuters. Used with permission.
Accenture analysis. Data sources: Bloomberg, Thomson Reuters.

27
May -12
May -13
In a market characterised by oversupply,

as is the case for coal today, marginal
cost is the key driver for pricing. Marginal
cost represents the minimum cash amount
required to produce an additional tonne of
coal. This has two dimensions: short and long
run. When calculating the short-run marginal
costs, OPEX and Royalties represent the main
components of break-even cost decision
making. Long-run marginal costs reflect
all costs, including CAPEX, SG&A, working
capital, debt servicing and other residual
costs to arrive to a break-even internal rate
of return target.
Given the fact that mines operate at different
marginal costs, it is possible to create a cost
profile of the cumulative mined volume from
the lowest to the highest levels of marginal
cost. Figure 7 illustrates the impact of
marginal price changes and expected market
responses from operators:
Figure 7: Investments and Production Price Decision Framework [Illustrative]

Marginal Pricing
($/tonne)
Consumer
switch
3
Alternative energy
feedstock switching price
Illustrative Price Range
Marginal Cost Pricing
Incentive price to recover

target investment return
Invest
Produce
Incentive price to recover
production O&M & other
variable costs
Individual Mine Volumes
Cumulative
volume
1
Shutdown
& Close
Volume (Tonnes)
1. Short-run production decision Prices

below marginal costs imply producers stop
producing, which removes supply from the
market and provides a floor to the price.
2. Long-run investment decision Prices
above this level provide an incentive for
producers to invest in fixed assets and
increase supply.
3. Buyer substitution Prices above this
level provide an incentive to consumers to
switch to an alternative energy source and
provide a ceiling to the coal price.
The 85th percentile of the global export

marginal cost curve (Figure 8) is expected
to provide the capacity floor in the market,
with the least economical producers being
removed from production. Given the pipeline
of investments for additional export capacity,
the cost curve is expected to shift to the
right between 2013 and 2020. The 85th
percentile of Indonesian export producers
are profitable at $63.6/tonne on an energyadjusted basis28 and as such offer a strong
rationale for further investments. Hence
production is likely to continue expanding
in the next five to seven years. On the other
hand, the 85th percentile of Australian export
producers are profitable at $87/tonne29
clearly current prices are creating
a loss-making environment for some
producers and justify the decisions for
capacity rationalization.
Investment Incentivisation
The pipeline of thermal coal incremental
export volume production is shown in
Figure 9. Indonesia is projected to have the
largest absolute growth in exports, adding
approximately 140MT by 2020 to its existing
350MT of export production.30 Cost-efficient
mining in Indonesia, which is partly offset by
lower calorific-value coal yield, is stimulating
investment and is the primary factor behind
miners large-scale expansion projects.
In Australia, although costs remain high,
existing coal assets, logistics infrastructure
and experience in the coal industry are
driving investments. These investments are
more expensive given foreign exchange,
inflation and high labour and equipment
costs; but NPV discount factors in Australia
are expected to be lower by c10 percent
when compared to Indonesia.31 The current
price levels in Australia look set to reduce
the incentive to invest given the current
high capital intensity and likely diminishing
returns from additional investment in the
region. Accenture expects that the pipeline
of c100MT additional capacity (Figure 9)
will probably be revised downward. Planned
projects indicate that South Africa, Colombia
and Russia will see minor increases in their
export volumes.
Figure 8: Global Thermal Coal Export Cash Cost Curve

Marginal Pricing
($/tonne)
15%
$87/t in 2013 real terms
(Basis Newcastle)
Shutdown &
Close
85% of 2013 production capacity

0
200
2020
400
600
2016
800
Accenture analysis, Bloomberg, Thomson Reuters
Accenture analysis. Data sources: Deutsche Bank, Wood

Mackenzie, AME. Used with permission.
29
30
31
10
Volume (MT)
Source: Accenture analysis. Data source: Deutsche Bank, Wood Mackenzie, AME. Used with permission.
Figure 9: Incremental Export Volumes Production Outlook by Country (2020 Level

Minus 2012 Level)
150
Indonesia
125
Australia
100
75
50
Colombia
25
Russia
South Africa
0
0
100
200
Source: Accenture analysis. Data source: IEA. Used with permission.
28
1,200
2013
2012 Export Production (MT)
27
1,000
300
400
Market Arbitrage Opportunities and

Market Risks
Although current coal prices may imply
a reduced appetite from investors in this
market, there are a number of potential
opportunities for producers to undertake
profitable arbitrage within a coal marketplace
that is becoming more standardised and
liquid. A number of producers have to
date focused on the production element
of the value chain, sending their coal to
marketing intermediaries who in turn deploy
sophisticated trading strategies to secure
margin from the downstream coal value
chain. Those producers who lack trading and
marketing capabilities are therefore missing
out on the possible gains from short-term
market dynamics and opportunities to capture

market arbitrage. More specifically, Southeast
Asian producers could benefit from extending
their participation in the value chain, with
key opportunities arising from upgrading,
blending, multisourcing and end-customers
sales diversification. In the next sections,
we examine two key areas of arbitrage
opportunities: geographic and quality.
Geographic Arbitrage
In the analysis set out next, we look at the
arbitrage opportunities available in the market
for delivering to China, India and Japan using
a pricing framework developed by Accenture
that is detailed in Figure 10.
Figure 10: Arbitrage Calculation Pricing Methodology

FOB International Reference market price
[e.g., Indonesia Kalimantan, Australia Newcastle, etc.]
Export Market
FOB Price
Platts Prices @
different
reference
locations
FX conversion
rate (If
applicable)
International
Freight Rate
Ship volume size
(panamax for USEurope and
Indonesia-China,
capesize for all
other routes) and
adjustment factor
Single- or dualport delivery
freight rates
adjustment
CIF Price
[e.g., Qingdao, China]
Financing
and Insurance
LOC financing
cost
Number of days
between
purchase and
receivables
Number of days
vessel en route
DAT Price
Port
Unloading Charges
DDP Price
Customs
and Clearing
Jetty rate
Surveying costs
Port tankage rate
Customs taxes
Demurrage days
Other port charges
Demurrage rate
Vessel-to-vessel
transfer costs
% loss incurred
not covered
Insurance rate
Retrieved
US$/tonne spot
cash prices as
quoted by
Bloomberg and
Reuters
Made calorific
adjustment to
prices of all coal
indices at
6,000kcal/kg NAR
Freight rates
utilise last market
prices as of 12 July
2013 quoted by
Bloomberg
Applied a marine
insurance factor
of 1.003 that is
added to
shipment and
shipping total
cost
A flat port
unloading fee of
32CNY is applied
on a per tonne
basis
VAT to be added
to all import coal
prices
Quoted Qingdao
includes VAT at
17 percent and export
tax at 5 percent - these
are netted back
to create the DAT
price
11
Figure 11: Historical DAT Prices and DAT Price Load to Discharge Matrix Comparison
$/tonne
$300
Richards Bay, South Africa to NBO, China

Vostochny, Russia to NBO, China
Newcastle, Australia to NBO, China
$250
Kalimantan, Indonesia to NBO, China

Puerto Bolivar, Colombia to NBO, China
Hampton Roads, United States to NBO, China
$200
Qinhuang, China
$150
$100
$50
May-07
May-08
May -09
May -10
May -11
DAT Prices as of 1 July 2013
May -12
May-13
Differential to Local Price as of 1 July 2013

Discharge Port
Discharge Port
Qingdao,
China
Mundra,
India
ARA,
Europe
Kalimantan/Tanjung
Barat, Indonesia
$88.23
$90.84
$83.80
Newcastle,
Australia
$88.05
$94.49
$84.38
Richards Bay,
South Africa
$88.40
$84.17
$84.10
Puerto Bolivar,
Colombia
$91.25
$75.76
$90.44
Hampton Roads,
United States
$85.83
$71.65
Vostochny,
Russia
$92.32
$89.70
$92.29
Local Market Price
$94.32
$75.80
\
Load Port
Load Port
Qingdao,
China
Mundra,
India
ARA,
Europe
Kalimantan/Tanjung
Barat, Indonesia
$6.09
$-15.04
Newcastle,
Australia
$6.27
$-18.69
Richards Bay,
South Africa
$5.92
$-8.37
Puerto Bolivar,
Colombia
$3.07
$0.04
Hampton Roads,
United States
$8.49
$4.15
Vostochny,
Russia
$2.00
$-13.90
Note: All prices adjusted for energy equivalence to 6,000kcal/kg; Indonesian freight costs were arrived at through
scaling AUS freight to 50 percent. Analysis utilised FOB spot prices, market freight rates, insurance and port charges
to arrive at DAT price. Chinese figures were adjusted ex-VAT @17 percent and ex-export-tax @5 percent. DAT deltas
were calculated utilising domestic thermal coal price for Qinhuang, China. See Figure 10 for more details.
12
Figure 12: Coal Import Pricing Differential to Chinese Domestic Price and Monthly
Imports of Thermal Coal in China by Country of Origin
Jan-11
Apr -11
Jul-11
Oct -11
Jan-12
Apr -12
Jul-12
Oct -12
Jan-13
Apr -13
0
80
5MT
60
10MT
40
15MT
20
20MT
25MT
-20
30MT
-40
35MT
-60
-80
Australia
Indonesia
Russia
Imports by Country of Origin
Import Price Relative to Domestic

DAT to China (USD / t)
Oct -10
100
40MT
45MT
South Africa
-100
United States
50MT
The results presented in Figure 11 show

geographic arbitrage opportunities make it
more favourable for Chinese users to buy
seaborne imports rather than source from
local markets whose product needs to be
transported to the southern industrial regions
from the north. This price arbitrage can
explain the decade-long trend towards higher
levels of imports into China from zero in 2000
to 175 million tonnes in 2012.32 Questions will
arise when domestic producers become more
competitive as rail infrastructure from north
to south reduces capacity constraints.
As Figure 12 shows, Indonesia had previously
supplied the lowest-priced coal relative to
other exporting countries although the United
States has recently emerged as the cheapest
supplier of coal landed in China. However, the
United States is expected to face important
challenges in achieving greater scale given
the limitations of its export infrastructure
and logistics limitations from mine to port.
32
13
Figure 13: Thermal Coal FOB/EXW and Freight Rates (Prices as of 1 July 2013)
75.80
12.58
35.00
25.00
89.70
9
61.72
12.00
2.62
99.46
N/A
9.95
4
7.7
6
64.75
14.5
3.43
11.00
6.85
5.6
10.85
80.55
12.75
74.20
Note: Qingdao, China price includes netback adjustment for VAT at 17 percent and export tax at
5 percent; this allows more accurate comparison to the international price level. Prices adjusted
for energy equivalence to 6,000kcal/kg.
Overall, global trade flows will increasingly

be impacted by ongoing price arbitrage
between the major price hubs, driven by lower
liquidity where long-term contracts are still
prevalent, regional regulation and absence of
infrastructure to accommodate large-scale
capesize vessels or mine-to-terminal logistics
assets (Figure 13).
The decline in dry-bulk freight rates has also
supported opportunities available to regional
arbitrageurs to ship coal from more remote
locations and benefit from FOB/CIF location
arbitrage. As Figure 14 shows, dry-bulk freight
rates have declined significantly from their
peak in 2008. Given the weak forecast for
shipping fundamentals, namely significant
overcapacity, recovery is unlikely until 20152016, further supporting the case for more
complex, multisource and remote coal
trade strategies.
14
12.00
77.75
4.19
77.75
Freight Rate ($/tonne)

FOB Price (1 July 2013, $/tonne)
Quality Arbitrage
Figure 14: Major Coal Freight Route Pricing and Index

$70
12,000
Australia to China
Indonesia to China
South Africa to China
10,000
BDI
$50
8,000
$40
6,000
$30
4,000
$20
BDI (bps)
Major Coal Freight Routes ($/tonne)
$60
When coal prices of varying energy content

are location adjusted, pricing differentials
indicate that an increase in calorific value by
100kcal/kg will provide a premium of $1.67
in the marketplace (Figure 15) for China.33
However, given a number of variables such as
local supply and demand in export markets,
costs associated with different logistics,
other non-Chinese domestic factors and
physical properties (e.g., ash and sulphur
content), DAT prices for different coal supplies
in China are not fully linearly correlated to
calorific value. This creates the opportunity
for arbitrage of a potential upside of $10-$15
per tonne for selected coal supplies through
direct substitution, or a smaller share of the
potential upside available from blending with
other supplies of lower calorific value.34
2,000
$10
$0
Jun-07
0
Jun-08
Jun-09
Jun-10
Jun-11
Jun-12
Jun-13
Figure 15: Coal Price Adjusted for Common Location vs. Energy Content
$120
DAT Coal Price in China ($/tonne)
$110
$100
$90
$80
Positive arbitrage for these coal

supplies through substitution or
blending
$70
y = 0.0167x -13.168
$60
$50
4000
4500
5000
5500
6000
6500
7000
7500
Calorific Value (kcal/kg)

Note: FOB prices and freight costs were averaged over the prior 12-month period. Netback to China on a DAT
pricing basis as the global demand hub provided the central point for equivalent global pricing on a quality
basis.
Accenture analysis. Data sources: Bloomberg, Thomson Reuters.

33

34
15
Figure 16: Coal Volatility Against Global Reference Indices

25%
MSCI World
Brent
Market Risks
While trading and marketing a share of
originated volumes is a potential source
of incremental margin for producers who
aim to realize arbitrage margins, market
price volatility and liquidity risks need to be
considered carefully.
Coal price experienced high levels of volatility
during 2007-2008, peaking at 20 percent
(five-day return volatility from historic 180day rolling average), and equivalent to an
average annual volatility of approximately
100 percent. While the degree of price
volatility has been subsequently reduced,
annual volatility remains at c30 percent to
c35 percent.35 As depicted in Figure 16, CIF
ARA has exhibited similar volatility to Brent
and global equity markets. Newcastle coal
has shown relatively lower volatility over the
past six years, largely as a result of relatively
stable demand from Japan and China.
Investigating the correlation over time
between different coal prices (Figure 17)
shows that domestic market developments in
China have often led to price developments
that are decoupled from other global coal
prices; this again supports arbitrage trading
opportunities. Such periods of de-correlation
are expected to continue in a market where
country-specific regulations, long-term
contracts, and diversity of coal types will
limit price efficiency. However, taking
advantage of such opportunities through
trading and marketing activities will mean
exposure to different market indices, creating
spread market risk that will need to be
actively managed.
In addition to volatility and pricing dynamics,
the relative lack of liquidity in coal compared
to other energy markets (Figure 18) creates
additional risks that producers moving into
trading and marketing will need to manage
as volumetric risks could lead to significant
losses or high costs by relying on the shortterm spot market to fulfil needs.
5-Year U.S. Treasury Index

20%
Newcastle, Australia FOB

API2 CIF ARA
15%
10%
5%
0%
May -07
May -08
May -09
May -10
May -11
May -12
May -13
Note: 5-day volatility calculated from a 180-day rolling average

Figure 17: Regional Coal Prices, 180-day Rolling Correlation Analysis

100%
Richards Bay, SA - Newcastle, Australia

Richards Bay, SA - Qingdao, China
50%
Newcastle, Aus - Qingdao, China
0%
-50%
-100%
Mar -08
Mar -09
Mar -10
Mar -11
Mar -12
Mar -13
Figure 18: Bid-Ask Spread Evolution-Crude Oil (Brent)

and Natural Gas (HH) vs. Coal (API2 and API4)
Crude Oil (Brent)
Natural Gas (HH)
Thermal Coal (API2)

Thermal Coal (API4)
4.0%
1.0%
x4
2.0%
0.5%
0.0%
0.0%
Jul-10
Jul-11
Brent Aug13
Accenture analysis. Data source: Thomson Reuters. Used with

permission.
35
16
HH Aug 13
Jul-12
API4 Aug 13
API2 Aug 13
Note: Bid-ask spread represented here as (PAsk PBid) / PAsk for the listed Futures contracts
Jul-13
17
Expanding Into Trading, Marketing and Logistics

In order to seize the arbitrage opportunities
identified and drive incremental margin,
Accenture identified two major operating
capabilities development areas that Asia
Pacific coal miners should consider:
Figure 19: Selected Capabilities Development for Asia Pacific Coal Producers
Enhance Current Marketing Practices: Market segmentation,
marketing of production volumes, long-term and spot contracts
mix, financial hedging
Required trading and
marketing capabilities
1. Expanding into trading and marketing

activities
2. Development of end-to-end logistics
capabilities
In the following section, we examine those
two capability development areas.
Develop Trading Capabilities: Target operating model, CTRM

system and solution, risk management and policies, new skills,
transfer prices, performance management
Growth Strategy through

trading and marketing

Asia Pacific coal producers traditional
marketing activities have been mainly
limited to relationship-based interaction
with intermediaries through FOB sales and
in limited cases to end-customers through
CIF sales. However, trading creates the
opportunity to achieve higher margins
across the end-to-end value chain through
commercial optimisation. To understand the
value of an asset-backed trading strategy, we
can consider what happened in the Japanese
energy markets following the earthquake and
tsunami in 2011. In the wake of the nuclear
shutdown, Asian coal prices rose significantly.
Miners who had previously locked in to longterm supply agreements without the ability
to sell coal on a delivered basis were unable
to capitalise on the increased demand from
Japan while traders realised an important
arbitrage upside.
As depicted in Figure 20, there are a number
of different trading strategies that players can
aim to exploit and develop through trading
and marketing capabilities.
Required logistics
operational
capabilities
Develop logistics asset-base: Value chain mapping, extending

ownership downstream towards the end customer (chartering,
storage, transhipping, etc.)
Develop logistics capabilities: Operating model, pricing, cost,

globally
nomination and monitoring process,
scheduling systems
is of market and liquidity risk for
Figure 20: Possible Trading Strategies

Name: Quality Arbitrage
Name: Directional Trading
Description: Combining different quality coal

to take advantage of nonlinear pricing of
quality in the market.
Description: Taking a directional view in the

market to mitigate long coal price exposure
or to lower the price risk of the equity coal
position.
Sub-strategies:
Blending at load port
Blending at discharge port
Blending equity coal/third-party coal only/
equity and third-party mix
Substitution
Value Enablers: Nonlinearity in quality
premiums
Sub-strategies:
Selling futures (x percent of future
production/term horizons)
Rolling short coverage
Buy a put option
Enter a swap floating to fix price
Key Assumptions: Trader ability, volatility,
trending markets
Name: Geographic Arbitrage
Name: Spread Trading
Description: Direct targeting and shipment

to customers who are supply constrained
relative to the rest of the market.
Description: Relative trading between

offsetting positions that are not anticipated
to move in parallel with one another.
Sub-strategies:
Interregional price differentials
Inter-country price differentials
Intra-country price differentials
Sub-strategies:
Term spreads/calendar spread
Index spreads (location variation/quality
variation/exchange variation)
Physical and financial spread
Value Enablers: Delivered price to customer,

pricing power and margin capture
Key Assumptions: Volatility, trader ability,

capital, leverage, risk lines available
Name: Term Arbitrage (Cash & Carry)
Name: Spot Trading
Description: For a market in contango money

can be made if cost of carry is less than the
premium built into the curve term structure
Description: Purchasing physical coal on

the global market in order to exploit supply
constraints and surpluses.
Sub-strategies:
Sell forward and store covering volumes
Sub-strategies:
Short-term, third-party volumes
Organise freight from supply-constrained
sites
Distressed cargo
Buying physical spot to store
Sell forward no storage (use future mine

production to fulfil)
Value Enablers: Curve premium, cost
of carry (working capital, storage,
operational risk)
18
Develop Trading Strategies: Asset-backed optimisation

(geographic, quality, term arbitrage), hedging, optionality,
commercial optimisation, arbitrage plays
Key Assumptions: Volatility, trader ability,

capital, leverage, risk lines available
Up/Midstream
Assets
Mining Assets
Processing Assets
Logistics Assets
Other Assets
Mid/Downstream
Figure 21: Trading-Centric Operating Model and Selected Core Operating

Capabilities of Trading Functions
Trading
Power Assets
Processing Assets
Logistics Assets
Other Assets
Front Office
Asset
Portfolio
Development
Optimisation
& Optimisation
Business Plan
Trading Strategy
Core Trading
Scheduling
Logistics
S&D
Research
Pricing &
Structuring
Origination
Marketing
Middle Office
Market Risk
Modelling &
Reporting
Risk Policy
& Limits
Risk Management
Control /
Performance
Compliance
Management
Data and Research

Data &
Pricing
Performance
& Curves
Benchmarking
Credit &
Operational Risk
Back Office
Financial Reporting
Cash and Liquidity
Financial
Management
Reporting
Accounting
Accounting &
Reconciliation
Settlements &
Invoicing
IT Support
Legal
P&L Analysis &

Reporting
HR
Figure 22: Key Activities Required for the Development of New

Trading and Marketing Capabilities
Trading and Marketing Capability
Market,
Liquidity
Tax
Optimisation
Transfer Pricing
Commercial
Strategy
Inventory &
Working Capital
Management
Supply & Sales

Logistics Mgt.
Scheduling
Transportation
& Storage
Assets
Key focus areas to help enhance trading and marketing capabilities

Tax & Legal
Structuring
Optimal Tax
structure
Assessment for
corporate income
tax, customs / VAT
taxes
Optimisation of
dividends taxation
waterfall to parent
company
Analysis of
multiple locations
and holding entities
scenarios
Accounting
treatment by
entity (MtM vs.
accruals)
Commercial
Business Planning
Financial
model
reflecting the
planned
commercial
structure and
plan of new
procurement
entity
Forecasted
volumes to be
purchased,
supplied & net
exposure to be
maintained
based on
contracting
structure
Transfer
pricing setup
Organisation Design
& Operating Model
Select company
model
Operational
capabilities to be
centralized and
transferred to
new entity
(logistics,
transport,
trading)
Additional
capabilities to be
enhanced (risk
management,
settlements,
treasury)
Company
Capitalisation
Equity capital
injection in new
legal entity
Level of parental
guarantees
required
Consolidation &
accounting
framework (IFRS/
GAAP)
Committed &
uncommitted
credit lines
Unsecured and
secured debt
Processes and
Systems & IT
Definition of all
processes to be
managed by the
entity (front-to-back
office mapping)
Achieving those trading strategies may depend

in part on the development of a new operating
model (Figure 21) with critical capabilities
required from contract structuring and pricing
through to support functions.
A lean operating model for a core trading
function can require a strong framework in
which integrated front, middle and back office
work closely together. The asset development
team could look to focus on optimising
production while also providing traders
with as much foresight and optionality as
possible in order for them to extract a trading
margin. Equally, in order to capture delivered
economics, the trading function would need
to be able to operate the logistics chain
efficiently and also help protect the trading
margin. Supply and demand research is a
vital factor in coal trading where the market
responds strongly to changes in fundamentals.
Finally, a strong commitment to origination
and marketing is important in order to
realise market opportunities: Without a
strong supplier and/or customer base, market
opportunities remain theoretical with reliance
on pure directional trading leading to very
limited margins. Middle office, specifically
risk management, is a critical component and
would need to be independent from the front
office in order to function effectively. Backoffice operations would need to be efficient
and knowledgeable to handle tasks such as
trade confirmations, settlements, invoicing
and broker reconciliations.
Developing such new capabilities may require
important transformation activities targeting
corporate structuring, commercial planning,
organisation design, capitalisation and
systems that need to be carefully planned, as
shown in Figure 22.
Allocation of
resources, FTEs,
systems, external
software to
execute
processes
Plan IT
integration with
rest of business
units
Organisation
hierarchy
Linkages and
protocol with
other business
units
19
Logistics
Being able to execute advanced marketing
and trading strategies depends on the
flexibility and control coal players can
have on their logistics operations. Relying
on third-party logistics assets can prove
to be difficult in certain segments of the
value chain, as is the case for example
of pit-to-terminal logistics, while more
manageable for other segments, for example
chartering. As a result, optimising the
logistics portfolio through a mix of owned
and contracted-capacity assets can be key
to managing costs and promoting sufficient
flexibility for executing trading strategies.
However, it may not be necessary to fully
own all assets. Capacity off-take or tolling
contracts can be combined with minority
or zero-equity contributions to secure the
required segments of logistics operations and
therefore limit capital injections.
Coal players aiming to capture marketing and

trading opportunities may therefore need to
consider expanding their reach into offshore
transhipment facilities, chartering, storage,
blending and other logistics assets that can
enable more complex trade strategies to be
executed and supported by the end-to-end
logistics value chain (Figure 23).
business activities that they can grow in their

operating market, in new geographies, in new
assets, in new commodities or new valueadded services.
As well as providing support for marketing

and trading, developing new logistics
capabilities can offer opportunities for
diversification from pure coal plays and create
the possibility of new revenue streams such as
by offering logistics services to third parties.
Such a model can offer the opportunity to
increase the utilisation rate of logistics assets,
ensure they are operated in a cost-optimal
configuration and support higher return
on capital employed. Figure 24 highlights
opportunities for coal players to expand
their logistics operations into standalone
However, here again, the development of

logistics can depend on the development of
a new lean and efficient operating model
supported with critical capabilities to
manage such operations as scheduling, assets
maintenance, bunkering, integration with
commodities flow forecasts and others.
Figure 23: Logistics Value Chain for Thermal Coal from Pit to End-customer
Commodities at
Origination Point
Coal supply
from mines
Terminals/
Transhipping/
Storage
and Offloading
Ocean
Transport
Coal transfer Coal transfer Coal dry-bulk

to train carts,
from terminal/ carriers (e.g.,
barges from
transhipping/
capesize,
mine to sea
storage to
panamax) on
terminal/
ships
voyage/time
transhipping
charter
Coal
blending
facility
if required
River and
coastal
specialised
feeders
20
Land
Transport/
Barging
Terminals/
Transhipping/
Storage
and Offloading
Coal transfer
from DW
carrier to
terminal
facilities
Port storage
Surveying
Customs,
Clearance
Surveying
Custom
clearing
Land
Transport/
Barging
Coal transfer
to train carts,
truck carts,
barges from
port to end
consumption
points
Commodities
at
Consumption
Point
Power
stations,
industrials,
steel / cement
production
Figure 24: Logistics Growth Opportunities for Coal Producers

1
Growth
Opportunities
Coal Dry-Bulk
Existing Market
Barges & Offloading
Grow market share of coal lifting,

trans-shipment, offloading
2
New Markets
Enter in neighbouring geographies to

provide services
3
Other Logistics
Segments
Chartering
Voyage and time chartering to

coal buyers, sellers and customers
(owned or third party)
Port/Terminals Storage
Provide storage facilities, handling at major

ports and terminals (owned or third party)
Land & Barge

Transportation
Provide logistics services for coal shipment

to end customers (train, truck, barging)
Existing Market
Provide logistics services for other dry-bulk

commodities in currently operating region
(e.g., nickel/copper)
New Markets
Provide logistics services for other dry bulk

commodities from regional countries (e.g.,
bauxite, iron ore, phosphate)
Chartering, Ports/
Terminals, Land
Provide logistics services for other dry-bulk

commodities across the end-to-end logistics
value chain
Blending / Layering &

Sampling
Support coal grades blending (on offloading

vessels/onshore terminals)
3PL End-to-End
Logistics Management
Provide full logistics service offering with

portal interface for end-to-end deliveries
4
Other Dry-Bulk
Commodities
Barges & Offloading
e.g., Agribulk, Alumina, Bauxite, Coke,

Copper Concentrate, Iron Ore, Iron Ore
Pellets, Sand, Slurries, Nickel Ore,
Limestone, Soda Ash
Other Logistics
Segments
5
Other
Logistics Services
21
Conclusion and
Recommendations
Despite short- to medium-term oversupply
creating a downward pressure on prices,
Accenture estimates the market to be close
to a price floor for thermal coal. With
85th percentile marginal cost prices of
Australian export producers at $87/tonne36
and Indonesian producers at $63.6/tonne37,
any market prices below these levels for
sustained periods would lead to supply-side
rationalisation and a consequent increase in
coal price. As we expect demand for coal in
Asia to be resilient, mainly owing to demand
for a low-cost energy supply, our medium- to
long-term coal price outlook is positive.
However, the current price environment is
limiting thermal coal producers margins. In
response they should consider new sources
of margin growth other than capacity
expansion to help enhance return on capital
and reduce earnings volatility. For mining
companies to remain competitive, we see an
important opportunity for them to expand
their operations into trading, marketing and
logistics in order to seize upside from market
arbitrage. Today, multiple trade strategies
exist by blending lower and higher calorificvalue coal and selling the mix in end markets,
or by changing sourcing patterns by buying
36

37

38
22
coal in slightly more depressed markets, such

as the United States, and redirecting exports
to higher-value markets, such as China.
Accentures analysis suggests that in current
market conditions, blending can increase
margins achieved on end-prices by upwards
of 5 percent to 15 percent, while location
arbitrage can lead to a 10 percent to 15
percent increase in margins. 38
For Asian Pacific coal companies, who have
traditionally remained focused on upstream,
this is a significant opportunity. Moreover, in
specific countries such as Indonesia,
the government is actively encouraging
producers to shift from selling production
offshore Indonesia (FOB) to selling directly to
end markets (CIF).
But this type of expansion strategy will
likely require an upfront investment at
a time when coal mining revenues have
contracted. Expanding into trading could
require companies to hold more risk capital,
while expanding into logistics will require
asset purchases, such as storage and blending
facilities, offshore terminals and chartering.
This expansion into the downstream value
chain can rapidly become a cost-intensive
business depending on the asset ownership

structure and operational processes. A
number of Asian Pacific miners could support
these investments by tapping into their
liquid assets, which are standing at relatively
healthy levels compared to their global peers,
or by diverting capital expenditure from
planned mine expansions.
Those miners that can take early advantage
of this expansion strategy may have an
opportunity to enhance their long-term
growth and reduce earnings volatility. Now is
the time for Asian Pacific coal players to seize
this opportunity.
Appendix
Coal Global Production Split
Figure 25 is a schematic that depicts the split of global coal production
by type. The focus of this graphic is on bituminous coal specifically
thermal coal - used as a source of feedstock for power generation.
Figure 25: Coal Types (%) - Indicative of Global Production and Report Scope
LOW
HIGH
CARBON/ENERGY CONTENT OF COAL [kcal]
High Moisture Content
Low Moisture Content
Low-Rank Coals 47%
Hard Coal 53%

The focus of this report is
thermal coal
Lignite
17%
Subbituminous
30%
Bituminous
52%
Thermal
Steam Coal
Largely power
Power generation
generation
Cement manufacture
Industrial users
Power generation
Cement manufacture
Industrial users
Anthracites
1%
Metallurgical
Coking Coal
Manufacture of
iron and steel
Domestic/Industrial
including smokeless
fuel
Source: Accenture analysis. Data source: World Coal Institute. Used with permission.
Coal Indices
The following list of indices was used in the arbitrage analysis of thermal coal.
Figure 26: Coal Indices and Characteristics

Ref No:
Index
Port of Trade
Calorific Values
Ash
(%)
Sulphur
(%)
Incoterm
1 Newcastle
IHS McCloskey
Newcastle, Australia
6,000 kcal/kg NAR
1%
N/A
FOB
2 Richards Bay
IHS McCloskey
Richards Bay, South Africa
6,000 kcal/kg NAR
1%
18%
FOB
3 Vostochny
IHS McCloskey
Vostochny, Russia
6,000 kcal/kg NAR
N/A
N/A
FOB
4 Qingdao
IHS McCloskey
Qingdao, China
5,800 kcal/kg NAR
1%
N/A
FOB
5 HBA
IHS McCloskey
Kalimantan, Indonesia
6,322 kcal/kg NAR
0.4%
N/A
FOB
6 Puerto Bolivar
IHS McCloskey
Puerto Bolivar, Colombia
5,750 kcal/kg NAR
N/A
N/A
FOB
7 Central Appalachian
IHS McCloskey
Hampton Roads, United States
6,000 kcal/kg NAR
N/A
N/A
FOB
8 Powder River Basin
IHS McCloskey
Hampton Roads, United States
6,000 kcal/kg NAR
N/A
N/A
EXW
9 AP12 ARA
Argus/McCloskey Price Index Rotterdam, Netherlands
6,000 kcal/kg NAR
N/A
10%
CIF
Source: Accenture analysis. Data source: Thomson Reuters, IHS McCloskey. Used with permission.
23
About Accenture
Ogan Kose
Xavier Veillard
Accenture is a global management

consulting, technology services and
outsourcing company, with approximately
275,000 people serving clients in more
than 120 countries. Combining unparalleled
experience, comprehensive capabilities
across all industries and business functions,
and extensive research on the worlds
most successful companies, Accenture
collaborates with clients to help them
become high-performance businesses and
governments. The company generated net
revenues of US$28.6 billion for the fiscal
year ended Aug. 31, 2013. Its home page is
www.accenture.com.
Ogan Kose is the global managing director

of Accenture Trading, Investments &
Optimisation Strategy, which is part of
Accenture Strategy & Sustainability Group.
Overall, he has more than 15 years of
experience helping commodity players with
their earnings and risk management. His
primary focus areas are commodity trading,
risk management, investment evaluation and
financial analysis, pricing, and commodity
contract structuring. At Accenture, Ogan
has worked to help clients across multiple
geographies, such as the United States,
Europe, China and Southeast Asia. He holds
Bachelor of Science and Master of Science
degrees in chemical engineering (Imperial
College, London) and a Master of Business
Administration from Georgetown University.
He is a member of the Global Association
of Risk Professionals and is a financial risk
manager. He is based in London.
Xavier Veillard is the Asia Pacific Director

of Accenture Trading, Investments and
Xaviers primary focus is corporate strategy
and restructuring, financial valuation and
commodity trading. Xavier has worked with
Oil and Gas corporations, natural resources
ministries, commodities traders and mining
corporations in North America, Europe,
Africa and Southeast Asia, supporting capital
investment programs, assets commercial
and capital structuring and asset-backed
trading strategies. Xavier holds an Honours
Bachelor of Aeronautical Engineering from
McGill University in Canada and a Master
of Sciences in Mechanical Engineering from
Imperial College London. He is based in
Singapore.
About Accenture Management

Consulting
Accenture is a leading provider of
management consulting services worldwide.
Drawing on the extensive experience of its
17,000 management consultants globally,
Accenture Management Consulting works
with companies and governments to
identify and deliver value by combining
broad and deep industry knowledge with
functional capabilities to provide services
in Strategy, Analytics, Finance & Enterprise
Performance, Marketing, Operations, Risk
Management, Sales & Customer Services,
Sustainability, and Talent & Organization.
Its home page is www.accenture.com/
consulting
This document is intended for general
informational purposes only and does not
take into account the readers specific
circumstances, and may not reflect the most
current developments. Accenture disclaims,
to the fullest extent permitted by applicable
law, any and all liability for the accuracy
and completeness of the information in this
document and for any acts or omissions made
based on such information. Accenture does
not provide legal, regulatory, audit, or tax
advice. Readers are responsible for obtaining
such advice from their own legal counsel or
other licensed professionals.
Copyright 2013 Accenture

All rights reserved.
Accenture, its logo, and
High Performance Delivered
are trademarks of Accenture.
ogan.a.kose@accenture.com
James Smyth
James Smyth is a senior consultant
in Accenture Trading, Investment and
James primarily focuses on commodities
markets fundamentals analysis, commodity
trading strategy and commercial
optimisation. James has worked with
multiple mining majors and juniors, national
oil companies and oil majors. Prior to
Accenture, James spent three years in the
financial services industry, working for a
global bank and for an asset management
firm, within the fixed income, equity and
commodity markets. James is a Member of
the Chartered Institute of Securities and
Investment and holds a first class honours
degree in economics from the University of
Warwick. He is based in London.
james.p.smyth@accenture.com
xavier.veillard@accenture.com

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From Thermal Coal Production

to Marketing and Trading

Global Evolution of Consumption, Production and Trade

Market Price Dynamics and Opportunities

Expanding Into Trading, Marketing and Logistics

Trading and Marketing

Conclusion and Recommendations

by oversupply, marginal cost price is one

risk management among others, in order to

Accenture believes that within this cost

Accenture expects miners to face the

This strategy is particularly relevant to

Now is the time for coal producers to take

Figure 1: Summary of Report Analysis and Scope

Outlook for global consumption and

Accenture analysis. Data source: BP Statistical Review 2013. Used

Accenture analysis. Data source: IEA. Used with permission.

Accenture analysis. Data source: BP Statistical Review 2013. Used

Accenture analysis. Data sources: IEA, World Coal Institute, IEA

Evolution of global trade, mapping major

Market Price Dynamics and Arbitrage Opportunities

Review of market price dynamics and

Deutsche Bank Report, Thermal Coal: Coal at a Crossroads, 9

Accenture analysis. Data sources: Deutsche Bank, Wood Mackenzie,

Trading and Marketing

Key capabilities identified by

Source: Accenture analysis

Thermal Coal Market Overview

Accenture analysis. Data sources: BP Statistical Review 2013,

Data source: BP Statistical Review 2012. Used with permission.

Accenture analysis. Data source: IEA. Used with permission.

Accenture analysis. Data source: IEA. Used with permission.

Accenture analysis. Data source: BAU projections for Indonesia.

Accenture analysis. Data source: IEA. Used with permission.

The expansion in Chinas consumption has

in the coal industry has been driven by a

Fuel Composition to 2030

0.6 tonne of oil

2012 Fuel Composition (MTOE share)

Total Asia Pacific

Figure 3: Imports and Exports by Country of Destination/Origin

Estimated Avg CV: 6,000 kcal/kg

Avg calorific value: 6,177 kcal/kg

Avg calorific value: 5,621 kcal/kg

Avg calorific value: 5,030 kcal/kg

Avg calorific value: 3,783 kcal/kg

Avg calorific value: 5,617 kcal/kg

Europes position as a relatively large coal importer is going to decrease with a

Production is expected to increase slightly to 2020 thereafter, slowing down slightly

Avg calorific value: 5,524 kcal/kg

Looking at the recent historical patterns

Market Supply and Demand Dynamics

low calorific content, has been a preferred

Wood Mackenzie Press Release: Energy, 12th May 2011, Wood

Accenture analysis. Data source: BP Statistical Review 2013, IEA.

Accenture analysis. Data source: IEA. Used with permission.

Market Price Dynamics and Opportunities

Figure 5: Historical Spot FOB Cash Prices

Prices rose considerably over the past decade