19.06.2013 opportunities and challenges for mongolian coking coal in the chinese market, graeme...

OPPORTUNITIES AND CHALLENGES FOR

MONGOLIAN COKING COAL IN THE

CHINESE MARKET

Graeme Hancock

President and Chief Representative, Mongolia

Coaltrans 2013

19 June 2013

ANGLO AMERICAN AT A GLANCEAnglo American is one of the top 5 diversified global mining companies

Global Headquarters: London

Stock Exchange Listings: London and Johannesburg

Over 100,000 full time employees

Gross revenue in 2012: US$28.7 billion

Operating Profit 2012: US$6.2 billion

Our commodity businesses:

• Iron ore and Manganese

• Metallurgical coal (2nd largest producer in Australia and 3rd largest exporter globally)

• Thermal coal (6th largest exporter globally)

• Copper (8th largest producer globally)

• Nickel (8th largest producer globally)

• Niobium

• Phosphates

• Platinum group metals (40% of global production)

• Diamonds (35% of global rough diamond production by value)

3

A GLOBAL PLAYER

Platinum

Diamonds

Copper

Nickel

Iron Ore and Manganese

Thermal Coal

Corporate &

representative offices

Key

Headquarters

Metallurgical Coal

Other Mining and Industrial

Headquartered in London with 12 corporate and representative offices

ANGLO AMERICAN IN MONGOLIA

Anglo American is a new entrant in the Mongolian mining scene

• We opened a representative office in Ulaanbaatar in late 2012

What is the current focus of our activities in Mongolia?

• Establishing the company with appropriate skill sets

• Building knowledge of the local mining industry and business environment

• Building relationships with Government, Business and Civil Society

Stakeholders

• Establishing our brand and values in Mongolia

• Positioning ourselves to take advantage of future opportunities

• Building capacity with our stakeholders

As part of this establishment process we seek to establish Anglo American as

the partner of choice for Mongolia.

• We have already been supporting an Enterprise Development program in

Mongolia as part of our Corporate Social Responsibility agenda.

• We are hosting a Socio-Economic Assessment Toolbox workshop next month

MANAGING SOCIAL ISSUES

Respect human rights

Deliver lasting, positive net benefit

Identify and manage social impacts

Efficiently utilise resources

Obey all laws and regulations

Ensure contractors follow our standards

Set targets, review performance

Develop staff competencies

Engage employees and stakeholders

Report and investigate incidents

HOW DO WE TARGET OUR CSR ACTIONS?ENSURING WE UNDERSTAND THE LOCAL CONTEXT

• Our Socio-Economic Assessment Toolbox

(SEAT) is at the heart of our management of

social performance and developmental

issues

• SEAT is an award-winning manual that

provides extensive guidance on:

– Profiling and engaging with host

communities

– Assessing positive and negative impacts

– Managing relationships with host

communities

– Contributing to community development

• SEAT provides extensive guidance on

understanding our local context, and how we

as a company should respond

• Available at www.angloamerican.com/seat

http://www.angloamerican.com/seat

Our approach to community development is based on

understanding local contexts and leveraging our core business

to create sustainable upliftment. We are piloting research to

enhance our understanding of development impacts.

• Leveraging our $14.8 billion supply chain

(approximately 100 x social investment

budget each year)

• Ensuring that host communities have the

best possible chance of securing the

increasingly skilled jobs on our operations

• Focusing in particular on how local

municipalities can use tax revenues to

provide effective public services

•Offering equity and loans on a commercial

basis to support local entrepreneurs, both

within and outside our supply chain

•Design projects so that mine infrastructure

(water, power, health etc) can be shared use

where practicable, to share costs and

broaden benefits delivered

• Providing grants to welfare-enhancing

initiatives where more market-based

approaches are not possible.

Local Procurement

Local Training and

Recruitment

Governmental

Capacity

Development

Enterprise

Development

Synergies from

Mine Infrastructure

Social Investment

*

*Source: 2012 data from Sustainable Development Report

SUPPORTING LOCAL SOCIO-ECONOMIC DEVELOPMENT

SUPPORTING ENTERPRISE DEVELOPMENT

8

Anglo American enterprise

development (ED) programmes

created and supported almost

65,000 jobs in 2012.

Why Enterprise Development?

• ED creates sustainable

businesses and livelihoods

• ED local suppliers can reduce

mining operating costs by

supplying locally produced

goods and services

• ED is one of the most cost-

effective ways to deliver socio-

economic benefits and secure

our licence to operate

*Source: 2012 data from Anglo American Sustainable Development Report

THE CURRENT MARKET SITUATION FOR

MONGOLIAN COAL

• Mongolian Met Coal Exports to the end of May 2013

• 6.33 million tons of coal, - down 14.4 % yoy,

• Valued at USD448 million, - down 44.1% yoy

Some key questions• Are these Q1 results really reflective of Chinese Market

conditions?

• What other factors are driving the current situation?

• What is the real price of Mongolian HCC in the Chinese Market?

• What are competing countries doing?

• Why are there discounts to Mongolian coal producers ?

• What needs to be done to ensure that Mongolia remains a

competitive and viable producer in the long term?

CHINESE IMPORT VOLUMES

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

Jan

-11

Feb

-11

Mar

-11

Ap

r-1

1

May

-11

Jun

-11

Jul-

11

Au

g-1

1

Sep

-11

Oct

-11

No

v-1

1

De

c-1

1

Jan

-12

Feb

-12

Mar

-12

Ap

r-1

2

May

-12

Jun

-12

Jul-

12

Au

g-1

2

Sep

-12

Oct

-12

No

v-1

2

De

c-1

2

Jan

-13

Feb

-13

Mar

-13

Ap

r-1

3

Mongolian stat dataMongolia (China stat data)Total China Import

Source – Anglo American Mongolia and Beijing, Mongolia NSO

MONGOLIAN MET COAL AS % OF TOTAL

CHINESE MET COAL IMPORTS

Jan

-11

Feb

-11

Mar

-11

Ap

r-1

1

May

-11

Jun

-11

Jul-

11

Au

g-1

1

Sep

-11

Oct

-11

No

v-1

1

De

c-1

1

Jan

-12

Feb

-12

Mar

-12

Ap

r-1

2

May

-12

Jun

-12

Jul-

12

Au

g-1

2

Sep

-12

Oct

-12

No

v-1

2

De

c-1

2

Jan

-13

Feb

-13

Mar

-13

Ap

r-1

3

0%

10%

20%

30%

40%

50%

60%

70%


MET COAL PRICES JAN 2011- MAY 2013

0

50

100

150

200

250

300

350

400

450

Jan

-11

Feb

-11

Mar

-11

Ap

r-1

1

May

-11

Jun

-11

Jul-

11

Au

g-1

1

Sep

-11

Oct

-11

No

v-1

1

De

c-1

1

Jan

-12

Feb

-12

Mar

-12

Ap

r-1

2

May

-12

Jun

-12

Jul-

12

Au

g-1

2

Sep

-12

Oct

-12

No

v-1

2

De

c-1

2

Jan

-13

Feb

-13

Mar

-13

Ap

r-1

3

May

-13

FOB AustraliaPeak Downs

CFR ChinaPeak Downs

FOB Aus HCC 64

CFR China HCC 64


0

50

100

150

200

250

300

350

400

450

23

/08

/20

10

23

/09

/20

10

23

/10

/20

10

23

/11

/20

10

23

/12

/20

10

23

/01

/20

11

23

/02

/20

11

23

/03

/20

11

23

/04

/20

11

23

/05

/20

11

23

/06

/20

11

23

/07

/20

11

23

/08

/20

11

23

/09

/20

11

23

/10

/20

11

23

/11

/20

11

23

/12

/20

11

23

/01

/20

12

23

/02

/20

12

23

/03

/20

12

23

/04

/20

12

23

/05

/20

12

23

/06

/20

12

23

/07

/20

12

23

/08

/20

12

23

/09

/20

12

23

/10

/20

12

23

/11

/20

12

23

/12

/20

12

23

/01

/20

13

23

/02

/20

13

23

/03

/20

13

23

/04

/20

13

23

/05

/20

13

FOB Aus HCC 64

CFR China HCC 64


CFR ChinaPeak Downs

Mongolia Met coal

MONGOLIAN MET COAL PRICES (EX WAREHOUSE GANQIMAODU)

JAN 2012- MAY 2013

Source – Anglo American Mongolia and Beijing, SXCoal

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

Jan

-11

Feb

-11

Mar

-11

Ap

r-1

1

May

-11

Jun

-11

Jul-

11

Au

g-1

1

Sep

-11

Oct

-11

No

v-1

1

De

c-1

1

Jan

-12

Feb

-12

Mar

-12

Ap

r-1

2

May

-12

Jun

-12

Jul-

12

Au

g-1

2

Sep

-12

Oct

-12

No

v-1

2

De

c-1

2

Jan

-13

Feb

-13

Mar

-13

Ap

r-1

3

0%

10%

20%

30%

40%

50%

60%

70%

0

100

200

300

400

500


CFR ChinaPeak Downs

FOB Aus HCC 64 CFR China HCC 64

Trend in Chinese Imports

ETT/Chalcodispute ?

Queensland Floods


0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

Jan

-11

Feb

-11

Mar

-11

Ap

r-1

1

May

-11

Jun

-11

Jul-

11

Au

g-1

1

Sep

-11

Oct

-11

No

v-1

1

De

c-1

1

Jan

-12

Feb

-12

Mar

-12

Ap

r-1

2

May

-12

Jun

-12

Jul-

12

Au

g-1

2

Sep

-12

Oct

-12

No

v-1

2

De

c-1

2

Jan

-13

Feb

-13

Mar

-13

Ap

r-1

3

Total China ImportsUSAMongoliaCanadaAustraliaMozambiqueRussiaIndonesia

WHAT ARE OTHER SUPPLIERS DOING?


0.0

50.0

100.0

150.0

200.0

250.0

300.0

10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Generalised Chinese Domestic Producer Cost Curve for HCC USD/t CFR Bohai Sea

Current CFR Bohai Sea port coal price US$138

WHAT CAN WE EXPECT AS A SUPPLY RESPONSE

FROM CHINESE DOMESTIC PRODUCERS?

Source – Anglo American Mongolia and Beijing, SXCoal

WHY DO MONGOLIAN PRODUCERS RECEIVE LOW PRICES?

• Most Mongolian coal crosses the border raw (unwashed)

• Traders buy raw coal and wash it facing a loss of tonnage on washery yield

• The dirtier the coal the lower the yield and the lower the price to the producer

• Inconsistent quality

• Because coal is raw, quality varies and it appears that traders are quoting

based on the worst case quality received

• Seams are mixed, or roof and floor material included in exports reducing

quality and consistency

• Inconsistent Supply

• Irregular tonnages means that traders cannot enter into long term supply

agreements and must trade spot often with lower price outcomes

• Re-handling costs

• Currently congested transport systems with re-handle at several points along

the supply chain, each adding significant costs inside China thereby reducing

trader offer prices. The Chinese Government is working hard to reduce rail

congestion which is expected to decline over the next 5 years

SOME COSTS ARE ALSO HIGH

• High cost border crossings – both sides of the border face constraints,

but in particular on the Mongolian side of the border

• Reference price setting for Royalty calculation

• Chinese pricing power – producers are required to sell at the border to

either traders of final off-takers

• 17% VAT and border charges

Current border crossing logistics

Urgently need rail to remain competitive

POSSIBLE SOLUTIONS

• Most of the factors mentioned are under the control of the coal producer

or the Government

• Inconsistent quality – raw coal

• A move to washed coal production is essential to ensure consistent quality -

to reduce transportation costs and trader discounting

• Re-handling costs

• An efficient standard gauge rail system is required to ensure single handle

and no border re-handle as well as to reduce rehandling inside China

• Border crossings need upgrading for rail transit and 24 hour per day

operations

• Royalties need to reflect actual contract prices otherwise producers can

be taxed out of business

• Chinese pricing power – without standard gauge rail Chinese off-takers

will retain their pricing power. Bonded cargo carriage through China is

needed in order to access international seaborne prices – this is not

possible without standard gauge rail on Mongolian territory

CONCLUSIONS

• The market for Mongolian washed hard coking coal remains quite strong

and receives a premium price in the China Market

• Consistent quality, consistent supply and stable relationships with off-

takers are necessary to enable producers to achieve better pricing

• In order to enhance the competitiveness of the Mongolian coking coal

industry a number of issues need to be resolved:

• Progress on improving bulk cargo transportation (standard gauge rail) and

border crossing logistics

• Reducing re-handling by improving transportation logistics

• Ensuring that Mongolian coal is subject to a fair and reasonable royalty

regime

• Mongolia has a comparative advantage in terms of proximity to the

Chinese market. What is needed to capitalize on this is for both the

industry and the Government to work together to improve the

competitiveness of the Mongolian Coal sector, otherwise Mongolia risks

losing its market share.

ANGLO AMERICAN

THE PARTNER OF CHOICE FOR MONGOLIA

Thank you for your attention