Citigroup Commodity Heap - Coal: The Infrastructure Impact

Supply Restrained — Coal is the world's fastest growing source of energy. Yet seaborne coal trade will be restrained by continuing port and rail constraints on the supply side.

Further Australian Port Problems — NCIG third coal terminal (30mtpa capacity) at Newcastle is scheduled for a planned start-up in March 2010, yet faces delays due to the requirement to dredge harmful materials out of the channel. Further issues remain unresolved in regard to the capacity balancing system. Abbot Point faces delays to expansions plans from 21mtpa to 25mtpa due to the derailment of a ship loader and flooding earlier this year.

Australian Rail Rescheduled — The 31mtpa, $A1bn Northern Missing Link Railway in QLD had been expected to be completed by 2010. However the project is not yet approved and hence unlikely to be completed before 2012. The 30mtpa $A1.1bn Surat Basin Railway Project (Southern Missing Link) is still under feasibility study due for decision in 2009. QLD's privatisation program (QLD rail & Ports) could further put expansions at risk.

South African Port & Rail Setback — RBCT Phase V expansion from 71mtpa to 91mtpa is running behind schedule and has been delayed until Q4 due to equipment issues. Currently the port is operating at ~60mpta below its capacity of 71mtpa due to constraints and derailments on the rail network. It is likely rail will continue to be the constraint after port expansion.

Russian Exports Restricted — Russia's coal reserves are on average ~5000km from ports as such freight costs are high. Port expansions are planned for increased exports (25mpta additional capacity by 2015 for Asia). However rail will likely be the constraints given poor condition and lack of rail stock.

Indonesian Expansions Impacted — Increased utilization of low cal coals is a risk to thermal coal. However Indonesian domestic demand for low cal coals should increase in 2010 as several new power stations are commissioned. A large scale development of coking coal at Maruwai is now less likely given BHPs decision to halt development at Haju (the first stage of Maruwai). We believe infrastructure was the likely issue.

Price Forecasts — We continue to see some downside risks in the short term as Chinese imports of thermal, PCI and coking coal ease in H209. By 2011 we expect demand to normalise and supply side constraints to re-assert themselves. We retain our forecasts of rollover at US$70/t for thermal and US$129/t for coking in JFY10.