India Rising

India to 2020 Tiger, Tiger Burning Bright

Dr Neil J. Bristow
Presentation at Salvas Sydney Breakfast Sydney, 7th June 2011
H & W Worldwide Consulting

neil.j.bristow@hwworldwideconsult.com +61240286268

Some Interesting Facts on India

Until 1896, India was the only source for diamonds to the world. India was one of the richest countries till the time of British in the early 17th Century. India is among the top 5 producers in the world for food grains, pulses, poultry and first for milk. Over the last 15 years, India has been the second fastest growing country in the world after China, averaging above 6% growth per year. The number system was invented by India. Aryabhatta was the scientist who invented the digit zero. Indian railways is the largest employer in the world, employing over 1 million people. Had just 3 shopping malls in 2001, India had 100 in 2005, 345 by 2007 and ~420 today. Christopher Columbus was attracted by India's wealth and was looking for route to India when he discovered America by mistake.

Plan of Presentation
1. Australia and India the Past Relationship 2. India - Drivers for Accelerated Growth 3. The Future from a Coal Perspective 4. Summary and Implications

H & W Worldwide Consulting

Key Takeaways
Australia and India have a strong long term relationship in coal Australia is well endowed with a suite of met coals ideal for India current and future needs Australia is a proven reliable, long term supplier......unlike potential new suppliers If Indias steel and power growth takes off, Australia must be prepared to meet strong demand growth for all coals Emerging India investment in Australia is a sign of things to come and of a beneficial future relationship

Plan of Presentation
1. Australia and India the Past Relationship 2. India - Drivers for Accelerated Growth 3. The Future from a Coal Perspective 4. Summary and Implications

H & W Worldwide Consulting

Background to the Relationship

Why does India need Australian coal?
India has large reserves of its own coking coal
Some coking properties OK, but high ash content

Large iron ore reserves why not DR?

Limited natural gas, DR small scale relatively inefficient

Other importers why Australia?

Australia largest exporter and relatively close

But why does India need HCC rather than WCC?

To carry domestic and other cheaper coals To increase coke quality as industry develops larger scale BF, steel plants

But why does India not buy large volumes of thermal coal?
Major use of Indonesian thermal coal, particularly sub bituminous Going forward will need significantly more coal - Australian

Australia and India Import History

India has become an increasingly important part of Australias export market; share rising from below 6% to 10% in 2010.
300 250 200 150 100 50 0 India Australia total %

India's share of Australian exports

16% 14% 12%

Million tonnes

10% 8% 6% 4% 2% 0%

Source: Australian Customs

Australia and India Import History - Hard Coking Coal

Indias importance in HCC is more pronounced having doubled from a 1999 low to around 25%, and still increasing YTD 2011 - over 28% at a growth rate of ~10.5%pa
120 100 80
million tonnes

India's share of HCC exports

30% 25% 20% 15%

60 40 20 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011an

India Australia HCC %

10% 5% 0%

Source: Australian Customs

Australia and India Import History Semi Soft Coking and PCI Coal
India is also gaining in importance in other met coals from zero to around 12% , at a growth rate of ~20%pa! Will SSCC growth continue or move to HCC? What abut PCI?
60 50 40 30 6% 20 10 0 India Australia SSCC/PCI 4% 2% 0%

India's share of SSCC and PCI exports

14% 12% 10% 8%

Source: Australian Customs

million tonnes

Australia and India Import History Total Metallurgical Coal

Indias importance in Australian met coal exports has grown significantly and accounts for >20% of the total, and no 2 position. Potentially surpassing Japan in HCC imports in 2011.
180 160 140
million tonnes

India's Share of Total Met Coal Exports

25%

20%

120 100 80 60 40 20 0 0% India Australia Met % 5% 15%

10%

Source: Australian Customs

Australia and India Import History

Total Metallurgical Coal
India was essentially unaffected by the Global Financial Crisis imported coal demand continued its robust growth.
120 100
million tonnes

Comparison of India and Japan HCC

40% 35% 30%

80 60 40 20 0

25% 20% 15% 10% 5% 0%

India
Source: Australian Customs

Japan

Australia HCC

India %

Japan %

Australia and India Import History A Perspective

Australia is the dominant supplier of coking coal to India, with over 83% of the market; will it be in the future? Indian Coking Coal Imports by Month
4,500 4,000
Thousands Tonnes

3,500 3,000 2,500 2,000 1,500 1,000 500 -

Australia NA
Source: Interocean, Salva

China USA

Indonesia Vietnam

New Zealand Singapore

Russia Canada

South Africa

Summary The Past

India has gained in importance to Australia Major HCC importer strong rise to no 2 Growth rates suggest India soon to overtake Japan in HCC imports No effect of the GFC - Growth continued throughout the economic downturn Thermal coal buying = Indonesian

Plan of Presentation
1. Australia and India the Past Relationship 2. India - Drivers for Accelerated Growth 3. The Future from a Coal Perspective 4. Summary and Implications

H & W Worldwide Consulting

Global Population Changes

Population is a major driver for increased power demand; India will surpass China by 2030 to be the most populous country, sustaining strong growth over the next 3 decades.

Total Population Trend to 2050

1800 1600 1400
Population (Million )

India

1200 1000 800 600 400 200 0 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

China

Source : UN Population Prospects, 2008 revision

H & W Worldwide Consulting

Population Demographics Present

The different shapes of the population pyramid between China and India will lead to a sustained longer growth in power demand for India due to its significantly younger population. The population pyramid China 2010 The population pyramid India 2010

Source : UN Population Prospects, 2008 revision

H & W Worldwide Consulting

Population demographics Future

The shapes of the population pyramid will remain very different as China becomes an old country and India remains young with ~60% below 30 years of age. The population pyramid China 2030 The population pyramid India 2030

Source : UN Population Prospects, 2008 revision

H & W Worldwide Consulting

China has Overtaken India in Urbanisation

India at its formation was more urbanised than China, the rapid acceleration in growth in the late 1990s saw China move very significant people from the rural to urban areas, forming the mega cities.

Urbanization (%)
80 70 60 50 40 30 20 10 0 India China

India will Continue Strong Urbanisation

India will urbanise a further 215 million people by 2025. Although China will exceed this total the effect will see India adopting some of the key Chinese concepts i.e. Constructing taller buildings which will boost steel demand.

Source : McKinsey, BHPBilliton presentation

India will grow at a faster rate than China

In the next 10 years Chinese economic growth will moderate and slow, as India is forecast to pick up growth and over take China in the next couple of years.
14,000

Forecasts

14

12,000

12

10,000 GDP US$ trillions

10 GDP growth rate %

8,000

6,000

4,000 2,000

4 2

0 2005 China GDP % 2008 India GDP % 2011 2014 China GDP (US$b) 2017 2020 India GDP (US$b)

GDP - Comparisons and Differences

The GDP structures of India and China are very different: India is far more focused on services while China is focused on manufacturing. Agriculture trends are similar although the importance to India of the agriculture sector is far higher

Source : World Bank

GDP - The Importance of Services

India has a vibrant active service sector highly competitive in the global market place, it is yet to develop a strong manufacturing sector recent signs show that this is underway.
Composition of GDP in India (%)
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1961 1964 1967 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 Agriculture Industry Services

Composition of GDP in China (%)

Agriculture

Industry

Services

Source : World Bank

Drivers of Indias Economy

High savings rates Availability of low cost, skilled and semi skilled labour Technology supporting the Service sector Favourable demographics Trade opening Manufacturing
Growth in parts manufacture Emerging centre for small car development and manufacture Plans for intelligent engineering products Major opportunities for food processing and manufacturing

Is India Following China with a lag of ~15 years?

India has seen a pick up in FDI. Could India become the major centre replacing China by 2020? Major boost to steel and power demand and presenting major growth in coal requirements.

120,000 100,000 China 80,000 60,000 40,000 20,000 -

FDI Flows (US$M)

India

Is India that different? No, not really.

India is showing strong signs of following the conventional development route

Exports trends to GDP continue to climb Exports from special economic zones are following China model Signs India is set for manufacturing and industrial take off in next 10 years

Industrialisation
Comparisons of India with other Asian countries India is showing strong signs of following the industrialisation route
Trade Surplus in manufactured goods -%GDP (Heavy light) (4.4%, 2%) (0.6%, 9.6%) (-2%, 7.4%) (0.2%, -0.2%)

Decade Averages Japan 1960s Korea 1980s China 2000s India 2000s

Trade Integration (Exp + Imp/GDP) 18 60 54 30

Per capita oil consumption 1.8 0.9 0.22 0.1

Per capital steel consumption (t) 0.4 0.27 0.22 0.03

Per capita cement consumption (t) 0.35 0.5 0.69 0.11

Trends to lower oil consumption Trends to lower steel consumption (thinner, higher quality steel) Trends to rising cement consumption (still in a greenhouse world?)

Growth Profile

India

Japan

Comparison Growth Profiles

Indians growth has been accelerating
Average real GDP Growth 1960s 1970s 1980s 1990s 2000s 2010s est.

Japan 10.1 4.4 4.6 1.1 0.6

Taiwan 10 10 8 6.5 2.7

Korea

China 5

India 4 2.9 5.6 5.7 7.3 9

7.3 8.7 6.2 3.8 lower

6.3 9.4 10.5 9.8 8

Growth trends sustain high rates for long periods China potentially sustain longer due to magnitude of its population If PPP rates are considered rates are even higher

Consider Automotive Sector

India is already moving in 4 wheels Leading development of small peoples car e.g. Nano Led acquisition to build competitive position ahead of China

Per Capita ConsumptionWhere is the Potential?

History suggests >700kg per capita consumption for many years. This would equate to production of >1bt from ~70Mt currently.
Per capita consumption of steel in selected countries
900 800 700 600 kg/person 500 400 300 200 100 0 1900 1905 1910 1915 1920 1925 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

India

USA

Japan

France

Germany

China

India

Brazil

Source: MySteel, Arcelor Mittal, Macquarie Research

In highly populated countries, this could be higher!

With pressure on land, countries with high population density could exceed this level.

Source: BHPBilliton, Global Steel 2010, Goa

Indian Steel Issues

Production growth
Major problems with land and approvals, POSCO Inability to grow has seen India move from exporter to importer Highly fragmented industry with large DR production and very large numbers of small induction furnaces

Technology
Higher quality steels are likely to require more efficient BF based steelmaking Limited PCI, many BFs dont have facilities Lack of high quality met coal leading to HRCO

Raw materials
Ports and rail infrastructure required for movement of raw materials Will iron ore continue to be exported? Who will meet the requirements for met coal?

Indias Steel Industry is Different!

C a te g o r y
M A IN P R O D U C E R S
Ca pa c it y 3 M tp a m i n . S E CO N D A R Y P R O DU C E R S (L a r ge a n d m e d ium s c al e pr o d u c ti on ) SM AL L PR ODU CER S Ca pa c it y 0 .2 M t p a m a x .

P la n ts SA IL P la n ts , R I N L a n d T a ta S te e l Lt d .
A ll IS P s b a s e d o n B F , h en c e r e qu ir e c ok e .

E ss a r S t e e l, Is p a t , J SW , JS P L , B h u s ha n , e t c .
U s e va r ie t y o f p r o c e s se s . In p ut s in c lu de s c ra p , D R I , s p o n g e i ro n , ho t m et al ( B F s /M B F s / C o re x ) .

Sp r e a d a ll o ve r In dia .
U s e ve r y s m a ll E A F s / IF s . I n p u ts a r e a ll s o lid m e ta llic s ; n o h o t m e ta l.

Wide range of technology mix India has one of everything Data difficulty India steel capacity/production likely to be under reported Major sponge iron sector due to local lump ores and poor quality coal Industry seeking investment off shore unlike China (RM basis) Major capacity under construction mainly brownfield and greenfield difficult (ArcelorMittal/POSCO/Tata Steel)

Indian Steel Outlook to 2025

Steel production will grow rapidly to 2025 and beyond. Demand growth will most likely see increased BF/BOF steelmaking to feed emerging manufacturing sector.
300

Steel and Pig Iron forecasts

Crude Steel Pig iron Crude steel 10% Pig Iron 10%

250 200
Million tonnes

150

100 50 0

Source: World Steel Association, H&W Worldwide Consulting

Plan of Presentation
1. Australia and India the Past Relationship 2. India - Drivers for Accelerated Growth 3. The Future from a Coal Perspective 4. Summary and Implications

H & W Worldwide Consulting

Total Met Coal Consumption

Based on pig iron forecasts India will overtake Japan as the largest met coal importer around 2015-6, assuming new BF and coke plants come on as forecast.
160 140 120
million tonnes

Met coal consumption

Other PCI coal Coking coal Domestic

100 80 60 40 20 0

Imports

Source: Interocean, Salva, H&W Worldwide Consulting

Power Consumption Forecasts

Changing the parameters leads to major growth in industrial use and residential demand, with the largest percentage change in commercial consumption. Base case
Captive Demand Other Commercial Industrial losses Rail Agricultural Residential
Power demand (GW)

4500000 4000000 3500000

Power Demand (GW)

4500000 4000000 3500000 3000000 2500000 2000000 1500000 1000000 500000 0

High case
Captive Demand Other Commercial Industrial losses Rail Agricultural Residential

3000000 2500000 2000000 1500000 1000000 500000 0

2005

2010

2015

2020

2025

2005

2010

2015

2020

2025

Source : IEA, Macquarie, H&W Worldwide Consulting

Power Generation by Fuel Type

Coal is likely to remain the major fuel for power generation and is likely to gain market share in the high case at the expense of oil, diesel and hydro, reaching ~74% of generation. Power production (base case) Power production (high case)
4,000,000 3,500,000

Power Generated (GW)

Power generated (GW)

3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0

RES Nuclear Gas Diesel Coal Hydro

4,000,000

RES
3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0

Nuclear Gas Diesel Coal Hydro

Source : IEA, Macquarie, H&W Worldwide Consulting

India: Big Plans for Coal-fired Power Generation

Coal is likely to remain the major fuel for power generation, thermal remains the major source of power generation in future plans.
MW 25,000 20,000 15,000 10,000 5,000 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 Hydro Coastal thermal Nuclear Other thermal 11th and 12th plan power projects

Source: NEC, Macquarie Research, July 2011

History of overpromising, but even conservative estimates are huge

However, the track record is not good, unlikely to meet targets as a widening gap between planned and actually built. This situation is unlikely to improve greatly in the current and next plans. India will remain very power short!
MW capacity addition 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 5156 5661 6166 6974 7479 8085 8590 9297 9702 `0207 India 5 year plan - electricity expansion Proposed Achieved
160 140 120 100 80 60 40 20 2008 Mt

Indian Import Demand Major Coastal IPP UMPP Non-specific imports

2009

2010F 2011F 2012F 2013F 2014F 2015F

Source: GTIS, Macquarie Research, April 2011

Thermal Coal Imports

Coal imports are predicted to grow strongly with India potentially surpassing China by 2013 and rapidly becoming the largest thermal coal importing country. Indian thermal coal import forecasts
350 300 250 200 150 100 50 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2025

McCloskey Macquarie HWWC

Source : McCloskey, Macquarie Research, H&W Worldwide Consulting

Million tonnes

Steel Forecasts - Higher Cases

Consider some sample growth rates
450 400 350
Million tonnes

Indian steel Growth Forecasts

10%pa 15%pa 12%pa 20%pa

300 250 200 150 100 50 0 2006 2008 2010 2012 2014 2016 2018 2020

Is 20% a fantasy China exceeded this for a period? Is 10% or 12% too conservative if Indias growth accelerates?

Drilling Down into Steel Production

Consider some sample growth rates and steel production at 2020 2010 8%pa 10%pa 12%pa 15%pa
66.8 66.8 66.8 66.8

2012
78 81 84 88

2015
98 108 118 134

2020
144 173 207 270

2025
212 279 366 544

66.8 96 166 414 1029 20%pa India official forecasts have been raised from 110Mt by 2020 to ~180Mt Groundswell in industry that all too conservative Major new investments underway SAIL seeking to double and then reach 60Mtpa by 2020 Potential 52Mt capacity in next 3-4 years

Recognition that India wont wait expand steel or imports-demand is there Even at 20%pa steel consumption per capita is ~320kg/thm at 2020

Plan of Presentation
1. Australia and India the Past Relationship 2. India - Drivers for Accelerated Growth 3. The Future from a Coal Perspective 4. Summary and Implications

H & W Worldwide Consulting

Implications of Major Steel Production Growth

What would Indias raw materials outlook be at 2020 on previous scenarios?
2020 Steel increase 8%pa 10%pa 12%pa 15%pa 20%pa
Assumptions: Pig Iron As growth rates increase BF/BOF increasingly preferred at source of production due to economies of scale, larger BF size and limitations on DR route due to NG and energy costs. Increase in PCI rates, with faster acceleration in high steel growth case, rates to reach country averages of 100kg/thm @10%pa to 120kg/thm @20%pa rate. Increased use of SSCC likely at higher demand due to magnitude of volumes and growth in HRCO. Iron ores rats linked to hot metal growth with declining grades likely as growth rates rise due to higher more rapid demand boosting speed to market and likely increased use of lower grade materials.

77 106 141 203 347

2020 Pig Iron Increase in Iron Ore Increase in Met Coal Production Increase Demand Demand 76 156 50 99 131 191 315 191 239 328 515 66 87 126 208

Met Coal

Iron Ore

Implications for Met Coal

Metallurgical coal
Demand increase (Mtpa)

8%pa 50

10%pa 66

12%pa 87

15%pa 126

20%pa 208

8%pa will see ~1.25 times increase in imports 10%pa will see import demand growth similar to total Japanese imports 20%pa increase is equal to current seaborne market for all coking coal Major increase in all forms of met coal,
PCI = 2.1x today market HCC = more in demand at higher rates due to rising productivity ~doubling market

Major issue of infrastructure ports and rail at these volumes

Implications for Iron Ore

Iron Ore
Demand increase (Mtpa)

8%pa 156

10%pa 191

12%pa 239

15%pa 328

20%pa 515

High growth scenario = ~double current domestic production Potential for India to become an iron ore importer,
Rio sale sign of things to come!!

8% pa will effectively cease all exports without industry expansion Likely to see India play ever decreasing role in seaborne trade Continued tension between Steel and Mining industries

Summarising Factors
All assume very significant movement of raw materials
can the infrastructure be built ? Major rail, port and road building challenge ahead

High growth scenarios look impossible but we always miss the upside
China boom, pricing, freight etc

Yes, but its India.....

India is moving, changing......but is NOT China!!

Major issue, where are raw materials going to come from?

And of course China is still here!! Wanting the same coal and iron ore?

India in 2020
Could be passing Germany for no 4 spot in the world economy Could have a vibrant manufacturing sector focusing on light cars, motorcycles, smart manufacturing and light engineering Could be the no 1 global software and programme developer Could be the no 1 met coal importer ahead of China Could be the no 1 thermal coal importer ahead of China Could be the 2nd most important iron ore importer after China Could surpass Hollywood in film exports IPL could become more successful as the English Premier League Could have turned Cricket into a truly world sport

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Summary and Conclusions

This will be Indias decade India is following the conventional Asian development growth path Economic acceleration and take-off expected well before end of decade Growth rates will surpass China by mid decade Major growth in steel and power production with corresponding impact on raw materials India likely to be no 1 global coal importer Could be importing iron ore before 2020