Flows of Thermal Coal into AsiaEnsuring Stable Supplies for Japan

Hiroyuki Tsurugi

Managing OfficerChief Operating Officer, Energy Business Unit IMitsui & Co., Ltd.

1. Introducing Mitsui & Co. – Energy Segment Business Fields and Activities– Upstream/Midstream Assets (Natural Gas/LNG, Oil, Coal)

2. Characteristics of Coal Compared with Oil and Natural Gas3. Importing Thermal Coal into Asia

– Seaborne Trade Flows of Thermal Coal into Asia (2013)– World Imports of Thermal Coal

4. Japan’s Imports of Thermal Coal– Trends in Japan’s Imports of Thermal Coal– Outlook for Japan as an Importer of Thermal Coal

5. Initiatives by Mitsui & Co.– Ensuring Stable Supplies of Thermal Coal to Japanese

Users– Callide Oxyfuel Project in Australia (CCS)– Wood Biomass Initiatives

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Content of Today’s Presentation

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Energy Segment Business Fields and Activities

Business Activities

Coal

Oil & Gas Upstream (E&P)

Oil Trading & Marketing

Nuclear Fuel

Thermal Coal Marketing and Trading

Exploration, Development, and Production of Oiland Natural Gas

Importing/Exporting and Offshore Trading of Crude Oil and Petroleum ProductsOil Refineries, Oil/LPG sales in Japan

Uranium Mine Development, Nuclear Fuel Cycle Business

Business Fields

LNG Maintenance and Expansion of Existing LNG Projects, Commercialization of Natural Gas Resources

Environment,

Next-generation Energy Bio fuel, Emissions Trading, Hydrogen Energy, etc.

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Upstream/Midstream Assets (Natural Gas/LNG, Oil, Coal)

Kupe

Tangguh LNG

Casino/Henry/Netherby

Meridian CBM

Marcellus Shale

Tuna

Merangin 1

Qatar LNG

Oman Block3, 4, 9, 27/NOGJV

Mozambique Area1Enfield/Vincent/Laverda

Sakhalin‐Ⅱ

NWS LNG

Wanaea/Cossack

Eagle Ford shale

Browse LNG

Thai/L10/43、L1Jan. 43

Alba Britannia

Norway PL475/PL475D

Myanmar/ M3, AD‐9, AD‐11, MD‐5

Tempa Rossa

Cameron LNGAbu Dhabi LNG

Equatorial Guinea LNG

Oman LNG

Gulf of Thailand

Vietnam/Block52/97

Thai/Block 14A. 15A. 16A

Thai/Block B12/27

Thai/Block G4/43Thai/Block B8/32&9A

Cambodia Block A

Thai/Block 10. 11. 12. 13. 10A. 11A.G4/48

Thai/Block G7/50. G8/50

Vietnam/Block B&48/95■ Natural gas, LNG◆ Oil◇ Coal

As of end of June 2015

South Walker Creek

Moranbah North

Kestrel

Bengalla

Poitrel

Dawson

Capcoal

Drayton

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Characteristics of Coal Compared with Oil and Natural Gas

Coal100 Coal100Coal 100

Oil 80Oil 68 Oil 71

Natural gas57 Natural gas

0

Natural gas20-37

CO2(Carbon dioxide) Nox(Nitrogen oxides)Sox(Sulfur oxides)

Environmental Burdens of Fossil Fuel

Source: Energy White Paper 2010

CIF Prices of Main Energy Imports

Source: JOGMEC

1. Price competitiveness

2. Substantial reserves; Worldwide distribution

3. Heavy environmental burden

53 years55 years

113 years

99 years

1,687.9 bil. bbl.

186 trillion m3

891.5 bil. tons

5.9 mil. tons

Oil*1(End of 2013)

Natural gas*1

(End of 2013)Coal*1

(End of 2013)

Source: Federation of Electric Power Companies, GraphicalFlip-chart of Nuclear & Energy Related Topics

Reserve-to-Production Ratio by Fuel Type

Uranium*2

(Jan. 2013)

Thermal coal

Crude

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Seaborne Trade Flows of Thermal Coal into Asia (2013)

Australia 204

Russia Russia 49

Canada5

Canada5

U.S.A. U.S.A. 9

South Africa South Africa 48

Asia 754Asia 754 China 250

India 142

Japan 42

ColombiaColombia6

Others48

Source: IEA: Coal Information 2014

Unit: Million tons

Indonesia 385

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World Imports of Thermal Coal

• World seaborne trade in thermal coal will increase steadily until 2025. From 2020 onwards, over 80% will flow into Asia.

• Asia, especially India and China, is the main driver of demand. • Because of the downturn in China’s imports, India could overtake China to become

the world’s biggest importer of thermal coal this year.

Source: Compiled from AME Strategic Market Study 2015 Q2

(Million tons)

Others

Other Asia

India

China

Japan

Thermal Coal Imports (Actual and Forecasts)

The Drop in China’s Thermal Coal Imports

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0

50

100

150

200

250

300

2010 2011 2012 2013 2014 2015/6

Chinaʼs Imports of Thermal Coal(Million tons)

• Imports peaked in 2013 and began to decline. • The decline is mainly the result of reduced imports of low-grade coal

due to Chinese environmental regulations.

Source: Compiled by Mitsui & Co. using data from the General Administration of Customs, PRC

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Trends in Japan’s Imports of Thermal Coal

・Australia and Indonesia alone account for over 80%.

・Imports from Australia are rising, but those from Indonesia are rather static or declining 

marginally.

Source: Customs clearance data

Australia Indonesia China Russia Canada Others

Unit: Million tons

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Sluggish Thermal Coal Market

• Thermal coal prices are in a downward trend due to an oversupply caused by the demand slowdown, etc. in China since 2011.

• Sluggish market has led to downsizing of mining operations, mine closures and the postponement of development plans, resulting in uncertainty about medium/long-term supplies.

Jan. 2007 Jan. 2008 Jan. 2009 Jan. 2010 Jan. 2011 Jan. 2012 Jan. 2013 Jan. 2014 Jan. 2015

Thermal Coal Price Indices

While Japan’s share will be relatively lower, it will remain a significant and stable source of demand.

There will be no major change in the present pattern, with Japan importing high-grade coal, and China, India, and other Asian countries importing medium- and low-grade coal.

There will be a gradual change in purchasing coal, shifting from high-grade Australian bituminous coal to medium-grade coal, including sub-bituminous coal, as well as spec coal that meets certain quality requirements.

There will be a shift from long-term contracts, which traditionally dominated, to short-term or spot contracts, and from contracts based on fixed prices to indexed prices-based ones.

The development of new supply sources will lead to the diversification of sources.

There will be further tightening of environmental regulations imposed on coal-fired thermal power plants.

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Outlook for Japan as an Importer of Thermal Coal

Calorific value (kcal/kg GAR)

Grade (Indicative) Low Medium High

Japan

China

India

Thermal Coal Grades Imported by Japan, China, and India

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• Medium/low-grade Indonesian coal: Demand highest in Asian emerging countries Unlike Japan, Asian emerging countries tend to prefer low-CV coal. The bulk of this coal is

sourced from Indonesia because of freight advantages. • Medium-grade Australian coal: Certain level of demand in Asia

There has also been certain level of demand for Australian medium-grade coal in Asian countries. Due to sluggish coal market prices in Australia and a downturn in maritime freight charges, demand for medium-grade Australian of around 5,000-6,000 kcal/kg GAR has increased recently.

Preferred grade ranges of importing countries (Source: Interviews by Mitsui & Co)

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Mitsui aims to secure coal resources and ensure stablesupplies through initiatives integrating the above three aspects.

Coalmine Investment and Development

Logistics Environmental Countermeasures

・ Participation for acquiring concession to own quality assets・ Building and reinforcement of relationships with emerging

countries and suppliers in those countries・ Utilization of professional mining engineer; proactive

participation in decision-makingProactively secure stable supply sources

・ Development of new supply sources・ Reinforcement of logistics and financing functions

Enhancement of trading company functions to meet needs

・ Reduction of environmental burdens (e.g., curbing of CO2 emissions)

・ Renewable energy initiativesImprovement of coal utilization environment based on today’s needs and expectations

Ensuring Stable Supplies of Thermal Coal to Japanese Users

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Callide Oxyfuel Project in Australia (CCS)

• This public-private partnership* project in Australia is the world’s first demonstration of oxyfuelcombustion system in a commercial coal-fired power plant. CO2 is captured from the process, compressed and injected underground. The total budget is approx. A$245 million.

* Participants: Mitsui & Co., J-Power, IHI, CS Energy, ACALET, Glencore, SchlumbergerThe project has received financial support from the Japanese government (Ministry of Economy, Trade and Industry), the Australian Federal Government, the Queensland Government, while technical support has been provided by the Japan Coal Energy Center (JCOAL).

• Engineering and commercialization knowledge obtained through the demonstration is used in feasibility studies for achieving commercial operation of coal-fired power plants with near-zero emissions of CO2 and other atmospheric pollutants, such as SOx, NOx and mercury.

・March 2008: J/V agreement signed・June 2012: Start-up of oxyfuel combustion demonstration at the Callide-A coal-fired power plant (approx. 400km NW of Brisbane, 30MW)・February 2015: Achievement of 10,000-hour oxyfuel operating target

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The use of this resource is expanding under the feed-in tariff (FIT) system. The priority now is to create a system to ensure stable supplies from overseas.

Wood Biomass Initiatives

Wood pellets

Palm kernel shells (PKS)

Wood chips0

1000

2000

3000

4000

5000

6000

7000

8000

2013 Low Medium High Low Medium High Low Medium High

Mostrecent

2020 2030 2050

Oceanic

Geothermal

Wind

Solar

Biomass

Large-scalehydroSmall/mediumhydro

Source: Ministry of Environment (100 mil. KW）