Management Board Report on the activity of the JSW S.A. Capital Group for 2012

2. Description of the activity of the Capital Group

2.1. Description of the industry and competition

The core business of the Capital Group includes the production and sales of:

• coking coal (hard and semi-soft) and steam coal,
• coke and coal derivatives.

Due to the intended use of the Group’s products:

• coking coal – coke production,
• steam coal – production of electricity and heat,
• coke – component of the feed for steel production in steel mills, foundries, the chemical industry, the non-ferrous metal industry, production of insulation materials, etc.,

there is a direct relationship between the Group’s activity and supply and demand in the coal, coke, steel and energy markets.

In 2012, the Group was the only domestic producer of type 35 (hard) coking coal and a major producer of type 34 (semi-soft) coal. In Poland, type 34 coking coal is also produced by Kompanię Węglową S.A. The Group’s share in the total domestic production of coking coal is 80% (66% in type 35 coking coal and 14% in type 34 coal) and approx. 6% in the domestic production of steam coal1. For many years, the largest producer and consumer of coal has been China (more than 3.5 billion tons). The world’s largest coal producers ranked below China are the United States, India, Australia, Indonesia, Russia and South Africa. In Europe, major producers of coal other than Poland are the Czech Republic, Germany, Ukraine and Russia. The total production of coal does not cover the demand of European customers, hence the need, especially in Western countries, to import the required coal. The deficit of coal in the European Union in 2011 was approximately 180 million tons2, including approximately 40 million tons of coking coal. This creates an opportunity for the Group to place its coal within a profitable geographic rent area. The main market for the sale of coal produced by the Group is the Polish market.

In the area of production of hard coking coal, thanks to its balance sheet and operating resources and significant capital expenditure commitment, the Group has a strong foundation to maintain its leading position in the European coking coal market. The Group has approximately 0.5 billion tons of operable coal resources, including significant quantities of high-quality coking coal with a low ash and sulfur content and very good coking parameters, enabling the Group to direct its offer to the coking and power industries both at home and abroad.

Another major product of the Group, after hard coking coal, is coke produced by the Group’s coking plants from an appropriately composed mix of coking coals. The Group’s share in the domestic production of coke is approximately 45%, which puts it in second place in the Polish coke market after ArcelorMittal Poland. In the structure of global consumption of coke, the consumption of coke in the blast furnace process plays the main role, corresponding to 80% of total production. The remaining 20% is used in other sectors than the metallurgical industry (production of ferroalloys, foundries, the chemical industry, heating). A similar structure of coke production exists in the Group, where the markets for blast furnace and foundry coke are of strategic importance. The main market for the sale of coke produced by the Group is the European market (ArcelorMittal, voestalpine, ThyssenKrupp, Moravia Steel, Salzgitter Flachstahl). In light of the recent market conditions (the economic slowdown, a low rate of growth of steel production in Europe, high inventories of coke), the Group’s customer base was expanded to include overseas customers. Accordingly, part of the coke produced in the Group’s coking plants has been exported to India and Brazil. Coke offered by Poland in overseas markets successfully competes against Russian, Ukrainian, Japanese or Colombian coke.

The variety of coal and coke products offered by the Group allows it to operate in many markets and flexibly manage its trading policy, adjusting it to the current market conditions.