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

2.2. Key products, goods and services

The Group’s coal mining activity in 2012 was performed by five coal mines. The Borynia-Zofiówka1 and Pniówek mines produce good quality coking coal mainly for the production of blast furnace coke. The Jas-Mos3 mine produces coking coal with very low phosphorus content and low volatile matter content, used successfully in the production of foundry coke. The Budryk and Krupiński Mines currently produce primarily steam coal used by power plants to generate electricity. The share of coking coal and steam coal in total net coal production in 2012 was 70.4% and 29.6%, respectively.

The main product of the coke segment is blast furnace coke produced in Koksownia Przyjaźń and Koksownia Radlin forming part of KK Zabrze, accounting for 64% of the total amount of coke produced in 2012. Foundry coke produced in WZK Victoria accounted for 10% of the Group’s total coke production. The remaining production of the coke plants consisted of: industrial coke (nut I and II, pea coke, fine coke, broken coke and low-phosphorus coke), metallurgical coke and heating coke, whose share in the Group’s total production of coke was 19%, 3% and 4%, respectively.

In addition to coke, the coking plants produce coal derivatives: coking tar, benzene, liquid sulfur, ammonium sulfate and coking gas. Benzene and tar have regular customers in the European market. Cooperation with these customers has been conducted for years under long-term contracts. Sulfur and ammonium sulfate are sold in the domestic market. Surplus coking gas is sold to consumers directly by the coking plants.

The Group’s production structure, both with regard to the production of hard and semi-soft coking coals, steam coal and coke, is adapted flexibly to the dynamically changing market needs and in consideration of the supply and demand in the local and foreign markets.

Coal

In 2012, the quality parameters of individual shipments of commercial coal, in particular type 35 (hard) coal from the Borynia-Zofiówka, Pniówek mines and the Jas-Mos mine (with low volatile matter coal – LVM) and type 34 (semi-soft) from the Budryk and Krupiński mines and steam coal produced in the Borynia-Zofiówka, Budryk and Krupiński mines fitted within the limits set forth in the commercial agreements.

The coal production volume in 2012 was at the level of 13.5 million tons, i.e. 0.9 million tons more than in 2011 and 0.2 million tons more than planned for 2012. The total sales of coal produced by the Group, comprising intra-group and external deliveries, were realized at 12.7 million tons, i.e. 0.3 million tons more than in 2011. In 2012, compared to the same period of the previous year, total sales of coking coal increased by 0.5 million tons. However, supplies of steam coal in 2012 decreased by 0.2 million tons compared to 2011. It is noteworthy that the share of internal and external sales of the best quality type 35 (hard) coal that attracts the highest prices in the Group’s total deliveries keeps increasing (2010: 55.9%, 2011: 57.8%, 2012: 60.4%).

The table below presents coal production and sales broken down into intra-group sales and external sales.

  2012 2011 Growth
Production (in millions of tons) 13.5 12.6 107.1%
- Coking coal (in millions of tons)(1) 9.5 8.8 108.0%
- Steam coal (in millions of tons) 4 3.8 105.3%
 
Total volume of JSW S.A.’s sales (in millions of tons)(2) 12.7 12.4 102.4%
- Coking coal (in millions of tons) 9.1 8.6 105.8%
- Steam coal (in millions of tons) 3.6 3.8 94.7%
 
Volume of intra-group sales (in millions of tons)(2) 4.5 4 112.5%
- Coking coal (in millions of tons) 4.2 3.7 113.5%
- Steam coal (in millions of tons) 0.3 0.3 100.0%
External sales volume (in millions of tons)(2) 8.2 8.4 97.6%
- Coking coal (in millions of tons) 4.9 4.9 100.0%
- Steam coal (in millions of tons) 3.3 3.5 94.3%
 
Sales revenues (in PLN millions)(3) 7,040.9 8,036.3 87.6%
Intrasegment sales revenues (in PLN millions) 2,906.0 3,093.0 94.0%
Revenues on sales to external buyers (in PLN millions) 4,134.9 4,943.3 83.6%

(1) The share of hard coal in the total coal production in 2012 and 2011 was 57.5% and 58.2%, respectively.
(2) The volume of sales of coal produced by the Group.
(3) The figure presented includes the Group’s revenues on sales of coal produced by other entities in 2012 and 2011 in the amount of PLN 304.2 million and PLN 186.7 million, respectively.

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In 2012, sales of steam coal to external customers decreased by 0.2 million tons compared to 2011 and by 0.7 million tons compared to 2010, primarily a result of lower domestic demand from utility companies for coal used in the production of electricity. In the domestic structure of energy production, the share of cheaper lignite increased at the expense of coal.

In external sales of coking coal, type 35 coal produced by the Group accounted for 86.4% (2011: 89.1%). The remaining 13.6% was type 34 coal (2011: 10.9%). By the same token, sales of type 35 coking coal produced by the Group accounted for 80.5% (2011: 75.5%) and sales of type 34 coal – 19.5% of intra-group sales (2011: 24.5%).

In 2012, external coal deliveries to local buyers accounted for 79.9% (by volume) and 75.8% (by revenues). The remainder were deliveries to foreign customers. In 2011, external coal deliveries to local buyers accounted for 83.0% (by volume) and 78.4% (by revenues).

In 2012, revenues on sales of coal to external customers reached PLN 4,134.9 million and were lower by PLN 808.4 million (16.4%) than those generated in the same period of the previous year, which is primarily a consequence of the ongoing economic slowdown and a decrease in the prices of coking coal in the global markets.

Coke

In comparison to 2011, the Group’s coke production in 2012 increased by 22.6% and sales volume increased by 26.7%. 2012 is the first full period in which the production and sale of coke covers all coking plants currently owned by the Group. KK Zabrze has been subject to consolidation since 29 June 2011 and WZK Victoria since 9 December 2011. The two annual reporting periods take account of the acquisitions in accordance with their dates. Revenues on sales of coke and coal derivatives in the period under analysis reached PLN 4,307.9 million and were 2.1% higher than in 2011.

The table below presents the actual production and sales of coke and revenues from coke and coal derivatives.

  2012 2011(3) Growth
Production (in millions of tons)(1) 3.8 3.1 122.6%
External sales volume (in millions of tons)(2) 3.8 3 126.7%
Revenues on sales to external buyers (in PLN millions)(3) 4,307.9 4,220.0 102.1%

(1) Coke production from the coking plants belonging to the Group in individual periods.
(2) Volume of sales of the coke produced by the Group.
(3) Sales revenues in the Coke segment comprise revenues generated from sales of coke and coal derivatives both produced by the Group and the revenues from trading in coke and coal derivatives produced by external entities.

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Other activity

In 2012, from other activity performed by the Group, including various types of support activity (production and sale of electricity and heat, overhauls and maintenance, logistics, laboratory services) and non-core business (travel and insurance services), the Group generated PLN 378.2 million, i.e. 4.3% of the Group’s sales revenues. These revenues were PLN 164.7 million (77.1%) higher than those generated in 2011.

Sales prices

The prices of the Group’s basic products in 2012 were significantly lower than in 2011 (coking coal: (-) 22.9%, coke: (-) 19%). It should be noted at the same time that blast furnace coke prices in spot deliveries in the European market in 2012 in relation to 2011 dropped by approximately 35%. The reason for the lower prices of coking coal and coke was the decline in demand for coke due to lower demand for steel. The average price of steam coal remained at a much higher level than in 2011, but kept decreasing steadily from the beginning of 2012 (Q1 2012: PLN 322.47 per ton, Q1-Q2: PLN 320.48 per ton, Q1-Q3: PLN 319.80 per ton).

The following table shows the prices obtained from the sales of products.

  2012 2011 Growth
Coal segment      
Coking coal (PLN/t) 625.7 811.78 77.1%
Steam coal (PLN/t) 315.27 266.93 118.1%
Total (PLN/t)(1) 500.9 583.26 85.9%
    
Coke segment      
Total (PLN/t)(2) 970.2 1 197.93 81.0%

(1) The prices pertain to deliveries of coal produced by the Group and include transportation costs incurred by the Parent Company amounting to, on average, PLN 11.07 per ton in 2012 and PLN 5.61 per ton in 2011.
(2) FCA prices pertain to the Group’s coking plants in the relevant periods.

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