South Korea Mining Report Q3 2009

South Korea relies on external sources for much of its mineral requirements. The country imports as much as 87% of its minerals and a significant percentage of its energy resources, including almost the entire demand for bituminous coal, ores and concentrates of copper, iron, lead and zinc. However, the country does host small reserves of gold, molybdenum, silver, tin, tungsten and zinc.

In May 2009, South Korea's imports of heating coal fell 22% due to falling demand from domestic power producers. In total, South Korea imported 6.7mn tonnes of coal in April 2009, compared to 8.63mn tonnes in April 2008, according to the Korea International Trade Association (KITA). Decreased demand from South Korea has also depressed the regional coal market, which is already suffering reduced orders from India and China. On average South Korea paid US$101.8 per tonne in April 2009, down from US$104.79 per tonne in the same period in 2008. However, Korea's major utilities have recently secured supply deals with Chinese coal producers at around the mid-US$70's mark. South Korea imported 3.28mn tonnes of coal from Australia in April 2009, followed by 2.04mn tonnes from Indonesia. Coalfired power accounted for around 38.0% of the country's total generation in 2008, according to BMI estimates. We expect the fuel's market share to be 36.3 terawatt hours (twh) by 2013, firing an estimated 167twh at the end of the forecast period. South Korean coal consumption is forecast to increase from 60mn to 63mn tonnes of oil equivalent (toe) by 2013. This equates to a rise in demand from 89mn to 95mn tonnes of hard coal.

In June 2009, Korea Electrical Power Company (KEPCO) agreed to purchase a 17% stake in Canadian uranium mining company Dension in a deal worth CAD75.4mn (US$65.1mn). In addition, KEPCO has agreed an offload deal to take 20% of Denison's uranium production - not less than 350,000 pounds (lbs) per year - between 2011 and 2015. KEPCO also has the opportunity to take an additional 400,000lbs per year in the same period, should it decide to. Denison's mining assets are located in Athabasca Basin in Saskatchewan in Canada and in the US in Colorado, Utah and Arizona. A number of nuclear-capable countries have been scrambling to buy-up uranium assets. Due to the threat of climate change, nuclear power is regarded as one of the most environmentally friendly ways of producing energy.

Meanwhile, Pohang Iron and Steel Company (POSCO) planned to cut steel production by up to 8.4%, or 230,000 tonnes, in March 2009, representing its fourth consecutive monthly output cut. This latest reduction comes on top of the 570,000 tonnes cut in the first two months of 2009 and the 200,000 tonnes cut in December. It brought forward scheduled maintenance of its 3.1mn tonnes per annum (tpa) No 4 blast furnace by three months, closing the facility from 18 February for three to four months and effectively cutting production by 1mn tonnes in 2009. The steelmaker estimates that Q109 output would be reduced by a total of 700,000-800,000 tonnes. POSCO CEO Chung Joon-Yang voiced his concern that the crisis in the steel industry could last between two to three years, leading to a 30% reduction in output.

However, there are some signs of a recovery and in Q309 POSCO is expected to ease production cuts - as steel demand is slowly starting to rise again. Although a full-scale recovery is unlikely in the second half of the year, this does suggest that the bottom of the market has been reached.

Mining forecast BMI believes that South Korea will not be as badly impacted by the global slump in the mining industry as some nations, because it relies heavily on imports for raw materials. As a result, many South Korean metals producers are taking the opportunity to agree low-cost tenders for raw materials. For example, in June 2009, five power utilities confirmed a 45% reduction in prices for thermal coal with Chinese suppliers. Korea's steel industry, meanwhile, is actually investing heavily in capacity expansion in order to be able to capitalise when global demand returns to strength. BMI expects a contraction in South Korea's mining sector in real terms over the forecast period, as industrial demand falls and commodity prices continue to slump. By 2013, the market should be worth KRW2.394trn (US$2.39bn).

Global Overview In this report, BMI examines the phenomenon of increased Chinese activity in the global mining sector and what this means for the industry.