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$60 Million Coal Contract

$60 Million Coal Contract Gains Solid Energy An Export Commendation

Christchurch-based business Solid Energy International has been awarded a
Trade New Zealand Export Commendation for winning a $30 million a year contract with Japan’s Nippon Steel, the world’s second largest steel mill. The contract will run for at least two years.

What is even more satisfying, says Solid Energy International’s acting General Manager Barry Bragg, is that the contract was secured at a time when Japanese steel mills were reducing their coal imports.

(Note for Editors: Media are invited to attend the Export Commendation presentation which will be made on Friday, 3 November 2000, by Trade New Zealand Chairman Joe Pope at Solid Energy International’s premises, Level 6, National College House, 151 Kilmore Street, Christchurch, from 2pm-3pm. A photo opportunity after the presentation can be arranged at Lyttelton Harbour).

The contract will see Solid Energy International supply Nippon Steel with at least 480,000 tonnes of semi-coking coal a year to the end of 2001 and contains at intention for long-term supply beyond that, says Bragg.

“It’s the largest annual volume contract ever signed by Solid Energy International and is also the first evergreen or long-term agreement we’ve secured with a Japanese Steel Mill, something that is very unusual in today’s volatile and extremely competitive international coal market.”

The Nippon contract, signed last year, was the culmination of two year’s work and followed three trial shipments of coal to the Japanese steel maker.

To meet the increased demand generated by the Nippon Steel deal, Bragg says Solid Energy International is now developing a new coal mine on the West Coast of the South Island, in partnership with Todd Energy. Solid Energy International employs about 400 staff, many of whom are involved in mining operations on the West Coast.
Bragg expects the new Spring Creek mine, near Greymouth, to boost the company’s annual coal production by 250,000 tonnes to 3.25 million tonnes within the next two years.

He says the Nippon contract is important for the company’s long-term growth, not only in terms of the increased foreign exchange earnings and jobs, but also because of the positive boost it will give to Solid Energy International’s credibility in the international marketplace.

“Nippon Steel is the world’s second largest steel producer. Some of the world’s largest mills use its blast furnace technology and they benchmark their operational performance against Nippon Steel. Following the publicity of our agreement with Nippon we expect big steel mills in Asia and Europe to show renewed interest in our coal.

“In addition, Nippon Steel is now looking seriously at importing other coal products from Solid Energy International, which should boost our business with them even more.”

Solid Energy International is one of three divisions that make up the State Owned Enterprise Solid Energy New Zealand Ltd. Solid Energy exports about 50 percent of its annual coal production. Japan takes about 60 percent of its total exports. Other major markets are China, India, Chile and Australia.

Bragg says to ensure the business gets the maximum profit from its coal, it is also developing high value specialist markets in Belgium, the USA and Japan. A trial cargo has just been completed to South Africa which the company hopes will result in new business to that market.

Solid Energy is a real “coals to Newcastle” story, says Bragg. “We export to China,
the USA, India, Australia and South Africa, which are, in order, the five larges coal producers in the world!”

Bragg says Solid Energy International’s success with Nippon was achieved in the face of tough international competition, and the considerable challenges the company faces in its day-to-day operations.

“New Zealand coal, while being very high quality, sits in an extremely complex geological setting which makes it difficult to productively apply conventional underground mining technology. Coal mining and transportation together comprise more than 80 percent of the delivered cost of coal. That leaves a small margin for profit, so we are continually looking for technology and efficiencies that will help us improve our productivity.”

On a global scale, New Zealand is a very small producer of coal operating in an open and unregulated commodity export market. To maximise the value Solid Energy International obtains from its coal, Bragg says the business focuses on developing in-demand products that maximise the inherent value of the coal.

“We have to overcome reluctance by potential clients to deal with a small international producer. Logistics is also a challenge – the maximum that can be loaded out of Lyttelton Port is 60,000 tonnes of coal. That compares to 200,000 tonnes from Australian ports and results in a large freight cost disadvantage. We overcome these challenges by placing a greater emphasis on marketing than our competitors and by using commercial and technical arguments to convince clients of the greater value in using our product.”

Bragg says along with other coal exporters, Solid Energy International had to adapt to survive the “hugely negative” impact of the Asian crisis that beset much of that region in the late 1990s.

“Asia has always been a major importer of coal. The recent financial crisis dramatically affected the international coal export business and confidence in that region.

“For Solid Energy International, as for our competitors, this resulted in a significant drop in volume and price reductions for coal exports to steelmakers and energy utility companies – our major clients.”

While Solid’s foreign exchange earnings suffered as a result, Bragg says the company did manage to retain all its clients during this turbulent time.

“That was a major feat and one which required the company to alter the mix of products we sold to 90 percent of our clients to meet their changing needs and budgets.”

Bragg says while volume demands for coal have improved, prices continue to languish due to over-supply problems generated by the Asian crisis, though he says this should improve in 2001.

Solid Energy International currently exporting about $100 million worth of coal per year. Bragg says this figure is back to pre-Asian crash levels, and should only continue to rise as a result of the Nippon Steel deal and its flow-on benefits.
For further information:
Barry Bragg
Acting General Manager
Solid Energy International
Ph: 03 353 0100

Distributed by Sarah Dunwoodie, Communications, Trade New Zealand (09) 915 4224

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