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Regional coal
Smoking hot thermal, head to Asean
Bullish on coal with a differentiated view on thermal
Macquarie’s global commodity team has upgraded all global coal grades
throughout the curve with the highlight being upgrading thermal by 38% and 20%
to US$145 (JY11) and US$120 (JY12) per tonne, which is roughly US$20 per
tonne ahead of consensus in both years, and raising hard coking coal prices by
4–11% throughout the curve to US$251 in 2011 and US$223 in 2012.
Our differentiated call is on the thermal side. Consensus believes that prices
have peaked as the floods in Australia are starting to subside. However, our
traders see the potential for a further rally, and we expect the Japanese settlement
to be at US$145. This is on the back of further potential supply disruptions (as
we have only just entered the “traditional” Australian wet season), coal producers
prioritising coking coal over thermal in the supply chain, and upselling thermal in
to PCI and Semi soft markets, making thermal supply tighter. Beyond the current
supply disruption we see the supply-demand balance for thermal remaining tight
medium term due to robust demand from India, Indonesia and China.
Harum, SAR & Adaro are our top picks in the thermal space with Gujarat NRE
and Mitsubishi our key plays on the coking coal thematic.
Asean is the place to be – Top picks: Harum, SAR & Adaro
We prefer the Asean plays vs the Chinese (due to pricing leverage) and the
Australians (given valuation and production difficulties). Our top picks in the
sector are Harum, SAR and Adaro. Our higher global coal price assumptions
lead us to raise our Asean earnings forecasts by 16–30% in 2011 and 2012,
leading to us to be ~35% ahead of consensus expectations in 2011 and 2012.
The sector is trading on 10.6x (2011E) and 9x (2012E) PER, which is at a ~30%
discount to the historical sector trading multiple. Further the sector has an
attractive FCFE yield of 8% and 11% in 2011 and 2012, respectively.
China – limited pricing leverage but China Coal is preferred
Despite the major upgrades we have done to seaborne thermal coal prices in
2011–12, we expect Chinese domestic thermal coal prices to be fairly stable in
2011. We are expecting both spot thermal coal & coking coal price to increase
by 5% YoY on average. Stocks are likely to be driven by seasonal coal price
fluctuations, policy risks and asset injection events in 2011.
We continue to like China Coal for superior long-term growth prospects, given
our view that major coal miners could face a gradual margin squeeze over a 3–5
year period. In the near term, we expect the Chinese coal stocks to continue to
underperform the Indonesia coal names given the lack of pricing exposure.
Limited Australian value, outside of Aston Resources
In our view, there is limited value across the Australian coal sector given recent
outperformance. Our key pick in the coal sector is Aston Resources with a TSR
of 15%. Aston is exposed to both metallurgical and thermal coal as production
starts in FY13. While the ramp-up is heavily dependent on the procurement of
further port allocation, we remain confident our conservative volume forecasts
will be achieved.
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