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Queensland, Australia has seen heavy flooding in recent weeks due to which several miners have declared force majeure and coking coal prices have spiked. Indian steel players import most of their coking coal requirements and hence could be significantly impacted by the recent price increase.
Queensland dominates coking coal sea-borne trade
�� Out of the total estimated sea-borne coking coal market of 240Mt in CY2010, Australia is expected to have contributed to a lion's share of 140mt (58%) of total output (our estimates). Within Australia, Queensland (QLD) accounts for the vast majority of coking coal production (>80%) with the rest coming from New South Wales.
Massive flooding in QLD has meant major miners have declared "force majeure'
�� The last few weeks have seen QLD witness the worst floods in 50 years due to heavy rainfall.Mining operations and transportation have been disrupted with several of the major coal producers including BHP Billiton, Rio Tinto and Xstrata declaring force majeure. About 10- 15mt of coking coal exports is expected to have been impacted. The recently released 4QCY10 production data released from BHP Billiton, which is the largest producer of coking coal in Queensland has indicated that output is lower by 30% qoq.
India imports bulk of its coking coal requirements
�� India, due to lack of domestic availability of hard coking coal, imports the vast majority of its requirements. Due to geographic proximity to Australia, Indian steel makers have preferred to import bulk of their coking coal from Australia as compared to US or Canada. While supply may not be an issue as US players step up capacity to meet the demand, the elevated prices is likely to hurt the Indian steel players.
Coking coal demand through imports is ~8mt per quarter
�� The Indian coking coal demand largely from the steel industry is assessed to be about 8mt per quarter and expected to go to 10mt per quarter by the year-end once new capacity from incumbents goes on-stream.
Steel Authority and JSW Steel could be significantly impacted
�� We see immediate impact of higher coking coal prices on Steel Authority of India (SAIL) and JSW Steel both of which together import about 4mt per quarter. Spot QLD coking coal was at US$320/t (FOB) this week vs US$270/t last week and US$238/t in mid-December. Though the Q4FY11 coking coal contract price is US$225/t, with the recent spike in prices, the contract price for 1QFY12 could be far higher if prices sustain at these levels. A US$50/t increase in coking coal contract price for Q1FY12 could decrease JSW and SAIL's total earnings by about US$200mn. Steel realizations have to increase by about 5% from current levels to compensate, which might be difficult. We note that the steel companies typically carry about 2-3 months of coking coal inventory and hence might be able to delay purchases to that extent. Hence, how long prices sustain at these elevated levels is key. We highlight that following the 2008 floods, miners took about 9 months to achieve full capacity.
Earnings sensitivity to coking coal prices
�� Given in the table above is a sensitivity analysis of the impact on quarterly earnings at different coking coal prices. We have currently assumed an average coking coal price of US$220/t for FY12F. For every 1% increase in coking coal prices, we estimate an earnings decrease of 1.6% for SAIL and 1.7% for JSW Steel.
�� We have a Hold rating on SAIL and a Sell on JSW Steel.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Queensland, Australia has seen heavy flooding in recent weeks due to which several miners have declared force majeure and coking coal prices have spiked. Indian steel players import most of their coking coal requirements and hence could be significantly impacted by the recent price increase.
Queensland dominates coking coal sea-borne trade
�� Out of the total estimated sea-borne coking coal market of 240Mt in CY2010, Australia is expected to have contributed to a lion's share of 140mt (58%) of total output (our estimates). Within Australia, Queensland (QLD) accounts for the vast majority of coking coal production (>80%) with the rest coming from New South Wales.
Massive flooding in QLD has meant major miners have declared "force majeure'
�� The last few weeks have seen QLD witness the worst floods in 50 years due to heavy rainfall.Mining operations and transportation have been disrupted with several of the major coal producers including BHP Billiton, Rio Tinto and Xstrata declaring force majeure. About 10- 15mt of coking coal exports is expected to have been impacted. The recently released 4QCY10 production data released from BHP Billiton, which is the largest producer of coking coal in Queensland has indicated that output is lower by 30% qoq.
India imports bulk of its coking coal requirements
�� India, due to lack of domestic availability of hard coking coal, imports the vast majority of its requirements. Due to geographic proximity to Australia, Indian steel makers have preferred to import bulk of their coking coal from Australia as compared to US or Canada. While supply may not be an issue as US players step up capacity to meet the demand, the elevated prices is likely to hurt the Indian steel players.
Coking coal demand through imports is ~8mt per quarter
�� The Indian coking coal demand largely from the steel industry is assessed to be about 8mt per quarter and expected to go to 10mt per quarter by the year-end once new capacity from incumbents goes on-stream.
Steel Authority and JSW Steel could be significantly impacted
�� We see immediate impact of higher coking coal prices on Steel Authority of India (SAIL) and JSW Steel both of which together import about 4mt per quarter. Spot QLD coking coal was at US$320/t (FOB) this week vs US$270/t last week and US$238/t in mid-December. Though the Q4FY11 coking coal contract price is US$225/t, with the recent spike in prices, the contract price for 1QFY12 could be far higher if prices sustain at these levels. A US$50/t increase in coking coal contract price for Q1FY12 could decrease JSW and SAIL's total earnings by about US$200mn. Steel realizations have to increase by about 5% from current levels to compensate, which might be difficult. We note that the steel companies typically carry about 2-3 months of coking coal inventory and hence might be able to delay purchases to that extent. Hence, how long prices sustain at these elevated levels is key. We highlight that following the 2008 floods, miners took about 9 months to achieve full capacity.
Earnings sensitivity to coking coal prices
�� Given in the table above is a sensitivity analysis of the impact on quarterly earnings at different coking coal prices. We have currently assumed an average coking coal price of US$220/t for FY12F. For every 1% increase in coking coal prices, we estimate an earnings decrease of 1.6% for SAIL and 1.7% for JSW Steel.
�� We have a Hold rating on SAIL and a Sell on JSW Steel.
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