How resilient is thermal coal to the current economic concerns?:: Macquarie Research,

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How resilient is thermal coal to the
current economic concerns?
Feature article
 While thermal coal prices might be vulnerable at current levels in the near
term, we don’t think the downside risks are particularly large. Two key factors
should help mitigate downside risks under the more bearish scenarios
currently being contemplated by investors.
Latest news
 Most LME base metals prices rose in trading on Tuesday, with lead at the
head of the pack and up 2.2%. However, copper fell again, closing down 0.6%
on the day. Precious metals prices were mixed. Gold gained again to another
record high, although pulled back in the afternoon.
 China released a range of mainly positive macro-economic data on Tuesday.
Industrial production increased by 14% YoY in July, which was broadly in line
with forecasts and slower than in recent months. Fixed asset and real estate
investment also recorded robust increases, again broadly in line with forecasts.
However, consumer and producer price inflation accelerated to 6.5% and 7.5%,
respectively, the fastest rates in three years and driven by higher food costs,
although these rises were anticipated and it is thought likely that inflation will
slow in the coming months in response to tighter economic policy and the
arithmetic effect of the recent retreat in commodities prices.
 China’s crude steel production fell 4% MoM in July but was up by 12% YoY to
699mt annualised (we use our own estimate of output in July 2010 as we think
official data were understated), according to NBS. A sequential decline in
July is consistent with typical seasonal patterns. In fact, in only one year out
of the last ten (2004) has crude steel production increased in July. On all
other occasions output has fallen by between 1% and 8% MoM.
 China’s refined copper output rose by 18% YoY to a new monthly record of
478,000t in July, according to NBS. In contrast primary aluminium production
fell by 6% MoM to 18.3mtpa, from June’s record of 19.3mtpa on this data series,
although it was still 13% higher than a year ago. Zinc production also rose but
lead output dropped by 4% MoM, which we had expected as a result of the
government’s ongoing crackdown on poor environmental performance by
some lead-acid battery makers and the associated, albeit probably temporary,
drop in metal demand. Readers should note NBS data does not always agree
with CNIA data, which are published later in the month and we regard as
more accurate readings of actual output levels.
 In Indonesia, tin surveyed for export prior to shipment (as required by the
Ministry of Trade) rose by 5% YoY to 9,266t in July. The total tonnage surveyed
this year to date is up by 14% YoY to 59,429t as supply has risen in response
to a record high earlier this year. However, the rising tide of exports could
well reverse in the coming months in response to the recent sharp drop in
prices. Indonesia is the world's second largest tin producer, accounting for
16% of global finished refined tin output in 2010, and the major supplier to the
international market.