Prices Likely Weak into 2013, Selective Stocks Look Interesting
n We think thermal coal prices will recover, but stocks could continue to discount an uncertain outlook. We think the coal price correction will prove cyclical, but excess supply could keep recovery in check into 2013. Cyclical pause versus structural shift lower is an active debate in the market that may not be resolved near term. Stocks are pricing in a lot of the uncertainty, but earnings visibility for coal miners is likely to remain low. In this environment, we prefer ITMG (ITMG.JK; Rp34,700; 1), which we believe could support a 6% dividend yield at current coal prices, and Coal India
n Seaborne coal prices have collapsed, cutting into cost curves… Prices are down ~$20/t since the beginning of 2012, as a result of oversupply and weak demand. Excess tonnage is being pushed into the Asian market from the Atlantic , and, unfortunately, much of the volume has been price-insensitive in response to rapid imbalances in the Atlantic market. Cost analysis suggests we should be near support, and we believe we are below long-term sustainable prices.
n … But prices could remain soft as long as excess flow from Atlantic market persists. Prices could stay at current low levels or move lower as long as the US US US utility stockpiles and economic uncertainty in Europe suggest this could take a while.
n Chinese imports have been strong but spot interest has slowed recently. De spite of weak electricity generating statistics, Chinese thermal coal imports have been strong. Current spreads favor imports but spot buying has slowed recently suggesting summer re-stock may have run its course.
n Indian imports continue to trail underlying demand. Imports are viable though. We estimate the cost of generating power using imported coal at current market prices at Rs3.7/kwh versus merchant power prices at Rs4-4.25/Kwh. This implies that the breakeven price would be $100-110/t (6,000 kcal).
n Catalysts and signs of bottoming for Asian coal prices could come from the west… These include recovery in US natural gas prices, an inflection in US utility coal stockpiles, improved supply/demand balances in Europe and firming freight rates.
n … And closer to home. We understand ~10-15% of Japanese contract thermal coal demand is on a July-June year term. Industry sources suggest these could be struck at ~US$105 per tonne, well above the spot market, and prove a positive surprise. In Asia, we would look for a renewed import demand in China Australia and even Indonesia
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source: citi Asia Pacific dated 14 June 2012
