Bad News Not So Bad For Coal Stocks

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This story features WESFARMERS LIMITED.
For more info SHARE ANALYSIS: WES
The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Chris Shaw

On face value the fact both Macarthur Coal ((MCC)) and Wesfarmers ((WES)) have been forced to declare “force majeure” on coal shipments due to flooding at the Bowen Basin and Curragh operations respectively would be seen as a negative, as earnings for both companies have been revised lower on the news.

But there is another way to look at the situation, as reduced coal supply from both companies along with a number of other developments impacting the global coal market in recent days are likely to push up contract prices as buyers and sellers negotiate annual contracts.

Macquarie points out at the same time as both Wesfarmers and Macarthur have been hit by flooding there have been disruptions to supply in China thanks to a lack of power and this has forced the Chinese government to restrict exports of steaming coal. At the same time coal (and other mining) operations in South Africa have also been affected by the same problem, with mining giant Anglo being forced to limit production at five coal mines given the lack of power available.

Even before these new developments coal prices were very high but in the broker’s view there is now a chance contract prices will be pushed even higher. As an example it suggests while suppliers may have been ready to agree on thermal coal contracts at US$90 per tonne last week they are now likely to want US$100 per tonne, while coking coal producers are likely to target US$210 per tonne this week compared to US$150-$170 per tonne last week.

Others in the market have taken a similar view, Deutsche Bank pointing out this morning in notes on both Macarthur and Wesfarmers that while modest cuts to earnings forecasts are being factored in to account for the lower export volume expectations from both companies there is likely to be something of an offsetting factor from upward pressure on coal contract prices in the current negotiations.

There is also some level of irony that, particularly in Macarthur’s case, rail and port constraints have meant a lot of last year’s production has ended up in stockpiles. These will help the company through its production stoppage, but may not cover all lost production, according to Deutsche. Force majeure also means you get to jump the queue when ordering ships, but Macarthuer is not keen to do so yet until the weather has settled down.

As a result the broker retains its Hold ratings on both stocks, Citi also retaining its Hold on Wesfarmers for the same reason as it points out while the rain impact at Curragh may lower earnings by around 1% for the group the potential for higher coal prices acts as a counter.

The FNArena database shows no changes to recommendations for the stocks, with Wesfarmers continuing to be rated as Buy and Sell twice each and Hold six times, while Macarthur scores one Buy, one Sell and five Hold ratings. The average price target for Wesfarmers has fallen to $43.29 from $43.62 on the back of the earnings adjustments in the market, while the average target for Macarthur is virtually unchanged at $8.88.

Shares in the two companies are moving in opposite directions today as Wesfarmers shares as at 11.05am were down 25c to $37.73 while Macarthur shares were up 58c at $9.85.

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