Seasonal Boost For Coal?

This story features WHITEHAVEN COAL LIMITED. For more info SHARE ANALYSIS: WHC

 – Mine closures limited despite weak coal prices
 – Seasonal re-stocking could boost demand
 – This should support prices into 2013
 

By Chris Shaw

While coal prices have been under pressure in recent months, UBS notes actual mine closures (met and thermal) resulting from weaker prices have been surprisingly limited. Most cuts to output have been in the US and China, with reports Chinese production has been cut by 5-10%. 

This amount could be higher short-term as some small-scale mines in China have been ordered to shut down or cut production for two weeks covering the period of the 18th CPC National Congress. As this could affect around 20% of Chinese production, Citi expects this to offer some near-term price support.

Citi also suggests thermal producers in Indonesia may be cutting output, as while the Indonesian Coal Mining Association has indicated production in 2012 will be flat in year-on-year terms at around 340 million tonnes, Citi's analysis indicates current operating rates may be down 15-20% on the same basis.

Some miners have continued to ship at an overall loss, this to earn cash to offset take-or-pay commitments. Changes have been concentrated in retrenching workers and cutting contractors and overtime shifts. UBS sees this as causing the highest marginal cost units to fall, thus flattening the global cost curve. 

Spreads have improved recently in the Chinese market, to the extent imported coal is now slightly cheaper than domestic product. Citi suggests this could lead to a pick-up in imported coal demand in November and December as increased winter coal burn coincides with production cuts. 

A longer-term positive in Citi's view is the likelihood of higher Indian thermal imports, as the yet to be officially released Indian Five Year Plan for energy is believed to recognize the need for imported material. 

Shorter-term, as price and exchange rate pressures continue to build, UBS notes producers are scaling back or delaying growth projects. This reflects the fact many producers, and especially those in the thermal coal market, are not cash positive at current price levels.

For Australian producers, margins continue to come under pressure from the strong Australian dollar. UBS expects this will see a continuation of supply side cuts, particularly if demand remains weak and prices don't improve.

Seasonal re-stocking is expected to lift demand in coming months, something UBS expects will generate a price rally into 2013. Citi agrees, pointing out while a 'V' shaped price recovery is unlikely, prices above US$100 per tonne for Newcastle coal in 2013 remain a potential outcome.

Under a scenario of improving prices into next year UBS likes Whitehaven Coal ((WHC)) among the Australian plays, as the stock gives exposure to both thermal and metallurgical coal. 

UBS rates Whitehaven as a Buy, while the FNArena database shows a perfect seven for seven Buy ratings on the stock. The consensus price target is $4.28, with targets ranging from Macquarie, Credit Suisse and UBS at $4.00 to BA Merrill Lynch at $5.00.

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