Coal Sector (OVERWEIGHT) Black is beautiful - Danareksa

Aggressively priced JFY11F contracts
We upgrade our FY11F coal price assumption to US$129.8/t, in line with the recent coal price settlement between Chugoku Electric and Xstrata. We also upgrade our FY12F coal price assumption to US$110/t, while maintaining our FY13-14F coal price assumption at US$105-100/t. We view the recent settled price as aggressive since Japan doesn’t have much generating capacity to crank up its coal power generation, although it may underline the tight supply in the market. As we expect there will be resistance from the Japanese power producers, we apply a higher discount to the benchmark for this year. On the production side, the outlook is more upbeat given that the La Niña weather phenomenon is expected to end by winter 2011 (or June 2011 in Australia). This will result in better availability of coal in the market, putting downward pressure on the coal price from FY12F onwards.

Short-term expansion program at risk
The recent earthquake in Japan - which damaged some of the Komatsu and Hitachi Construction Machinery Japan plants - has raised concerns about short-term heavy equipment procurement. Consequently, the expansion plans of coal miners/mining contractors for 2011 might be at risk, as the damaged plants are designated to manufacture large-type heavy equipment for the mining industry. Against this backdrop, we trim our FY11-12F coal production target by 5.1-5.4%, and we also expect lower realized capex for the acquisition of heavy equipment this year.

Not much room for Japan’s coal power generation to grow
Nearly all available Japanese coal-fired power plants are being used, as shown by Japan’s total coal-fired power plants power output in JFY09 of 237.9TWh vis-à-vis its total coal-fired power plants capacity of 38.0GW, or equal to 332.4Twh in one year (around 71.6% of total generating capacity). Also, the recent earthquake has damaged the Hirono, Haramachi and Hitachinaka coal-fired power plants, which amounts to power generation capacity loss of 3.6GW, or equal to 31.5Twh in one year. As a result, we don’t expect the recent nuclear crisis to immediately lead to an increase in coal demand from Japan. Furthermore, we see that China and India will continue to lead the demand growth for coal going forward.



Who will perform this year?
We maintain our OVERWEIGHT call on the coal sector, as we believe higher coal prices will lead to higher ASP booked by coal companies this year, consequently leading to higher margins and growth since production won’t improve that much. PTBA is our top pick in the sector, given that: 1) cost advantage of relatively low exposure to fluctuations in the oil price, 2) it has less exposure to Japanese heavy equipment, 3) the domestic sales price is expected to increase 23.8% thanks to price settlement with PLN and 4) it has a long term growth strategy of expanding its railway capacity by forming alliances with regional railway players.