Interview with Rio Tinto energy head, UNTR - JP Morgan

* Research call: bullish thermal coal – Head of Rio Tinto Energy, Doug Ritchie, hosted a roundtable for the sell side this morning. The division contributes 10% of Rio's 2010 EBITDA (8% coal, 2% uranium). (1) Overall the tone was upbeat with the company expecting strong growth in global energy demand, including demand for coal and uranium. (2) management doesn’t see a dislocation of thermal and coking coal markets on a 12 month view – short term impacts should be more than offset by medium term rebuild as reflected in the forward curve of thermal coal (Figure 1). Thermal coal should be a clear beneficiary going forward. (3) On the supplier side, management noted anecdotal reports that suppliers such as Caterpillar, Komatsu and Bridgestone weren’t really affected while others such as excavator supplier Hitachi were.

* Research call – buy UNTR. Adityta Srinath thinks the sell-off relating to fears of supply disruption from Komatsu is overdone. Smaller construction machinery sold in Indonesia is mostly manufactured locally with a well developed indigenous vendor base. While the Komatsu Ibaraki factory (producing large dump trucks) has been taken offline (see table overleaf), there are 3-4 other facilities capable of stepping in. UNTR has reported adequate supply to cover 2 months of deliveries. O/W with Rp25k price target.

* Flows and liquidity – Immediately after the Kobe earthquake, Japanese households and banks sold foreign assets. If this were to be repeated now, we would see selling of $54bn of foreign bonds and $10bn of foreign equities. Japanese retail investors have more than $500bn of FX exposure. NZD and AUD are the most vulnerable to potential unwinding of these exposures. We saw evidence of this unwinding this week with a rotation away from DM into EM FX exposures.

* The JPMorgan view: A correction. Not a reversal. (1) Economics –– Japanese earthquake moves froth from H1 to H2, but still pushes down our 2011 global growth projection. (2) Asset allocation –– Equities are in correction mode, but solidity of the recovery, investor confidence, and only modest Japanese liquidation risk suggests the selloff will be modest and temporary. We stay long equities to bonds. (3) Fixed Income –– Money markets have gone too far in pricing out rate hikes. Short front end in Australia and Euro area. (4) Equities –– Cyclical sectors and Asian countries are more vulnerable following the Japanese earthquake. (5) Credit –– The damage in Japan has a negative near-term impact on Insurers, but it will increase pricing power in the long run. (6) FX –– USD/JPY should range between 80 and 82 for the next few months but still reach our year-end target of 79. (7) Commodities –– The disaster in Japan means a near-term increase in demand for fuel oil and LNG but a reduction in demand for crude oil and base metals.

NEWSFLOW
Bumi Resources Minerals (BRMS): Finance minister Agus Marto has told coordinating minister Hatta Rajasa that central government wants to buy the 7% stake in NNT. Funding source remains unclear, but Mr. Rajasa told the press that the funding will not come from state budget or state companies. The acquiring institution will be Pusat Investasi Pemerintah, or central government investment agency. (Investor Daily). Separately, central government has asked for a one-month extension to purchase the 7% NNT stake, from due date of 18-March. (Kontan). My take – it’s not over until it’s over; an attractive asset at good value and a potential swing-vote for management control.