Regional coal - JFY11 coal settlement at US$130/t - MACQUARIE RESEARCH

Event
§ Reuters reported that Xstrata has confirmed that it has finalised thermal JFY11 thermal coal settlement with Chugoku Electric at a price around US$130/t, basis 6,322 Kcal GAR (which is the highest ever Japanese fiscal year settlement). The settlement will provide a benchmark for other coal producers, including the Indonesians for negotiations with other customers. The settlement comes below our forecast of US$145/t (which we have previously highlighted post the Japanese earthquake and tsunami), but represents a premium to the current spot price and consensus estimates of +/-US$120/t.

Impact
§ The JFY11 settlement of US$130/t represents 33% YoY increase from last year's US$98/t. The settlement would also provide support to the spot price, despite the downward pressure from a seasonally weaker price period (due to low demand from the Northern Hemisphere and high production from the Indonesians and Australians) and potential 8mt demand loss from Japan (due to 7-8GW of thermal power plant capacity being lost for at least six months).
§ Supply-demand tightness in 2011. Despite the potential loss of demand from Japan, we continue to expect the seaborne thermal coal market to be in deficit in 2011 driven by a potential increase in demand from the Indonesian market (+/-20mt) and Indian imports (+/-20-30mt) as electrification increases. We forecast the global seaborne market to be in deficit of 20mt in 2011.
§ Asean coal companies are the way to play this. We continue to prefer the Asean over the Chinese thermal coal names to play the Japanese settlement given their leverage to the global thermal coal price, robust production growth and attractive valuation (trading at 12x 2011E PER vs the Chinese at 13x).
§ Our preferred plays within the sector are Harum, SAR, and PTBA given their leverage to coal price, production growth, and relatively low cost structure. Bumi and Adaro (partly in 2011 given 30% of volumes are priced on JFY11) are the other big liquid names which should benefit from this settlement. We note limited upside for ITMG (as they have priced in +/-50% of their contracts for 2011) and Banpu as we believe the street needs to downgrade post the sale of their Daning mine.

Outlook
§ We believe that the JFY11 settlement price of US$130/t is a positive as it could potentially provide support to the spot price (especially given the seasonally weak pricing period as the Northern Hemisphere go into summer and strong Indonesian production as we enter into the dry season).
§ We continue to prefer the Asean coal names to play the Japanese coal price settlement story, especially given their leverage to coal price, production growth and attractive valuation. Further, we believe that despite the settlement coming in below our US$145/t forecast, it still represents a premium to consensus forecast of +/-US$120/t, which should lead to 10–15% consensus upgrades and therefore drive stock performance. Within our coverage, Harum, SAR, and PTBA are our key picks.