Regional coal - Feedback - Looking forward to 2012 - MACQUARIE

Event
§ We visited over 35 clients in Asia (Kuala Lumpur, Singapore and Hong Kong) over the past week. Similar to the feedback that we received from our UK marketing ( See this link ), investors are positive on the thermal coal outlook, especially going into 2012, supported by the potential recovery in Japanese demand (post disaster in March) as well as increasing domestic demand in Indonesia and India. Further, there is not much pushback on the preference towards Asean names in the medium-term. Our key picks, Harum and SAR received the most interest from investors.

Impact
§ Range bound trade in the short-term. There was a lot of discussion around our range-bound view in the short-term, especially given the incremental positive news for the sector (including a strong MoM pick up in Chinese import demand in April and May with the re-emergence of import arbitrage). We highlight that our range-bound view is mainly driven by the increasing Chinese import appetite being offset by a seasonally weaker pricing period (especially as Indonesian coal production started picking up in May-June due to better weather). Also some Japanese cargo is being sold to the spot market at a US$3-5/t discount to the global spot price. However, we highlight that investors are less concerned on short-term volatility given the strong 2012 outlook.
§ Positive 2012 outlook seems to be a general view. Most investors agreed with our positive outlook on thermal coal going into 2012, which is also in line with the positive feedback that we received from the Coaltrans Conference (with the majority of participants highlighting that JFY12 settlement is likely to rise moderately to US$130-140/t, ahead of our US$120/t forecast). Our positive view is mainly driven by increasing demand from India and Indonesia (as they increase their electrification ratios) and the Japanese reconstruction story (with roughly +/-3GW out of 8GW of the damaged thermal power plant already back on-line and with more power plants to return to operation in 2012/13).
§ Prefer Asean coal...but no longer trade at a discount vs. Chinese names. Investors generally agreed on our preference towards the Asean names as they seek companies with production growth (from existing reserve bases), pricing leverage, and attractive valuation (currently the Asean coal sector trades on 10x PER vs. historical sector average of 12-13x). However, whilst some investors argued that on a relative basis, the Asean coal sector now trades at par with the Chinese (vs. +/-10% discount historically), others argued that the recent de-rating of the Chinese names is justified given the policy risks.

Outlook
§ In line with our marketing feedback from the UK in early May as well as Coaltrans, investors appear to be relatively positive towards the 2012 coal story as well as longer-term. This is consistent with our medium-term view and supportive of our preference towards the Asean coal sector. Most of our discussions centred on our top 2 picks, SAR and Harum.