>ASIA PACIFIC COAL: Constraints Exist, but 2H12 Outlook Positive for Thermal Coal

■ Seaborne coal demand should improve in 2H12. 2012 has started slowly for AP thermal coal markets. Seaborne prices are ~10-15% below 2011 with India and China largely absent from the market. Stocks are discounting low expectations, which we think will prove an opportunity ahead of a 2H12 improvement in fundamentals. Top regional picks are Harum, Adaro, Coal India, Whitehaven and China Shenhua.


■ Short-term fundamentals could remain lackluster. High stockpiles in China and demand issues in India may limit seasonal benefit of pre-summer re-stock. JFY12 contracts should be settled soon, with trade press suggesting $115-$122 per t versus $139 last year. We believe stocks are discounting a settlement closer to $100.


■ Underlying demand for Indian thermal imports to grow at 49% CAGR through FY2015…Assuming domestic supply grows at 5%, we estimate underlying demand for thermal coal imports would reach 120 mn t in FY12 (YE Mar. 2012) from 60 mn t in FY11, growing to 290 mn t in FY15. For a full review see “India Coal Industry”, Raashi Chopra, March 12, 2012.


■ …Consensus is bearish on Indian coal imports given restrictions… Poor finances of State Electricity Boards, internal coal logistics constraints, coal blending limitations and “acceptance” of power shortages will keep actual demand below theoretical. We estimate this impact at ~ 30 mn t over the next 12 months.


■ … We are more constructive and see ~32% import demand CAGR through FY2015. We expect growth in import demand to trail underlying but post healthy growth, with imports rising to 24% of Indian domestic coal consumption in FY15 from 11% in FY11. This is driven by rising demand of the power sector, where our power analysts expect 61GW of coal-based power capacity to be added during FY11-15.


■ We do not expect Indian port capacity to be an issue. We estimate available thermal coal port capacity of at least~125mt in FY 12 in India. Ministry of Shipping and Indian Ports Association data suggest coal traffic will grow to 389 mn t in FY15.


■ China: Qinhuangdao price should bottom out soon, but imports could remain soft. Major Chinese power plants have ample coal stocks. Favorable summer demand is approaching, but we expect China to remain an opportunistic import buyer in the near term. Nonetheless, we believe Qinhuangdao price should bottom out soon and Daqin railway maintenance could provide price support.


■ Our commodity team expects a tighter coal market to emerge in 2H12 — We remain confident that once the issues supportive of Indian imports emerge, Japan's damaged coal-fired capacity re-starts and Chinese industrial activity picks up, that the thermal coal market should tighten considerably.


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