Australian Coal Sector Overview

Submitted by Craig Strzelecki on Mon, 18/06/2007 - 07:35.

Australian stockmarket analyst, Macquarie Research Equities has provided a Australian Coal Sector Overview. Stocks in the coal sector have come under pressure, following a stellar start to the second quarter. Read on as the analyst reviews the Australian-listed coal companies, and discuss the future growth potential in an environment where most producers are infrastructure constrained. Bullish coal outlook: With China moving to a net importing position in 1Q07, and it is the analysts' belief it will remain so, they remain positive on the supply/demand fundamentals for the coal market. Ongoing strong demand from India and China combined with global supply disruptions and delays to greenfield and brownfield projects should see YoY price increases for all types of coal. Prices should also remain well supported by a much higher cost base for marginal supply than in the past. In thermal coal, marginal Russian supply (accounting for 10% of the market) is uneconomic below US$45/t so a return to sub-US$35/t prices is unlikely. Similarly, in coking coal, the marginal North American suppliers (accounting for 10% plus of supply) have cash costs above US$80/t and a quick return to sub-US$60/t prices seems unlikely. A super-bull case of China becoming a major net importer of not just thermal but coking coal remains a significant wildcard. They do not have enough confidence or knowledge in the Chinese supply/demand balance to make the super-bull case or base case but see it as a significant upside risk. Infrastructure constrained for some time yet: Ongoing global infrastructure constraints support our view of stronger prices for 2008. Given the lack of investment by infrastructure providers over the past decade, severe rail and port bottlenecks exist in the global export coal system. If the producers' forecasts are proven true, our analysis suggests the major Australian coal export routes (Port Waratah, Dalrymple Bay and Gladstone) are likely to be infrastructure-constrained until ~2010. M&A activity turns spotlight on coal stocks: Amid growing concern over the lack of infrastructure capacity and the inherent hurdles to organic growth, the desire to take advantage of extraordinary prices is forcing coal producers to seek growth through acquisition. This has refocused the spotlight back on the coal sector. Key sector picks: In the analysts' view, there is further consolidation to come, particularly in Australia, which should continue to drive sentiment and momentum in the sector. Of the stocks under their coverage, the analysts' top pick is Macarthur Coal (MCC- 12-month price target $6.60ps). Despite its infrastructure-restricted organic growth position over the next few years, Macarthur Coal remains attractive based on likely corporate appeal and an improving outlook for the low-volume PCI market. They have increased their 12-month share price target to $6.60ps.

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