UBS Time to get back into Plantations and Coal miners

We do believe it is time to get back into plantations and coal sectors.

Based on the attached chart, CPO has just formed a triangle breakout pattern, which potentially lead the CPO price to reach RM 2300 - 2400 per tonne.

UBS has just raised their coking and thermal coal forecasts. For 2009, coking coal is raised to US$ 129/t (previously US$ 85/t) and for 2010, at US$ 135/t from US$ 115/t. For 2011, forecast remains unchanged at US$ 160/t. As for thermal coal, 2009 forecast is revised to US$ 71/t from US$ 60/t, 2010 and 2011 remain unchanged at US$ 80/t and US$ 120/t respectively. We think UBS Indo has not incorporated these changes into their coverage universe, at least until yesterday (26 March).

Preferred picks for plantations: AALI and LSIP, for coal miners: ITMG and PTBA. UNSP and BUMI are only for those who have the nerves of steel.

Miners demonstrate pricing power
Indications that coking coal settlement at US$129/t for high quality Negotiations between BMA and Nippon Steel have concluded with an apparent capitulation by Nippon for US$129/t benchmark pricing for the 2009E contract, for high quality coking coals. We believe that this is modestly higher than consensus (c5%) and is significantly higher than UBS estimates of US$85/t. More importantly, expectations had been falling and we believe that investors had taken a more pessimistic view of prospects.

Roll-over to be honoured, but there is likely to be a fight
We understand that Nippon has agreed to honour roll-over tonnages at the previously settled price of US$300/t; although its roll-over tonnage is quite small. Other steel mills with higher roll-over tonnages are likely to put up a fight in our view given the obvious pressure on margins being experienced.

Steel producers appear helpless… strong read-through for 2010?
Given the deflationary pressure impacting steel producers, with the worst operating
conditions in decades, we view the apparent result as impressive. We believe that the line has been drawn and that as conditions ‘normalise’ prices are likely to rise,
we are raising our 2010 forecast for coking coal to US$135/t from US$115/t.

Upside to other commodities?
We believe that demand conditions are likely to remain challenging in 2009, nevertheless we note that it appears that thermal coal has been settled at a decent price (cUS$71/t), and support is appearing for industrial metals. We remain neutral on industrial materials. Preferred equities include CONSOL, Rio Tinto and Xstrata.