UBS Equities - Asia Coal; Déjà vu from 2007 as market tightens

Price arbitrage irrelevant as market tightens
The Newcastle coal price discount to Chinese prices has narrowed, but that is unlikely to cap neither imports nor prices, in our view. Despite relatively weak
demand in Q209, domestic and international prices have increased along with imports while inventories have been under pressure. This suggests an increasingly tight thermal coal market, which leads us to upgrade our coal price assumptions.

Demand is regaining momentum
Our regional utilities team has upgraded its assumptions for China’s power growth in 2009-10 to account for a stronger than expected recovery in industrial demand. Our channel checks reveal that power consumption is improving, driven by light industries, while heavy industrial growth recovered in June.

Supply growth at record low
Continuous financing constraints in addition to an unfavourable regulatory framework are delaying regional mine and infrastructure expansions. We expect Australian and Indonesian thermal coal exports to continuously exhibit low production growth over the next 18 months leading to an overall coal trade deficit.

Raising thermal coal price forecast
We revise our price forecast from US$80/t to US$90/t in 2010, from US$120/t to US$110/t in 2011, and from US$120/t to US$105/t in 2012. In China, we prefer China Shenhua and Yanzhou Coal, which we upgraded on 3 June 2009. In Indonesia, we prefer ITM (Indo Tambangraya Megah) and Straits Asia.