Macquarie Xstrata has confirmed that it has finalised thermal coal settlement with a major power utility in Japan for the JFY10 contract at a price of

Event
Xstrata has confirmed that it has finalised thermal coal settlement with a major power utility in Japan for the JFY10 contract at a price of US$98/t, basis 6,322Kcal GAR. The settlement will provide a benchmark for other coal producers, including the Indonesian for negotiations with other customers. The settlement price represents a premium to our forecast of US$92/t and current spot price of US$94-95/t.

Impact
The settlement represents a 40% YoY increase from last year's US$70/t settlement and 21% above Xstrata's January settlement at US$85/t. The settlement would also therefore provide a support to the spot price, despite the downward pressure from softening Chinese prices and a seasonally weaker price period (due to low demand from Northern Hemisphere and high production from the Indonesian and Australian). Supply demand tightness in 2011. We continue to expect the thermal coal market to be tighter in 2011 driven by potential supply/demand tightness due to the potential for increasing demand from the Indonesian market (+/-20mt) and Indian imports (+/-30mt) as electrification rates increases.
Further, the settlement also suggests pricing in 2011 could be significantly stronger than expected and therefore we see upside risks to our current US$97/t towards above US$100/t. ASEAN coal companies are the way to play. We continue to prefer the ASEAN vs. the Chinese thermal coal names, giiven thermal coal's strong medium-term demand outlook (from Indonesia and India), robust production growth, and attractive valuation trading on 13x and 8x 2010-11E PER vs. the Chinese trading on 14x and 11x, respectively.

Action and recommendation
We believe that the JFY10 settlement price of US$98/t is a positive and therefore we see upside risks to our thermal companies' 2010 earnings forecast. Further, we also see upside risk to our JFY11 settlement price forecast of US$97/t towards above US$100/t. We therefore continue to prefer the ASEAN vs. the Chinese thermal coal names, given a strong medium-term thermal coal demand outlook, robust production outlook, and attractive valuation. Within the Asian coal sector, we prefer SAR, Banpu, and Yanzhou Coal. Further, we also highlight that the companies that will benefit from the higher settlement are the ones with the most open book positions, such as 1) Bumi - 65% open book, 2) Indika - 50% open book, 3) ADRO - 50% open book, 4) BYAN - 50% open book 5) PTBA - 40% open book, 6) SAR - 30% open book, 7) ITMG - 20% open book. Companies mentioned Xstrata (XTA LN, GBP12.48, OP, TP:GBP16.0) Bumi (BUMI IJ, Rp2,300, OP, TP:Rp3,075) Indika (INDY IJ Rp2,450, OP, TP:Rp2,900) Adaro (!
ADRO IJ, Rp2,025, OP, N, TP:Rp1,860) Bayan (BYAN IJ, Rp6,100, N, TP:Rp5,850) Bukit Asam (PTBA IJ, Rp18,050, OP, TP:Rp21,300) Indotambang (ITMG IJ, Rp38,500, OP, TP:Rp41,500) Straits Asia (SAR SP, S$2.18, OP, TP:S$3.4)