CLSA Coal channel checking

China Reality Research has recently reported that:

· Spot prices of the three main types of coal at Qinhuangdao port rose sharply this week as key producers, including Shenhua, Datong Coal and China Coal, raised their contract prices on the spot market by over Rmb50/t
· On May-6 prices of 5,800kcal/kg, 5,500kcal/kg and 5,000 kcal/kg coal were up 4.1% (up 23% YoY), 3.5% (up 26% YoY) and 3.3% (up 24% YoY) WoW, respectively

To get a better understanding of what is happening in the marketplace for coal, CLSA Jakarta research team did our own channel check. We surveyed local coal traders, and our channel check suggests similar positive momentum.

Looking at recent datapoints and newsflow, we feel more and more convinced on tighter supply/demand outlook of coal.

China became a net coal importer last year for the first time. Beijing bought 104m tonnes of the product last year compared with net exports of 80m tonnes in 2003. This bodes well for Indonesia as the largest thermal coal exporter in the world.

Just to illustrate what 104m tons really means. Coal import in China still accounts for a mere 3.5% of total coal consumption, 3.0bn, in the country. 104m tons is just a teaser. The trend of more and more imports will no doubt continue. The impact on prices might not be immediately clear but be assured the LT implication on prices will be very positive. Just like when China became a net importer of oil in the 90s and now the second largest importer of oil behind the US.

We think India would be the next big thing while Indonesia with completion of its first generation 10GW coal fired power plants would need more coal.

Although ADRO and ITMG are still our top-picks in that sector, BUMI seems set to make a reappearance on he podium as its risk-reward profile is getting more favorable as the current political wind is blowing in its favor again.

Our top pick space is Adaro and ITMG. BUMI (O-PF, TP: Rp2,800) is certainly not for the faint hearted given its volatility, but we feel risk-reward profile favour Bumi especially as political wind blowing in its favour.