CLSA “Still dying for coal? A Chinese industry half way there”, The stocks to buy on this theme are UNTR and HEXA.

Analysts Simon Powell and Jonathan Galligan have authored a detailed report on Chinese coal mine safety: “Still dying for coal? A Chinese industry half way there”. The report analyses safety statistics, the fatality rate of listed miners, regulation, a comparison of China’s coal industry to the UK, and the next steps for investors.

The report shows the great improvement made in the past decade, with fatalities/mt falling from 6.1 in 2000 to 0.9 last year. And that small scale mines have a death rate potentially >30x higher than key SOEs. This supports the government’s ongoing push for industry consolidation, and suggests safety-related costs will continue to rise.

Our head of resources research Andrew Driscoll thinks that this trend of consolidation and implementation of safety standards will also constrain supply to some degree, while the continuing implementation of better safety standards will cause cost pressure in China and potential steepening in the cost curve. Supply constraints and rising costs in China should be supportive of higher coal prices, which would also benefit the seaborne coal market – Indonesia’s forte.

Indonesia’s thermal-coal market will be leveraged to Chindia’s electricity demand. Even if we make only modest assumptions on Indian imports alone, the country will need to import around 100m tonnes per year by 2012, an incredibly large amount considering that the global seaborne thermal-coal market is currently only 750 m tonnes per annum.

As for safety issues, Indonesian coal are mostly open cut mines which is a lot easier to access and thus generally safer. In addition, safety standards have been already been beefed up because of very strict license requirement. But the key to preserve safety standards in the future is:
1) Good and experienced contractors
2) Bigger equipments (trucks, excavators etc) to respond to higher prod vols.
This will significantly reduce the chances for accident. This also means that bigger is better in the industry. Hexindo (HEXA IJ), Hitachi distributor, has a strong position in excavator market, particularly giant sized equipment with capacity of over 200 tons.
United Tractors (UNTR IJ)’s Pamapersada is the largest contractor and known for quality, including safety issue.

The stocks to buy on this theme are UNTR and HEXA.