A Cup of Tea 19 March'10

Major stock indexes ended mixed Thursday on more evidence that the economy is regaining strength at a slow pace. The Standard & Poor’s 500 Index fell 0.1 percent to 1,165.52 at 3:59 p.m. in New York.
Some rumors said that The Federal Reserve may raise the discount rate, charged on direct loans to banks, before the next meeting of the Federal Open Market Committee on April 28.

Consumer prices were unchanged in February, the first time they didn’t increase since March 2009, Labor Department figures showed today in Washington. The U.S. economy will keep expanding without a pickup in inflation that would require the Federal Reserve to raise interest rates, reports today indicated.

Oil fell for the first time in three days as a stronger dollar trimmed demand for commodities as an alternative investment. Crude oil for April delivery lost 73 cents to settle at $82.20 a barrel on the New York Mercantile Exchange. It closed at $82.93 yesterday, the highest level since Jan. 6. Oil has risen 71 percent in the past year.

Nickel traded at $22,760 from $22,250. Nickel has rallied around 20 percent this year, making it the strongest performer of the base metals complex. It hit a late peak at $22,800, its highest since March 8. A strike in Canada, delays in bringing the New Caledonia Goro mine into production and most recently, a problem at BHP Billiton's Nickel West operation in Kwinana, Australia, have helped lift prices. Tin MSN3 was at last quoted at $17,790/17,795 from $17,750.

Crude palm oil futures on Malaysia’s derivatives exchange ended lower 2.31% Thursday as crude oil and soy oil futures weakened. Concerns that recent high prices are turning away Indian buyers also pushed prices into negative territory.

I think Indonesian market will mix for today, healthy inflow still on market. Our market will be opening slightly positive and support still at 2704. We must watch IDR movement.

ITMG was ready to acquire one of coal mining at Kalimantan for support volume production around 5 million ton this year.

PT Perusahaan Gas Negara’s sales volume may drop this year because of a supply shortage from ConocoPhillips’ South Sumatra field, Gas Negara President Director Hendi Prio Santoso said in Jakarta. After meeting last night Government decided PGN will getting more supply about 50 mmscfd from Block Leumentang, South Sumatera. But overall for national demand still deficit 300 mmscfd.

US President Barack Obama will delay visiting on Indonesia until June 2010.

Overall I still have positive view on our market for year end. But for shorter play we must more carefully and wise. I think nothing wrong if we put some cash on our portfolios at this time. I still go 3000 level for our JCI index until year end.

I will focus on coal play.
Iron ore and metallurgical coal is treated as two sister commodities in the steel industry as both are necessities. Well, recently Japan agreed to a 40% jump in iron ore price in a negotiation with BHP Billiton, and it is widely expected that the metallurgical coal price will see a 55% jump in 2010 to $200/ton from $129/ton in 2009. Chinese steel makers are rushing to secure the 2010 metallurgical coal supply according to the latest Chinese news. It is estimated that China alone will demand well over 100 million tons met coal annually.

Over the weekend, China Investment Corp. (CIC) backed by Noble Group Ltd., announced it will put more investment into the coal sector. Bloomberg also reported that the group sees rising demand from Asia and is ready to acquire more mines and build more ports.

My View on:
• INCO, ITMG, BMRI, UNTR, BBTN with HOLD
• BUMI, ADRO, TLKM, BBRI, , ANTM, TINS, DOID with BUY
• BDMN, PTBA, AALI, LSIP, CTRA, CTRS, BTEL, UNSP with Buy On Weakness
• ELTY, KIJA, ENRG with Speculative Buy
• BBCA, ASII, ISAT, PGAS with Neutral or Reduce

"Cash is The King"

Bang Juntri

Overnight Coal

· Arch Coal (ACI) bids $86 million for Montana-owned Otter Creek coal tracts. ACI placed a bid of $86 million plus future royalties for the right to mine a half-billion tons of state-owned coal in southeastern Montana near the Wyoming border. It already controls 731 million tons of coal in Otter Creek. Developing a mine in the region will require extra effort because of lack of required infrastructure, and will also require construction of the proposed Tongue River Railroad — a project fiercely fought by environmentalists and area landowners. (Source: BusinessWeek)
· PCI contract prices this year almost double of last year. Macarthur Coal said it has started agreeing prices for its pulverized, or PCI, coal at levels in line with other contracts being signed. Other miners have signed contracts in range of between US$170 and US$180 a tonne, double the US$90 a tonne seen last year. The company also said that the recent settlements have seen a shift from annual pricing resets to quarterly and half yearly resets. (Source: Dow Jones)
· China’s next coal consolidation target, Inner Mongolia. The Economic Committee of Inner Mongolia Autonomous Region said that it plans to control coal output at 700 million tons in 2010. The region produced 637 million tons of coal last year, up 171.88 million tons or 37% from a year ago. The production constrain is part of the government's effort to optimize the structure of the coal industry and promote the technological upgrade. (Source: Bloomberg)
· China's iron ore negotiations progressing on all fronts. Rio's iron ore negotiators to go on trial next week, as this year's price negotiations advance and just as CEO Albanese visits Beijing to rebuild relationships. (Source: Wall Street Journal; page A12)
· When is a carbon credit not a carbon credit? When its a used carbon credit of course. Carbon prices fell from €12 to €1 in Europe after it was discovered that some carbon trading on the Hungarian market was using credits that had been used before. This is said to highlight the complexity of these markets. (Source: The London Times)

CLSA INDO: Conoco Philips is under delivering to PGAS, lower vols for PGAS

There is news that Conoco Philips is under delivering to PGAS, update from Swati

Conoco Philips in South Sumatra is contracted to deliver 350mmscfd this year. Last year it delivered 260mmscfd and early Jan and Feb it delivered anywhere between 350-400mmscfd. Since last three days however there has been a drop in volumes to 300-330mmscfd. We have forecasted 380mmscfd from Conoco Phillips in 2010CL.

Current status?
It looks like Conoco Philips is delivering extra gas to Chevron via PGas transmission pipelines (PGas makes only transmission toll fee on this about US$0.6/mmbtu). This is possibly since the government has asked Chevron to increase oil production and therefore Conoco Philips is diverting more gas to Chevron since Chevron is paying much more for the gas than PGas. PGas is paying US$1.85/mmbtu for the gas.

PGas is currently discussing with the government that if Conoco under-delivers then PGas will cut volumes for its customers. PGas has meanwhile also intimated customers that there will be 20% cut in volumes. This means government will be under pressure to direct Conoco Phillips to divert the gas back from Chevron to PGas. Discussions are ongoing and we will only know in next few days.

In the worst case there could be potentially 5.4% lower distribution volumes (assuming there is no other contracts signed to compensate for these volumes). This could potentially impact earnings by 9-10%.

At this stage we don’t think that there will be no new contracts signed since its only early part of the year. Also government should support PGas here since industries are getting squeezed due to volume shortage.

Conclusion: We think any weakness should be seen as an opportunity to buy as 5.4% lower volumes doesn’t impair the long term structural story. It will only encourage PGas and the government to find more gas reserves as quickly as possible.

Credit Suisse ASIA STRATEGY: Any cheap Cyclicals left? Buy Indonesian Coal Sector

Indonesia market is enjoying Foreign assets allocation funds inflow post Fed rates to stay near zero “for an extended period” and again Indonesian Politics post 4th March Parliamentary Votes on Bank Century Bailout just in silence (waiting for the follow-up works of AG, Police and Anti Corruption Committee). Yesterday, JCI closed at 2010 High 2,756pts (vs all time high 2,830pts), and CS Indonesia Universe was trading on 14.7x 2010F PER with +17.2% EPS Growth and on 12.1x 2011F PER with +18.6% EPS Growth. Again we continue to Overweight Indonesia with JCI target 3,300pts end-2010F (implying 17.5x 2010F PER, a level seen during 1992-1997 stable strong economics growth), with Top-8 Quality stock picks: ASII, BBRI, BMRI, INDF, INTP, ITMG, SMGR & UNTR!


Within Indonesian Coal Sectors, we are recommending Take Profit for PTBA and SAR SP, while we continue to Prefer both ITMG/ADRO, as BUMI remains Restricted. NEWC Spot FOB steam coal weekly price was USD94.10/t as of 12th March, above CS average assumption of $90/t for 2010F. Please see Sensitivity Analysis if coal price is $100/t for 2010F (We are still Restricted on BUMI, but @Rp2,575 on 13.3x 2010 IBES Consensus PER):

(2010F, Rp) ADRO ITMG PTBA SAR SP

DCF at $90/t 1,700 34,200 9,400 S$1.50

EPS at $90/t 109 US$0.26 923 US$0.07

EPS IF $100/t 148 US$0.32 1,023 US$0.10

Stock Price 1,920 36,450 16,250 S$2.11

PER at $90/t 7.6x 15.2x 17.6x 20.5x

PER IF $100/t 3.0x 12.2x 15.9x 13.8x


· Sakthi Siva (Daily Attached): With more signs of a private autonomous recovery (US retail sales excluding automobiles up in five of the past seven months, US capex up 17%), we look at whether any cheap cyclicals are left. Using our P/BV versus ROE valuation model, we find the steepest discounts in Thai coal (66% discount), then Indonesian coal (59%). We prefer “cheap” cyclicals, as sectors that trade at a discount on our P/BV versus ROE valuation model are generally those anticipating earnings/ROE downgrades. For Indonesian coal, for example, we estimate implied ROE at 23% versus 29% currently.

Kim Eng BW Plantation (BWPT IJ): BUY - Valuation gap to narrow

We initiate coverage on BW Plantation with a BUY recommendation and a TP of Rp840. Based on EV/planted nucleus area, we believe BW is the cheapest Indonesia’s plantation play, it is valued at 34% discount compared with the peer sector of Rp119m/ha. With 31% earnings CAGR over FY09-14E, the stock appears attractive at 10.5x FY11E PER. Owing to high productivity and a young estate profile, we expect the valuation gap to narrow vs. the peer average of 15x PER.