The recent sector selloff has been brutal and already discounts a weak marketoutlook, but given oversupplied coal markets in the region, we believe anyrebound will be muted. We downgrade thermal coal price forecasts and cutearnings estimates by 5-11%. We move to a more defensive stance on thesector - cut Yanzhou to Neutral (from OW) given its leverage to spot markets,prefer Shenhua (stay OW) for its defensive, vertically integrated model.
US coal makes global waves – Newcastle hit first, QHD next. It allstarted harmlessly enough with low gas prices and a mild winter in the US.The resulting excess US coal pushed the Atlantic basin into surplus,ultimately finding its way onto Asian shores to depress coal prices. Theregion’s benchmark, Newcastle thermal export coal price, has fallen byc20% to USD98/t from Mar prices of cUSD120/t. At these levels,Newcastle is now 12% cheaper to China’s Qinhuangdao (QHD) thermalprices, which we expect will lead to rising Chinese imports in comingmonths. In our latest global coal update, US Coal Makes Global Waves, wereduce Newcastle prices in 2012-2013E by 10% while in this note; we cutQHD prices by 3%.