􀀗 Risk of coal oversupply as industrial
activity in China slows
􀀗 We forecast contract prices to remain
flat and spot prices to fall 30% in 2009
􀀗 Downgrade China Shenhua to N(V),
China Coal to UW(V)
We move to a cautious stance in the near term, as we
expect downward pressure and weak sentiment on Chinese
coal prices. We forecast contract prices to remain flat in
2009. The market may be disappointed, as consensus is still
looking for a 10% hike. Given the risk of coal oversupply,
and as coal mining costs will fall in the downturn, we
forecast the domestic thermal spot price to fall 30% y-o-y, to
RMB506/t, in 2009, a 15% decline from current levels.
Coal demand weakening. In 4Q08, industrial and
construction activity in China fell sharply, weakening coal
demand considerably. Apparent coal consumption fell 12%
y-o-y in November 2008, matching the weakening industrial
production growth of 5.4% (lowest growth since February
2002). In our view, China may see a repeat of the 1998-2002
downcycle; HSBC forecasts real GDP to slow to 7.8% and
industrial production growth to slow to 9.5% in 2009, from
9.2% and 14%, respectively, in 2008. We expect China to
generate a market surplus in 2009 and 2010 as coal demand
growth should moderate to 2% and 4% respectively.
Downgrade China Shenhua to N(V) and China Coal to
UW(V). China Shenhua remains our preferred play, as it is
relatively defensive on contract coal sales and power
business. We downgrade China Coal to Underweight (V), as
we see downside risk to its 2009 earnings. Its volume growth
and trading business will be hurt by the industrial slowdown
in China. We maintain our Underweight (V) on Yanzhou
Coal as it has the most exposure to a weak spot market.

目录

Investment summary 4
Coal prices and earnings may have peaked 4
A repeat of 1998-2002 downcycle 5
Coal prices to drop with the cost curve 5
Earnings forecast revisions 6
Investment Strategy 6
Risks 7
China supply-demand 10
A repeat of 1998-2002 downcycle 10
Export market also weakening 12
Coal usage intensity 13
China demand drivers 14
Domestic price outlook 15
Coal prices to fall with the cost curve 15
China Shenhua (1088) 18
Downgrade to N(V) – A defensive coal play 18
Valuation and Risks 20
China Shenhua (1088) 22
Yanzhou Coal (1171) 23
UW(V) – Spot prices at risk 23
Valuation and risks 25
Financials & valuation 26
Yanzhou Coal (1171) 26
China Coal (1898) 27
Challenges in 2009 27
Valuation and risks 28
Financials & valuation 30
China Coal (1898) 30
China coal statistics 31
Coal apparent consumption 32
China trade 33
China coal inventory 34
Coal Price 35
HSBC commodity price forecast 36
Disclosure appendix 38
Disclaimer 43