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Thursday, June 20, 2024       18:48 WIB

Metals - La Nina is a boon for 2H24F outlook; prefer thermal over met coal

Sector Update / Metals & Coal / Click here for full PDF version

Author(s): Ryan Winipta ; Reggie Parengkuan

  1. La Nina could bring a tailwind to both thermal & metallurgical-coal prices in 2H24F, affecting seaborne supply in Australia.
  2. ST S-D balance could tilt into surplus on rising Chinas coal production post safety-inspection and soft real-estate market.
  3. However, we think demand (for thermal) could pick-up following winter re-stocking in 2H24F. Thus, we prefer thermal over met-coal.
Thermal coal: ST demand risk, supply-disruption to support price

We see seaborne demand for thermal coal to be skewed to the downside in ST, considering that domestic coal production in China (5M24: -3% yoy) is set to recover after safety inspections are concluded in May24, in addition to high inventory in India (17 days, above 3-yr avg of 11 days) with summer demand already behind China & India accounts for c.50% seaborne demand. However, we expect a supply disruption on the back of potential La Nina in Aug-Nov24 (70% chance) and winter restocking season in 2H24F. Additionally, although the strength of the upcoming La Nina remains uncertain, we observed that even moderate La Nina is often accompanied by flooding in Queensland and New South Wales, where all coal miners are located in Australia, an upside risk to price in our view.

Metallurgical coal: flat demand, supply-disruption to lift price

We think supply-disruption shall be the only factor that could lift coking-coal price, as from demand side, the positive infrastructure development in India reflected in c.14% yoy finished steel consumption in 4M24 was offset by Chinas weak real-estate market (-3% yoy) as China consumes c.50% of global crude steel as opposed to Indias c.10%. Similar to thermal coal, we also expect the current La Nina cycle, which could affect supply in Australia (c.50% of seaborne supply) to be a positive tailwind to coking-coal prices in 4Q24F, similar to 2010-2011 and 2021 & 2022.

Prefer thermal over met-coal on more inelastic demand

We prefer thermal coal over metallurgical coal owing to its more inelastic demand and raised our Newcastles thermal coal price assumption to US$130/t (from US$120/t) ahead of Winters restocking season in 2H24F. However, in the short-term, we see potential downside risks for both thermal & met-coal as China mining safety inspection in Shaanxi (c.30% Chinas domestic production) is concluded, which could negatively affect seaborne demand. On the other hand, met-coal, unlike thermal, is still facing soft demand in Chinas real-estate market, offsetting the positive infrastructure development from India. Thus, we maintain our coking-coal price assumptions at US$260/t in FY24F (vs. YTD price of US$291/t).

ADRO as our top pick in energy/coal space, followed by ADMR

In-line with our preference on thermal over coking-coal, we like ADRO (Buy) as our top pick, as we think the company is set to benefit from higher Newcastle coal price during winter re-stocking season in 2H24F in addition to potential consensus earnings upgrade as 1Q24 result was a beat (1Q24 is still c.35% of consensus estimates even after +7% EPS upgrade since result release). Our pecking order (from most to least preferred) are: ADRO > ADMR > UNTR > HRUM > ITMG > PTBA, while putting ADMR second due to its bottom-up volume growth story despite relatively limited upside in ASP outside from supply-disruption.

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