AKD Quotidian about — Cements: Coal Rebound!

Karachi, November 29, 2012 (PPI-OT): A correction has recently been witnessed in global coal prices where the South African Richards Bay prices have increased from a bottom of US$79.87 per ton to current US$87.57 per ton while the Australian Newcastle coal prices have risen to US$83.25 per ton from US$79.9 per ton at the beginning of the month, with expectations of prices reaching US$90 per ton, as per a survey conducted by Bloomberg last week.

According to AKD Securities, the increase in coal price has come on the back of recently increased demand for the commodity as a cold wave swept through Beijing and North China as well as signs of economic recovery in the country. That said, coal fundamentals remain weak in the long run where AKD Securities maintains AKD Securities’ average FYI 3 coal estimate at US$89 per ton. At current levels, AKD Securities mains AKD Securities’ Accumulate call on LUCK and DGKC with target prices of PKR 164 and PKR 64.9, respectively.

Coal rebounds to US$87.57! As per the HIS McCloskey data available on Bloomberg, South Africa’s Richards Bay coal increased to US$87.57 per ton (FoB), the highest level since Sep 7’12. At the same time, Australian Newcastle coal prices increased to US$83.25 per ton, with consensus pointing to a price target of US$90 per ton in the near term. The hike in coal price has come about due to increased demand following i) signs of economic growth in China after a seven quarter slowdown where the country’s manufacturing may expand for the first time in 13 months as per data released by HSBG Holdings and Markit Economics with the PMI on Nov 22’12 standing at 50.4 compared to 49.5 for Oct’12 (reading above 50 indicates expansion) and ii) seasonal effect following advent of early and heavy winter in the Northern part of China leading to higher demand for thermal coal. That said, consensus opinion points to a weaker recovery in coal prices compared to CY10 and CY11.

What’s AKD Securities’ view? Given the seasonal nature of current coal price increase, AKD Securities maintains AKD Securities’ estimates for average coal price at US$89 per ton. Second quarter (as well as third quarter) earnings could potentially clock in slightly lower than market expectations following the recent rebound in coal prices. Below, AKD Securities has provided a sensitivity to AKD Securities’ earning estimates as well as target prices for venous coal prices:

Sensitivity to various coal prices

While the Cement sector continues to remain strong from a fundamental standpoint, from a trading perspective, it could come in for some minor correction in the short term where any dip in price should be seen as an entry point. At current levels, AKD Securities maintains AKD Securities’ `Accumulate’ stances so LCUK end DGKC with base cane target prices of PKR 164 end PKR 64.9 per share.