From Credit Suisse:
■ China targets a new range of thermal coal prices: Last Thursday, China’s NDRC met with major domestic coal miners and utilities hoping to facilitate the signing of supply agreements in order to lock in thermal coal prices. Today (2 Nov) state media reported the negotiated ‘medium-long term’ contract price targeted is Rmb535-540/tonne. This is around 20% lower than Rmb660-670/t prices we see now but well above recent price expectations. These medium-long term supply contracts are to be signed in early November. Rmb540/t corresponds to a Newcastle export price for 6000kcal coal of ~US$75/t.
■ Upgrade to OUTPERFORM: Two weeks ago we downgraded WHC to Underperform but with this latest push from NDRC it looks like thermal coal prices will establish a higher base level over the next 12-18mths and puts at risk our assumed CY17 thermal coal export price of US$60/t. We are doing an about face and upgrading our WHC rating to OUTPERFORM as the risks to valuation from a materially higher near-term price deck are now too high. While we haven’t changed coal prices, the risk is now strongly to the upside for both our nearer term thermal and met coal price forecasts. . That said, we still believe that longer term, China’s push to reduce coal burn in the south east by coal-by-wire from the west plus expanded renewables will see thermal coal imports decline.
