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UBS favors Chinese thermal coal miners over Glencore amid depressed prices

Thermal coal has been weaker than expected this year, and prices are falling materially in most markets, excluding Indonesia and China's domestic market, UBS wrote April 9.

The thermal coal contract between Glencore PLC and Japan's Tohoku Electric Power Co. Inc. for the year through March 2020 was settled at US$94.75/t, US$10 per tonne lower than the spot price and down 14% year over year.

Prices at the Richards Bay and Newcastle ports in Australia are falling due to lower LNG prices and restrictions on imports into China, which prompted Chinese coal traders to stop buying Australian coal amid delays in customs clearances of up to 45 days, according to analysts.

UBS said it expects downside risk to its Newcastle forecast of US$95/t this year and US$90/t in 2020, with US$71/t for spot. It expects downside risk to its Richards Bay forecast of US$64/t, with US$56/t for spot.

Glencore, with thermal coal exports of about 115 million tonnes, is the most exposed diversified miner, according to UBS, which has a neutral rating for the Swiss miner.

UBS also maintained its buy rating for BHP Group, which exports about 30 million tonnes, and its sell rating for Anglo American PLC, which exports about 27 million tonnes.

Chinese coal producers — including China Shenhua Energy Co. Ltd., with a sell rating, and Shaanxi Coal Industry Co. Ltd. and Yanzhou Coal Mining Co. Ltd., both with buy ratings — are less exposed to the falling prices, UBS added.

Spot prices of thermal coal delivered to northern Europe at the Amsterdam, Rotterdam and Antwerp, or ARA, ports have dropped about 40% from the average 2018 price of US$92/t.

ARA coal prices have been hit by record high port inventory, low natural gas prices, lower coal burn rates due to an unseasonably warm winter, strong renewables and increasing carbon prices.

In an April 11 note, BMO Capital Markets agreed that "the drop in thermal coal is down to weakness in European energy markets and strong substitution potential of marginal tonnes from the surge in LNG volumes seen in recent months."

Morgan Stanley said in an April 8 note that growing dispatches from Coal India Ltd. and an increase in coal-to-gas switching in Europe due to low gas prices also contributed to lower seaborne demand.

However, the higher demand for power needed for cooling in the summer is expected to pull up northeast Asian demand, which, combined with some supply cuts from the U.S. and Indonesia, is expected to bring a price recovery from current depressed levels.

"Inventories are set to lift more near-term and prices [are expected to] remain under pressure as plenty of ships are still on water to arrive [at] the ARA hub ... [but] we expect stabilization with the summer cooling season," UBS wrote.