20140522-高盛-The_Met_Coal_Debate__China,_3Q_benchmark_and_US_production_cuts_–_stay_negative_on_me_11页_348kb

Summary of the Met Coal Debate

Core Content

This report analyzes the met coal market, focusing on three key debates: the growth of China's met coal imports, the settlement of the 3Q2014 met coal benchmark, and the impact of recent production cuts on met coal prices. The analysis is based on data up to May 21, 2014, and includes market performance, forecasts, and stock implications.

Main Points

1. China's Met Coal Import Outlook

• View: Met coal imports in China are expected to decline in 2014.
• Reason: Slowing steel production growth and increasing domestic production are the main factors.
• Forecast: China's met coal imports are projected to fall from 59 million MT in 2013 to 54 million MT in 2014, a year-over-year decline of 8%.
• Impact: This weak demand environment is expected to keep met coal prices low in the near term.

2. 3Q2014 Met Coal Benchmark

• View: Downside risk exists to the $132/MT forecast.
• Reason: Weak spot pricing and lower-than-expected demand.
• Possible Price: Prices may settle closer to $125/MT.
• Implications:
  • At $125/MT, there is a 71% downside to WLT's Sell-rated consensus EBITDA.
  • A 41% downside to ANR's 3Q2014 consensus EBITDA.
  • Downside also affects BTU (Buy-rated) and ACI (Neutral-rated).
  • The 6-month target for ACI is lowered from $5.00 to $4.50.

3. Impact of Recent Production Cuts

• View: Recent production cuts in the US and Canada are positive but unlikely to significantly boost prices.
• Reason: Strong Australian production and weak Chinese demand are expected to offset the supply reduction.
• Forecast: Met coal benchmark prices for 2014/2015 are expected to be around $133 to $152 per MT, with downside risks to these levels.
• Supply Rationalization: Several mines in North America have announced operations suspension, idling, or reduced guidance, impacting supply.

Key Information

• Met Coal Pricing: Spot met coal prices have remained depressed at around $115/MT.
• Stock Performance: Met coal stocks (ANR, WLT, ACI) have underperformed, down -16% compared to the S&P.
• Price Targets:
  • ANR: Sell, current price $3.96, target $3.50, expected return -12%.
  • WLT: Sell, current price $5.92, target $5.00, expected return -15%.
  • ACI: Neutral, current price $3.86, target $4.50, expected return 20%.
  • BTU: Buy, current price $18.05, target $21.00, expected return 18%.
  • SXC: Buy, current price $20.12, target $26.00, expected return 29%.
• Average Return: The report forecasts an average total return of 9% for the coal sector over the next 6 months.
• Valuation Metrics:
  • The sector is valued using a $165/MT normalized met coal price, $14/ST normalized PRB price, $65/ST normalized App price, and a 7.0x-10.0x benchmark coal sector multiple.
  • ACI's target is based on a 9.75x normalized EBITDA multiple, down from 10.0x.

Stock Implications

• ANR and WLT: Maintain Sell ratings due to expected downside in EBITDA.
• BTU and SXC: Reiterate Buy ratings, as they are expected to outperform.
• CNX and CLD: Maintain Neutral ratings, with moderate upside potential.
• ACI: Lowered target to $4.50, reflecting lower expected multiples and cash flow burn.

Key Risks

• Volume and Price Risks: Weak China import data and strong Australian production could continue to pressure prices.
• Leverage and Operational Risks: Companies like Arch Coal and Walter Energy face risks related to operational issues and lower-than-expected prices.

Conclusion

The met coal market remains challenged due to weak demand from China, strong supply from Australia, and ongoing supply-side adjustments in North America. Despite recent production cuts, the outlook for met coal prices is still negative, with the 3Q2014 benchmark expected to settle below the forecasted $132/MT. The report advises caution, maintaining Sell ratings on ANR and WLT and reiterating Buy ratings on BTU and SXC.