Date | Jul 11, 2016:
Thermal coal prices have increased year-to-date (see chart). According to S&P Global Platts data, the price of FOB Kalimantan 4,200 kcal/kg GAR coal, a popular grade among Chinese and Indian buyers, has gained nearly 11% since the start of 2016. Some reasons for the increase include supply tightness in Indonesia and strong demand from China. The price of FOB Newcastle 5,500 kcal/kg NAR coal too has surged 22.5% so far this year, while FOB Richards Bay 5,500 kcal/kg NAR coal has jumped 26.6%.
“In a bid to protect Chinese domestic miners and to address rising pollution, China introduced several measures in 2014, such as asking its utilities to cut imports and miners to cut production significantly,” said Deepak Kannan, managing editor, Asia Thermal Coal, S&P Global Platts. The country is in the process of closing several uneconomic and illegal mines. These measures have led to a surge in Chinese coal prices this year. However, higher domestic prices have brought back some Chinese buying interest to imported cargoes thus affecting prices to that extent. Also, Indonesia cut supply in 2015 compared to 2014, pointed out Kannan. Further, sharp increase in prices of petroleum coke in the past three months has brought back coal demand from Indian cement manufacturers for South African coal, thus boosting prices, according to Kannan.
Higher global prices could well translate into better e-auction realisations for Coal India Ltd (CIL). Typically, realisations of coal sold through the e-auction route tend to follow the direction of global coal prices. Lower e-auction realisations had affected CIL’s performance last year. As JM Financial Institutional Securities Ltd pointed out, FY16 e-auction volumes improved 41% year-on-year, but realisations in the segment declined 24% year-on-year tracking global coal prices leading to lower earnings.
The coal producer bounced back on production and sales volume (or offtake) growth in June, after a rather lacklustre performance in April and May. Production and sales volume for June increased 10% and 6.6% year-on-year, respectively. On a combined basis for April and May, both measures had increased 0.5% and 1%, respectively.
CIL said last week that the board will meet on 11 July to consider a share buyback proposal. A potential buyback could well allay investor fears about the usage of the big cash pile on its books. Weak power demand and falling e-auction realisations are some reasons that have weighed on the stock for some time now. Currently, one share trades at 12.6 times expected earnings for this financial year.
(Source: http://www.livemint.com/)