Feeling hot, hot, hot!

Event

􀂃 We highlight that the tightness in the global thermal coal market could be here to stay on the back of: 1) Australian producers switching sales from thermal to semi-soft coal, 2) robust Chinese and Indian demand, 3) 2008 contract prices now at ‘arguably’ US$135 per tonne (excluding carry-over stock from 2007), and 4) domestic prices set to increase as Indonesia moves to market prices.

􀂃 We believe the Indonesian coal companies, including BUMI, SAR and PTBA, are very well positioned to benefit from these robust prices.

Impact

􀂃 Aussie producers switching out of thermal: Semi-soft contract negotiations have been concluded at US$220/t fob, US$95/t higher than thermal. Given that many Australian thermal-coal suppliers have some flexibility to switch sales from thermal to semi-soft, this could create a shortage of thermal later in 2008.

􀂃 Very tight Chinese and Indian markets: China was a net importer of coal in March (2.758mt) after small net exports in the previous three months. This follows reports that power plants have incredibly low stockpiles (just 12 days of consumption). Further, Indian coal stocks are below the critical seven-day level at 24 out of 77 coal-power stations and stocks in total are at 10.84mt, well below the standard requirement of 22mt.

􀂃 Actual contract prices set at US$135/t. According to McCloskey Coal, the actual contract price for thermal could be at US$135/t vs. the reported US$125/t in 2008. This is because ‘carry-over’ tonnages from prior years have lowered the average price (ie, typically, if suppliers fail to deliver contractual requirements in the previous year, they have to ship these tonnages in the next contract year at the old price).

􀂃 Indonesian domestic price set to increase: In 2008, PTBA negotiated a 30% price increase with state-owned electricity company PLN. This was viewed as a one-off. However, PGAS (the gas distributor) has recently signed ‘market prices’ for gas supply to PLN, and current negotiations between PLN and other coal producers are indicating significant increases from the current prices extended to PTBA. We therefore highlight the upside risk to domestic coal prices.

Outlook

􀂃 BUMI – No. 1 in 2008. In 2008, we believe Bumi will be the key beneficiary of higher prices, as it was late to lock in prices vs peers and is therefore benefiting from US$125/t spot/contract prices.

􀂃 SAR well positioned in 2009. As contract negotiations begin in September, SAR should benefit in 2009. ITMG’s management also expects to benefit.

􀂃 PTBA is a key beneficiary of higher domestic prices as Indonesia moves closer to ‘market prices’ for domestic coal.