Friday, May 31, 2013

Coal is rebounding, natural gas prices are up, and the world’s oil cartel is quite content

Times are good for the merchants of fossil fuels.

Coal is making a comeback in the U.S., natural gas prices are rising, and Saudis are living like kings off an oil market that is simply heavenly.

Just last year, demand for coal had dropped deeper than a canary lowered down a mine shaft. Prices had been pushed down by the natural gas fracking boom. But The Washington Post reports that demand and prices for coal have rebounded:

According to the latest data from the Energy Information Administration, coal has been reclaiming some — though not all — of its market share in 2013.

Natural gas prices have been creeping up over the past year, thanks to a combination of a colder winter, higher demand for heating fuel, scaled-back drilling, and also new storage facilities that are preventing a glut of gas on the market. The ultra-low gas prices that were devastating the coal industry in 2011 and 2012 weren’t sustainable forever.

Coal company executives and natural gas frackers and retailers aren’t the only fossil-fuel profiteers who are partying right now. OPEC is also feeling pretty good these days. From Bloomberg:

Saudi Arabia, the world’s largest crude exporter, is content with current conditions in the oil market, the kingdom’s petroleum minister said three days before OPEC members meet to assess the group’s output policy.

“This is the best environment for the market,” Ali al-Naimi told reporters today in Vienna when asked about the balance of supply and demand. “Demand is great,” al-Naimi said as he arrived at his hotel.

Tides everywhere are rising in celebration.

Wednesday, May 29, 2013

India moves to regulate coal industry to improve supply

* Power cut due to supply bottlenecks, poor quality coal

* Bill follows scandal over mining rights

* Bill to be submitted to cabinet within 10 days - minister (Adds quotes from ministers and analyst, details)

India took a step towards setting up a regulator for its coal industry on Wednesday, a move it hopes will improve supplies and weed out corruption in a sector that is the main source of energy for Asia's third-largest economy.

India boasts of the world's fifth-largest reserves of coal and the world's biggest coal miner, in state-run Coal India Ltd , but still suffers massive power cuts due to supply bottlenecks and poor quality of coal delivered to power plants.

The government's law minister was forced to resign this month over the so-called Coalgate scandal over mining rights, which has become one of the biggest headaches for Prime Minister Manmohan Singh.

"A coal regulator is good as this sector will be opened up sooner or later for private participation and an independent regulator can provide a level playing field," said Rakesh Arora, managing director and country head of research at Macquarie Capital Securities (India) Private Ltd.

A group of ministers approved the draft bill on Wednesday to set up the regulator, Coal Minister Sriprakash Jaiswal said, but gave no further details. The bill must next be approved by cabinet and parliament.

"We've tried to put together a very cogent, balanced bill which takes into account the interests of all stakeholders," Power Minister Jyotiraditya Scindia told reporters.


The group also agreed on a pricing mechanism known as "pass-through" which allows power producers to pass on the higher cost of imported coal to consumers.

The two proposals would be readied within 10 days and sent to the cabinet, Scindia said.

The moves are part of a flurry of reform measures that the Congress-led coalition government wants to push through to kick start sputtering growth ahead of elections that must be held by May 2014.

The Coalgate scandal involved alleged irregularities in the awarding of mining rights potentially worth billions of dollars to private companies.

Opposition demands for the law minister's resignation, and that of another minister in a separate corruption probe, brought parliamentary work to a standstill and raised the prospect of the government calling an early election.

The regulator would have the power to decide in disputes over quality and also have some jurisdiction over pricing, Scindia told reporters.

State-run power producer NTPC has long complained it is forced to accept coal that is heavily adulterated with rocks and stones, crimping its output and leading to blackouts which hurt economic growth and keep the country reliant on costly imports.

"Pricing, grading, quality, testing," Scindia said, when asked what would be the remit of the coal regulator. "But, pricing (authority) only in very, very specific and certain cases."

Macquarie's Arora said the regulator might have limited impact initially because of Coal India's dominance. "But it should evolve over time with opening up of the sector," he said. (Additional reporting by Nigam Prusty; Editing by Frank Jack Daniel and Alison Williams)

China's coal output, investment decline

China's coal output and investment both witnessed declines in the first four months of 2013, statistics from the China National Coal Association (CNCA) showed on Wednesday.

The country's coal output in the Jan.-April period stood at 1.15 billion tonnes, down 2 percent from the same period last year, while fixed asset investment in the coal mining industry declined 6.6 percent, according to the association.

The business revenues of the country's major coal producers in the first quarter declined 2.6 percent from the same period last year, with their profit down 40.3 percent, said Wang Xianzheng, president of the CNCA.

The industry has been affected not only by weak demand in the domestic and international market as the world economy enters recession but also a vast amount of cheap coal imported into China, Wang said.

He added that soft demand has made the country's stockpiles bigger and bigger. As of the end of March, China's coal stockpiles reached 292 million tonnes, 150 million more than the normal inventory, making it difficult for the industry to bring the figure down.

Coal imports have kept growing as their prices are more competitive. In the first four months, China imported a total of 110 million tonnes of coal, up 25.6 percent over the same period last year, according to the CNCA president.

The slow-but-sure development in clean energies such as wind power and solar energy has also put a dent in the coal industry, noted Bu Changsen, Chairman of Shandong Energy Group Co..

However,the overcapacity of the industry at present should not conceal the fact that China still faces a shortage of supply in the long term as the country is expected to continue with a fast GDP growth of around 7 percent in the years to come, added Wang.

To solve this conflict, he suggested, the coal industry should vigorously carry out structural adjustment such as promoting coal gasification, which can change the status of coal from a mere fuel product into a raw material for making other products.

China is the world's largest producer and consumer of coal, with official data showing the country's coal production reached 3.65 billion tonnes in 2012.

Mamata Banerjee slams hike in coal prices

West Bengal Chief Minister Tuesday slammed the recent hike in coal prices and said that UPA-II's "anti-people decision" would affect the common man.

"Coal India has again increased the price of lower grade coal by an average 10 percent with effect from today (Tuesday). The decision is scandalous," said Banerjee on a social networking site.

"This anti-people decision of the UPA-II government will affect the common people as input costs of electricity, steel, cement and many other industries will shoot up. As a result, the burden of higher price will ultimately be passed on to the end consumers," she said.

"I condemn this arrogance of the UPA-II government... whose interests is this government serving? Who is this government working for?" read Banerjee's post on Facebook.

Coal India Ltd (CIL) Tuesday announced a major overhaul in prices across the 17 grades of its output. The state-owned monopoly increased prices of low grade coal by up to 11 percent and slashed prices of premium quality coal by 12 percent.

Tuesday, May 28, 2013

Here's why investors can go long on Coal India

Analysts at top brokerage firms see further upside in Coal India Ltd BSE 3.01 % post its stellar performance in the Jan-March quarter. The state-run miner is trading at reasonable valuations and with further price hikes of coal, the stock is likely to gain.

The Kolkata-based miner has been under pressure so far in the year 2013 largely weighed down by unresolved business issues, incremental coal supplies and an impending stake sale.

The stock has corrected little over 8 per cent so far in the year 2013. For the month of May, the stock has moved in a range and is up nearly 2 per cent so far.

On Monday, the world's largest coal producer reported 35 percent increase in its fourth-quarter 2012/13 net profit, beating market estimates.

Net sales grew by 2.5 per cent YoY to Rs 19,905 crore, while sales volumes stood at 130 mn tonnes indicating company's focus on increasing off-take.

According to analysts, CIL had witnessed several challenges on the policy, operational and administrative fronts and the stock may remain buoyant amid further price hikes and attractive valuations.

Coal India announced a price increase 4-5 per cent which would be effective from June 2013, implying that revenue growth in FY2014E would be more balanced unlike FY2013 that was dominated by volume growth (8 per cent YOY).

CLSA maintains a 'buy' on Coal India with a target price of Rs 400, which implies a 29 per cent upside from yesterday's closing price. The brokerage says that the dividend pay-out has risen to 51 per cent in FY13 which is a positive.

CLSA remains positive on the stock on improving volume growth and pricing power, receding policy risks and attractive valuations.

The current trading multiples 7X P/E on adjusted PAT and 5X EV/EBITDA are at 20 per cent discount to the trading multiples at IPO price, highlights Kotak Institutional Equities in a report.

"Even as the Street ignores the valuations of CIL on account of the potential share sale, we highlight that the original issue price of Rs245/share plus incremental cash balance Rs65/share is almost equivalent to the CMP Rs315/share," the note added.

The brokerage firm has marginally revised its earnings and target price estimates. Kotak recommends a 'buy' on the stock with a target price of Rs 410/share compared to Rs404/share previously.
Key Risks:

Coal India Ltd had witnessed several challenges on the policy, operational and administrative fronts which had weighed down on the stock for the year 2013.

Some of these factors include revised norms for environmental/forest clearances, uncertainty on mining tax/ MMDR Act, delays in land acquisition, e-auction diversion, commitment on FSA and wage negotiations.

Analysts believe that these concerns do not impact the structural long term story as there is strong domestic coal demand, monopoly in coal production in India and ASP (Average selling price) which is significantly lower than global prices—potential for price hikes.