India, the world's third largest importer of thermal coal, is expected to start rebuilding inventories in the second quarter of 2012, which could boost shares of thermal coal companies in Southeast Asia, says Macquarie Securities.
"We see a strong restocking cycle happening in the second quarter. The first bit will be driven by the Indian market where we see low stock levels, appreciating rupee and finally higher merchant power prices,” Adam Worthington, Head of Regional Utilities, Renewables and Coal at Macquarie Securities, told CNBC on Monday.
India’s weak currency, as well as weaker power prices prompted a fall in thermal coal imports and stockpiles in 2011. According to Macquarie, stockpiles at the country’s power plants have deteriorated so much that around 55 per cent of the country’s power plants currently have less than 7 days worth of stocks.
Worthington says India’s long-term electricity demand stays in tact, and restocking will occur quickly as the rupee appreciates.
This restocking cycle is a bullish factor for Southeast Asian thermal coal stocks, with Macquarie expecting India to import around 110 million tons of thermal coal from the region this year. Worthington told CNBC that Singapore-listed Sakari Resources provides investors the best exposure.
“We believe the market is underestimating Sakari’s improving product mix towards higher margin coal,” he said, adding that Sakari’s new Subuku coal concession in Indonesia is producing coal at a much higher margin that its older mine.
Sakari currently sells around 30 percent of its coal production to India, and Worthington has a 12-month price target of S$3.50 (US$2.78) for the stock, which represents an upside of around 45 percent to current prices.
Indonesia’s Harum Energy is another of Worthington’s stock picks. Harum Energy’s expected production growth of around 35 percent this year, combined with an attractive valuation of 8.7 times 2012 earnings, should be a catalyst for the stock. While Harum does not sell its coal directly to India, Worthington told CNBC that any surge in restocking should boost the spot price and benefit the company.
Disclosure: Macquarie Securities holds Sakari Resources in its portfolio.